In this Form 10-K, references to "AXIS Capital" refer to AXIS Capital Holdings Limited and references to "we", "us", "our", "AXIS", the "Group" or the "Company" refer to AXIS Capital Holdings Limited and its direct and indirect subsidiaries and branches, including: AXIS Specialty Holdings Bermuda Limited, AXIS Specialty Limited ("AXIS Specialty Bermuda"), AXIS Specialty Limited (Singapore Branch), AXIS Specialty Investments Limited, AXIS Specialty Investments II Limited, AXIS Specialty UK Holdings Limited, AXIS Managing Agency Ltd., AXIS Corporate Capital UK Limited (corporate member which provides 70% capital support to AXIS Syndicate 1686 ("Syndicate 1686")), Novae Group Limited, AXIS UK Services Limited, AXIS Underwriting Limited, AXIS Corporate Capital UK II Limited (sole corporate member of Novae Syndicate 2007 ("Syndicate 2007") and corporate member which provides 30% capital support to Syndicate 1686), AXIS Ventures Limited ("AXIS Ventures"), AXIS Reinsurance Managers Limited ("AXIS Reinsurance Managers"), AXIS Specialty Holdings Ireland Limited, AXIS Specialty Europe SE ("AXIS Specialty Europe"), AXIS Specialty Europe SE (U.K. Branch), AXIS Specialty Europe SE (Belgium Branch), AXIS Specialty Europe SE (Netherlands Branch), AXIS Reinsurance (DIFC) Limited, AXIS Re SE, AXIS Re SE, Dublin (Zurich Branch) ("AXIS Re Europe"), AXIS Re SE Escritório de Representação No Brasil Ltda., Contessa Limited, AXIS Specialty Global Holdings Limited, AXIS Specialty U.S. Holdings, Inc., AXIS Reinsurance Company ("AXIS Re U.S."), AXIS Reinsurance Company (Canadian Branch), AXIS Specialty U.S. Services, Inc., AXIS Specialty U.S. Services, Inc. (U.K. Branch), AXIS Specialty Canada Services, ULC, AXIS Group Services, Inc., AXIS Specialty Underwriters, Inc., AXIS Insurance Company ("AXIS Insurance Co."), AXIS Surplus Insurance Company ("AXIS Surplus"), AXIS Specialty Insurance Company ("AXIS Specialty U.S."), Ternian Insurance Group LLC, AXIS Specialty Finance LLC and AXIS Specialty Finance PLC, unless the context suggests otherwise.
The markets in which we operate have historically been cyclical. During periods of excess underwriting capacity, as defined by the availability of capital, competition can result in lower pricing and less favorable policy terms and conditions for insurers and reinsurers. During periods of reduced underwriting capacity, pricing, and policy terms and conditions are generally more favorable for insurers and reinsurers. Historically, underwriting capacity has been impacted by several factors, including industry losses, catastrophes, changes in legal and regulatory guidelines, investment results and the ratings and financial strength of competitors. In 2020, we leveraged firming market conditions to increase our relevance in a select number of attractive specialty lines and treaty reinsurance markets and we continued to re-balance our portfolio towards less volatile lines of business.
We aim to execute on our business strategy through the following multi-pronged approach:
The table below presents gross premiums written in each of our reportable segments for each of the most recent three years.
Our insurance segment offers specialty insurance products to a variety of niche markets on a worldwide basis. The following are the lines of business in our insurance segment:
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• | •Liability: primarily targets primary and low to mid-level excess and umbrella commercial liability risks in the U.S. wholesale markets in addition to primary and excess of loss employers, public, and products liability business predominately in the U.K. Target industry sectors include construction, manufacturing, transportation and trucking, and other services. •Accident and Health: includes accidental death, travel insurance and specialty health products for employer and affinity groups. • primarily targets primary and low to mid-level excess and umbrella commercial liability risks in the U.S. wholesale markets in addition to primary and excess of loss employers, public, and products liability predominately in the U.K. Target industry sectors include construction, manufacturing, transportation and trucking, and other services. |
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• | Accident and Health: includes accidental death, travel insurance and specialty health products for employer and affinity groups.
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• | Discontinued Lines - Novae: includes those lines of business that Novae exited or placed into run-off in the fourth quarter of 2016 and in the first quarter of 2017. These discontinued insurance lines include financial institutions, professional indemnity, international liability, and international direct and facultative property. |
We produce business primarily through wholesale and retail brokers worldwide. Some of our insurance products are also distributed through managing general agents ("MGAs") and managing general underwriters ("MGUs"). In the U.S., we have the ability to write business on an admitted basis using forms and rates filed with state insurance regulators and on a non-admitted or surplus lines basis which provides flexibility in forms and rates, as these are not filed with state regulators. Our ability to write business on a non-admitted basis in the U.S. provides us with the pricing flexibility needed to write non-standard coverages. Substantially all of our insurance business is subject to aggregate limits, in addition to event limits.
Gross premiums written by broker, shown individually where premiums by broker were 10% or more of the total in any of the last three years, were as follows:
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| | Years ended December 31, | 2019 | | 2018 | | 2017 | |
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| | Marsh & McLennan Companies Inc. | $ | 434,108 |
| | 12 | % | | $ | 380,238 |
| | 10 | % | | $ | 330,057 |
| | 12 | % | |
| | Aon plc | 393,645 |
| | 11 | % | | 405,281 |
| | 11 | % | | 374,940 |
| | 13 | % | |
| | Other brokers | 2,015,822 |
| | 54 | % | | 2,067,447 |
| | 54 | % | | 1,633,444 |
| | 58 | % | |
| | Managing general agencies and underwriters | 832,356 |
| | 23 | % | | 944,626 |
| | 25 | % | | 476,477 |
| | 17 | % | |
| | Total | $ | 3,675,931 |
| | 100 | % | | $ | 3,797,592 |
| | 100 | % | | $ | 2,814,918 |
| | 100 | % | |
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| Years ended December 31, | 2020 | | 2019 | | 2018 | |
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| Marsh & McLennan Companies Inc. | $ | 496,913 | | | 12 | % | | $ | 434,108 | | | 12 | % | | $ | 380,238 | | | 10 | % | |
| Aon plc | 485,113 | | | 12 | % | | 393,645 | | | 11 | % | | 405,281 | | | 11 | % | |
| Other brokers | 2,310,687 | | | 58 | % | | 2,015,822 | | | 54 | % | | 2,067,447 | | | 54 | % | |
| Managing general agencies and underwriters | 725,686 | | | 18 | % | | 832,356 | | | 23 | % | | 944,626 | | | 25 | % | |
| Total | $ | 4,018,399 | | | 100 | % | | $ | 3,675,931 | | | 100 | % | | $ | 3,797,592 | | | 100 | % | |
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No insured accounted for more than 10% of the gross premiums written in the insurance segment.
Competitive Environment
In our insurance segment, where competition is focused on price, availability, service, and availability in the form of capacity, appetite and distribution, among other considerations, we compete globally and locally with global carriersU.S. and U.S. companies in regional and local markets.non-U.S carriers. We believe we can achieve positive differentiation through underwriting expertise in our chosen lines of business and market segments, providing customized solutions for our strategic partners, and industry leadingtop caliber claim service levels to our customers. In addition, our investment in building an agile business model is expected to further position us to capitalize on opportunities and more quickly bring innovative products and services to market;market while advancing our efforts to strengthen our portfolio and drive profitable growth.
Reinsurance Segment
Lines of Business and Distribution
Our reinsurance segment provides treaty reinsurance to insurance companies on a worldwide basis, written on an excess of loss and a proportional basis. For excess of loss business, we typically provide an indemnification toindemnify the reinsured entity for a portion of losses, both individually and in the aggregate, in excess of a specified individual or aggregate loss deductible. For proportional business, we receiveassume an agreed percentage of the underlying premiumpremiums and accept liability for the same percentage of incurred losses.losses and loss expenses. Our business is primarily produced through reinsurance brokers worldwide. The following are the lines of business in our reinsurance segment:
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• | •Catastrophe: provides protection for most catastrophic losses that are covered in the underlying insurance policies written by our cedants. The underlying policies principally cover property-related exposures but other exposures including workers compensation and personal accident are also covered. The principal perils covered by policies in this portfolio include hurricane and windstorm, earthquake, flood, tornado, hail and fire. In some instances, terrorism may be a covered peril or the only peril. This business is written on a proportional and excess of loss basis. |
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• | Property: provides protection for property damage and related losses resulting from natural and man-made perils that are covered in the underlying personal and commercial lines insurance policies written by our cedants. The predominant
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•Property: provides protection for property damage and related losses resulting from natural and man-made perils that are covered in the underlying personal and commercial lines insurance policies written by our cedants. The predominant exposure is property damage but other risks, including business interruption and other non-property losses, may also be covered when arising from a covered peril. The most significant perils covered by policies in this portfolio include windstorm, tornado and earthquake, but other perils such as freezes, riots, flood, industrial explosions, fire, hail and a number of other loss events are also included. This business is written on a proportional and excess of loss basis.
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• | •Professional Lines: provides protection for directors’ and officers’ liability, employment practices liability, medical malpractice, professional indemnity, environmental liability, cyber, and miscellaneous errors and omissions insurance risks. The underlying business is predominantly written on a claims-made basis. This business is written on a proportional and excess of loss basis. •Credit and Surety: provides reinsurance of trade credit insurance products and includes proportional and excess of loss structures. The underlying insurance indemnifies sellers of goods and services in the event of a payment default by the buyer of those goods and services. Surety reinsurance provides protection for losses arising from a broad array of surety bonds issued by insurers to satisfy regulatory demands or contract obligations in a variety of jurisdictions around the world. Mortgage reinsurance is also provided to mortgage guaranty insurers and U.S. government-sponsored entities for losses related to credit risk transfer into the private sector. •Motor: provides protection to insurers for motor liability and property damage losses arising out of any one occurrence. A loss occurrence can involve one or many claimants where the ceding insurer aggregates the claims from the occurrence. Traditional proportional and non-proportional reinsurance as well as structured solutions are offered. •Liability: provides protection to insurers of admitted casualty business, excess and surplus lines casualty business and specialty casualty programs. The primary focus of the underlying business is general liability, workers' compensation, auto liability and excess casualty. •Agriculture: provides protection for risks associated with the production of food and fiber on a global basis for primary insurance companies writing multi-peril crop insurance, crop hail and named peril covers, as well as custom risk transfer mechanisms for agricultural dependent industries with exposures to crop yield and/or price deviations. This business is written on a proportional and aggregate stop loss reinsurance basis. •Engineering: provides protection for all types of construction risks and risks associated with erection, testing and commissioning of machinery and plants during the construction stage. This line of business also includes cover for losses arising from operational failures of machinery, plant and equipment and electronic equipment as well as business interruption. We decided to exit this line of business in 2020. •Marine and Aviation: includes specialty marine classes such as cargo, hull, pleasure craft, marine liability, inland marine and offshore energy. The principal perils covered by policies in this portfolio include physical loss, damage and/or liability arising from natural perils of the seas or land, man-made events including fire and explosion, stranding/sinking/salvage, pollution, shipowners and maritime employers liability. This business is written on a non-proportional and proportional basis. Aviation provides cover for airline, aerospace and general aviation exposures. This business is written on a proportional and non-proportional basis. •Accident and Health: includes personal accident, specialty health, accidental death, travel, life and disability reinsurance products which are offered on a proportional and catastrophic or per life excess of loss basis. •Discontinued Lines - Novae: includes those lines of business that Novae exited or placed into run-off in the fourth quarter of 2016 and in the first quarter of 2017. These discontinued reinsurance lines include motor reinsurance, general liability reinsurance and international facultative property.
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• | Credit and Surety: provides reinsurance of trade credit insurance products and includes proportional and excess of loss structures. The underlying insurance indemnifies sellers of goods and services in the event of a payment default by the buyer of those goods and services. Surety reinsurance provides protection for losses arising from a broad array of surety bonds issued by insurers to satisfy regulatory demands or contract obligations in a variety of jurisdictions around the world. Mortgage reinsurance is also provided to mortgage guaranty insurers and U.S. government sponsored entities for losses related to credit risk transfer into the private sector.
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• | Motor: provides protection to insurers for motor liability and property damage losses arising out of any one occurrence. A loss occurrence can involve one or many claimants where the ceding insurer aggregates the claims from the occurrence. Traditional proportional and non-proportional reinsurance as well as structured solutions are offered.
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• | Liability: provides protection to insurers of admitted casualty business, excess and surplus lines casualty business and specialty casualty programs. The primary focus of the underlying business is general liability, workers' compensation, auto liability, and excess casualty.
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• | Agriculture: provides protection for risks associated with the production of food and fiber on a global basis for primary insurance companies writing multi-peril crop insurance, crop hail, and named peril covers, as well as custom risk transfer mechanisms for agricultural dependent industries with exposures to crop yield and/or price deviations. This business is written on a proportional and aggregate stop loss reinsurance basis.
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• | Engineering: provides protection for all types of construction risks and risks associated with erection, testing and commissioning of machinery and plants during the construction stage. This line of business also includes cover for losses arising from operational failures of machinery, plant and equipment, and electronic equipment as well as business interruption.
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• | Marine and Other: includes marine and aviation reinsurance.
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• | Accident and Health: includes personal accident, specialty health, accidental death, travel, life and disability reinsurance products which are offered on a proportional and catastrophic or per life excess of events loss basis.
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• | Discontinued Lines - Novae: includes those lines of business that Novae exited or placed into run-off in the fourth quarter of 2016 and in the first quarter of 2017. These discontinued reinsurance lines include motor reinsurance, general liability reinsurance, and international facultative property.
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Gross premiums written by broker, shown individually where premiums by broker were 10% or more of the total in any of the last three years, were as follows:
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| | Years ended December 31, | 2019 | | 2018 | | 2017 | |
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| | Marsh & McLennan Companies Inc. | $ | 838,617 |
| | 26 | % | | $ | 779,375 |
| | 25 | % | | $ | 783,286 |
| | 29 | % | |
| | Aon plc | 887,602 |
| | 28 | % | | 765,779 |
| | 25 | % | | 583,199 |
| | 21 | % | |
| | Willis Tower Watson PLC | 403,402 |
| | 13 | % | | 361,983 |
| | 12 | % | | 408,188 |
| | 15 | % | |
| | Other brokers | 795,352 |
| | 24 | % | | 864,601 |
| | 28 | % | | 690,337 |
| | 25 | % | |
| | Direct | 135,614 |
| | 4 | % | | 178,568 |
| | 6 | % | | 176,600 |
| | 6 | % | |
| | Managing general agencies and underwriters | 162,339 |
| | 5 | % | | 162,167 |
| | 5 | % | | 99,744 |
| | 4 | % | |
| | Total | $ | 3,222,927 |
| | 100 | % | | $ | 3,112,473 |
| | 100 | % | | $ | 2,741,355 |
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| Years ended December 31, | 2020 | | 2019 | | 2018 | |
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| Marsh & McLennan Companies Inc. | $ | 818,821 | | | 29 | % | | $ | 838,617 | | | 26 | % | | $ | 779,375 | | | 25 | % | |
| Aon plc | 694,712 | | | 25 | % | | 887,602 | | | 28 | % | | 765,779 | | | 25 | % | |
| Willis Tower Watson PLC | 435,498 | | | 16 | % | | 403,402 | | | 13 | % | | 361,983 | | | 12 | % | |
| Other brokers | 582,368 | | | 20 | % | | 795,352 | | | 24 | % | | 864,601 | | | 28 | % | |
| Direct | 105,777 | | | 4 | % | | 135,614 | | | 4 | % | | 178,568 | | | 6 | % | |
| Managing general agencies and underwriters | 171,363 | | | 6 | % | | 162,339 | | | 5 | % | | 162,167 | | | 5 | % | |
| Total | $ | 2,808,539 | | | 100 | % | | $ | 3,222,927 | | | 100 | % | | $ | 3,112,473 | | | 100 | % | |
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No cedant accounted for more than 10% of the gross premiums written in the reinsurance segment.
Competitive Environment
In our reinsurance segment, competition tends to be focused on availability, service, financial strength and increasingly, price. We compete with major U.S. and non-U.S. reinsurers and reinsurance departments of numerous multi-line insurance organizations. In addition to traditional market participants, we also compete with new market entrants supported by alternative capital sources offering risk transfer solutions on a collateralized or other non-traditional basis. Our clients may also acquire reinsurance protection through capital market products such as catastrophe bonds and insurance loss warranties. We believe that we achieve a competitive advantage through our diversified global product offering,offerings, responsiveness to customer needs and ability to provide sophisticated and innovative products. We offer excellent claims management, strong financial strength ratings and an ability to leverage our balance sheet and relationships with strategic capital partners to provide meaningful capacity.
Cash and Investments
We seek to balance the investment portfolios’ objectives of increasing book value with the generation of relatively stable investment income, while providing sufficient liquidity to meet our claims and other obligations. Liquidity needs arising from potential claims are of primary importance and are considered in asset class participation and the asset allocation process. A significant portion of theour investment portfolio is dedicated to investment grade fixed maturities that will generate cash flows that match expected claim payouts.
To diversify risk and optimize the growth in book value, we may invest in other asset classes such as equity securities, high yield securities and alternative investments (e.g. hedgeprivate equity funds) which provide higher potential total rates of return. These individual investment classes involve varying degrees of risk, including the potential for more volatile returns and reduced liquidity. However, as part of a balanced portfolio, they also provide diversification from interest rate and credit risk.
With regard to our investment portfolio, we primarily utilize third-party investment managers for security selection and trade execution functions, subject to guidelines and objectives for each asset class. This enables us to actively manage our investment portfolio with access to top performers specializing in various products and markets. We select the managers based on various criteria including investment style, performance history and corporate governance. In addition, we monitor approved investment asset classes for each subsidiary through analysis of our operating environment, including expected volatility of cash flows, overall capital position, regulatory and rating agency considerations. The Finance Committee of our Board of Directors approves our overall group asset allocation targets and investment policy to ensure that they are consistent with our overall goals, strategies and objectives. We also have an Investment and Finance Committee, comprisingcomprised of members of our senior management team, which oversees the implementation of our investment strategy.
Refer to Item 7 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cash and Investments' and Item 8, Note 5 to the Consolidated Financial Statements 'Investments' for additional information regarding our investment portfolio.
Refer to 'Risk and Capital Management' for additional information regarding the management of investment risk.
REGULATION
General
The business of insurance and reinsurance is regulated in most countries, although the degree and type of regulation varies significantly from one jurisdiction to another. In addition, some jurisdictions are currently evaluating changes to their regulation and we are monitoring these potential developments. To the extent we are aware of impending changes in regulation, designated project teams prepare us to comply on a timely basis with such anticipated changes. The following describes the current material regulations under which the Company operates.
Bermuda
Our Bermuda insurance operating subsidiary, AXIS Specialty Bermuda, is a Class 4 general business insurer subject to the Insurance Act 1978 of Bermuda and related regulations, as amended (the "Insurance Act"). The Insurance Act provides that no person may carry on any insurance or reinsurance business in or from within Bermuda unless registered as an insurer by the Bermuda Monetary Authority (the "BMA") under the Insurance Act. The Insurance Act imposes upon Bermuda insurance companies solvency and liquidity standards and auditing and reporting requirements, and grants the BMA powers to supervise, investigate, require information and demand the production of documents and intervene in the affairs of insurance companies. Significant requirements pertaining to Class 4 insurers include the appointment of an independent auditor, the appointment of a loss reserve specialist, the appointment of a principal representative in Bermuda, the filing of annual Statutory Financial Returns, the filing of annual GAAP financial statements, the filing of an annual capital and solvency return, compliance with minimum and enhanced capital requirements, compliance with certain restrictions on reductions of capital and the payment of dividends and distributions, compliance with group solvency and supervision rules, if applicable, and compliance with the Insurance Code of Conduct. On July 30, 2018, the Insurance Amendment (No. 2) Act 2018 amended the Insurance Act to provide for the prior payment of policyholders' liabilities ahead of general unsecured creditors in the event of the liquidation or winding up of an insurer. Effective January 1, 2019, this amendment applies to general business insurers and provides that, subject to certain statutorily preferred debts, the insurance debts of an insurer must be paid in priority to all other unsecured debts of the insurer. Insurance debt is defined as a debt to which an insurer is or may become liable pursuant to an insurance contract, excluding debts owed to an insurer under an insurance contract where the insurer is the person insured.
Effective January 1, 2016, the BMA was granted full "equivalence" under Solvency II (refer to"Ireland" below) for Bermuda’s commercial insurance sector, including Class 4 insurers.
The BMA acts as group supervisor of AXIS Capital and has designated AXIS Specialty Bermuda as the ‘designated insurer’ of the Group. In accordance with the group supervision and insurance group solvency rules, AXIS Capital is required to prepare and submit annual audited group GAAP financial statements, an annual group Statutory Financial Return, an annual group Capital and Solvency Return and quarterly group unaudited GAAP financial statements, and to appoint both a group actuary and a group auditor. AXIS Capital also files an annual capital and solvency return and must ensure compliance with minimum and enhanced capital requirements.
Effective September 23, 2020, AXIS Ventures Reinsurance Limited deregistered as a Class 3A insurer with the BMA and AXIS Ventures deregistered as an insurance manager with the BMA. AXIS Ventures Reinsurance Limited is currently pending dissolution.
AXIS Reinsurance Managers is regulated by the BMA as an insurance manager. Insurance managers are subject to the Insurance Act which provides that no person may carry on business as an insurance manager unless registered with the BMA under the Insurance Act. Insurance managers are required to comply with the Insurance Manager Code of Conduct.
AXIS Capital, AXIS Specialty Bermuda, AXIS Specialty Holdings Bermuda Limited, AXIS Specialty Investments Limited, AXIS Ventures, AXIS Specialty Investments II Limited and AXIS Reinsurance Managers must comply with provisions of the Bermuda Companies Act 1981, as amended (the "Companies Act"), regulating the payment of dividends and distributions. A Bermuda company may not declare or pay a dividend or make a distribution out of contributed surplus if there are reasonable grounds for believing that: (a) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the company’s assets would thereby be less than its liabilities.
AXIS Specialty Bermuda has reinsurance permissions in China and the Netherlands. AXIS Specialty Limited (Singapore Branch) has separate reinsurance permissions in China.
AXIS Re SE may write reinsurance in Bermuda under Solvency II equivalence between Bermuda and the E.U.
AXIS Managing Agency Ltd. may write general insurance and reinsurance in Bermuda using Lloyd's of London ("Lloyd's") licenses (refer to "U.K. and Lloyd's of London" below).
United States
U.S. Insurance Holding Company Regulation of AXIS Capital’s Insurance Subsidiaries
As members of an insurance holding company system, each of AXIS Insurance Co., AXIS Re U.S., AXIS Specialty U.S. and AXIS Surplus, collectively AXIS Capital’s U.S. insurance subsidiaries (collectively, the "U.S. Insurance Subsidiaries") are subject to the insurance holding company system laws and regulations of the states in which they do business. These laws generally require each of the U.S. Insurance Subsidiaries to register with its domestic state insurance department and to furnish financial and other information which may materially affect the operations, management or financial condition within the holding company system. All transactions within a holding company system that involve an insurance company must be fair and equitable. Notice to the applicable insurance department is required prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and an entity in its holding company system, and certain transactions may not be consummated without the department’s prior approval.
State Insurance Regulation
AXIS Re U.S. is licensed to transact insurance and reinsurance throughout the U.S. and in Puerto Rico. AXIS Re U.S. is also authorized to transact insurance and reinsurance throughout Canada through its Canadian branch and has reinsurance permissions in Argentina, Brazil, China, Columbia, Ecuador, Guam, Guatemala, Honduras, Panama, India and Mexico. AXIS Insurance Co. is licensed to transact insurance and reinsurance throughout the U.S. AXIS Specialty U.S. is licensed to transact insurance and reinsurance throughout the U.S., except California, Iowa, Maine, New Mexico, New York and Wyoming. AXIS Surplus is eligible to write insurance on a surplus lines basis throughout the U.S., Puerto Rico and the U.S. Virgin Islands.
Our U.S. Insurance Subsidiaries also are subject to regulation and supervision by their respective states of domicile and by other jurisdictions in which they do business. The regulations generally are derived from statutes that delegate regulatory and supervisory powers to an insurance official. The regulatory framework varies from state to state, but generally relates to approval of policy forms and rates, the standards of solvency that must be met and maintained, including risk-based capital standards, material transactions between an insurer and its affiliates, the licensing of insurers, agents and brokers, restrictions on insurance policy terminations, the nature of and limitations on the amount of certain investments, limitations on the net amount of insurance of a single risk compared to the insurer’s surplus, deposits of securities for the benefit of policyholders, methods of accounting, periodic examinations of the financial condition and market conduct of insurance companies, the form and content of reports of financial condition required to be filed, reserves for unearned premiums, losses, expenses and other obligations.
Our U.S. Insurance Subsidiaries are required to file detailed quarterly statutory financial statements with state insurance regulators in each of the states in which they conduct business. In addition, the U.S. Insurance Subsidiaries’ operations and accounts are subject to financial condition and market conduct examination at regular intervals by state regulators.
Regulators and rating agencies use statutory surplus as a measure to assess our U.S. Insurance Subsidiaries’ ability to support business operations and pay dividends. Our U.S. Insurance Subsidiaries are subject to various state statutory and regulatory restrictions that limit the amount of dividends that may be paid from earned surplus without prior approval from regulatory authorities. These restrictions differ by state, but generally are based on calculations using statutory surplus, statutory net
income and investment income. In addition, many state regulators use the National Association of Insurance Commissioners promulgated risk-based capital requirements as a means of identifying insurance companies which may be under-capitalized.
Although generally the insurance industry is not directly regulated by the federal government, federal legislation and initiatives can affect the industry and our business. Certain sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank") pertain to the regulation and business of insurance. Specifically, the Federal Insurance Office ("FIO") has limited authority to collect information and report on the business of insurance to Congress. In addition, Dodd-Frank contains the Non-Admitted and Reinsurance Reform Act of 2010 ("NRRA"). NRRA attempts to coordinate the payment of surplus lines taxes, simplify the granting of alien insurers to become surplus lines authorized and coordinates the credit for certain reinsurance. The Company continues to monitor the implementation of Dodd-Frank.
Ternian Insurance Group LLC, a leading provider of voluntary, limited benefit, affordable health plans and other employee benefits coverage for hourly and part-time workers and their families, is an authorized insurance producer in all 50 states of the U.S. except Hawaii. As a resident insurance producer in Arizona, Ternian Insurance Group LLC is subject to regulation and supervision by the Arizona Department of Insurance and is also subject to the regulation and supervision of the other states in which Ternian transacts business.
AXIS Specialty Underwriters, Inc., a Florida licensed reinsurance intermediary, is subject to regulation and supervision by the Florida Department of Financial Services. AXIS Specialty Underwriters, Inc. operates as the Latin American and Caribbean regional coverholder for Syndicate 1686, providing facultative reinsurance coverage to the Latin American and Caribbean market.
U.S. Authorizations of our Non-U.S. Insurance Subsidiaries
The insurance laws of each state of the U.S. regulate or prohibit the sale of insurance and reinsurance by insurers and reinsurers that are not admitted to do business within their jurisdictions, or conduct business pursuant to exemptions. AXIS Specialty Europe is eligible to write surplus lines business throughout the U.S. and in Puerto Rico. AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to (i) write surplus lines business throughout the U.S. and in all U.S. territories, (ii) write insurance business, except life insurance business, in the states of Illinois, Kentucky and in the U.S. Virgin Islands and (iii) write non-life reinsurance business throughout the U.S. and in all U.S. territories, except for accident and health reinsurance in New York.
In addition to the regulatory requirements imposed by the jurisdictions in which they are licensed, reinsurers’ business operations are affected by regulatory requirements in various states of the U.S. governing "credit for reinsurance" that are imposed on their ceding companies. In general, a ceding company obtaining reinsurance from a reinsurer that is licensed, accredited or approved by the jurisdiction or state in which the ceding company files statutory financial statements is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company’s liability for unearned premiums (which is that portion of premiums written which applies to the unexpired portion of the policy period), loss reserves and loss expense reserves ceded to the reinsurer. The great majority of states, however, permit a credit to statutory surplus resulting from reinsurance obtained from a non-licensed or non-accredited reinsurer to be recognized to the extent that the reinsurer provides a letter of credit, trust fund or other acceptable security arrangement. A few states do not allow credit for reinsurance ceded to non-licensed reinsurers except in certain limited circumstances, and others impose additional requirements that make it difficult to become accredited. In connection with the establishment of a Multi-Beneficiary Reinsurance Trust, AXIS Specialty Bermuda obtained accredited or trusteed reinsurer status in all U.S. jurisdictions except for New York.
Ireland
Our Ireland domiciled insurer and reinsurer are subject to the Solvency II Directive (Directive 2009/138/EC), as amended. Solvency II represents a consolidation and modernization of existing European Commission Solvency I insurance and reinsurance regulation and supervision and includes a harmonized risk-based solvency and reporting regime for the insurance/reinsurance sector. Solvency II covers three main areas: (i) the valuation of assets and liabilities and related solvency capital requirements; (ii) governance requirements including key functions of compliance, internal audit, actuarial and risk management; and (iii) legal entity and European Union ("E.U.") group reporting and disclosure requirements including public disclosures. The capital requirement must be computed using the Solvency II standard formula unless the Central Bank of Ireland ("CBI") has previously authorized a company to use its own internal model. Certain of our European legal entities are subject to Solvency II.
AXIS Specialty Europe
AXIS Specialty Europe is a European public limited liability company incorporated as a non-life insurer under the laws of Ireland. It is a Societas Europaea (SE), or European society company, and has been registered in accordance with E.U. law. As a SE company, AXIS Specialty Europe can more easily merge with companies in European member states and also transfer its domicile to other member states of the E.U. AXIS Specialty Europe is authorized and regulated by the CBI pursuant to the Insurance Acts 1909 to 2000, as amended, repealed or replaced, the Central Bank Acts 1942 – 2014, as amended, repealed or replaced, and E.U. regulation relating to general insurance and statutory instruments made thereunder. AXIS Specialty Europe is authorized to conduct business in 16 non-life insurance classes throughout the E.U. and the European Economic Area ("EEA"), which includes each of the member countries of the E.U. with the addition of Iceland, Liechtenstein and Norway. AXIS Specialty Europe may also write reinsurance business within the classes of insurance business for which it is authorized.
AXIS Specialty Europe is subject to Solvency II. In accordance with Solvency II, AXIS Specialty Europe is permitted to provide insurance services to clients located in any EEA Member State ("Freedom of Services"), subject to compliance with any "general good requirements" as may be established by the applicable EEA Member State regulator. AXIS Specialty Europe has notified the CBI of its intention to provide insurance services on a Freedom of Services basis in all EEA countries.
Solvency II also permits AXIS Specialty Europe to carry on insurance business in any EEA Member State under the principle of "Freedom of Establishment" subject to the prior approval of the CBI. AXIS Specialty Europe operates under Freedom of Establishment in the U.K., Belgium and the Netherlands through its branches established in each of these jurisdictions.
AXIS Specialty Europe's U.K. branch transacts general insurance business in the U.K., trading as AXIS Specialty London. The U.K. withdrew from the E.U. on December 31, 2020 and is now considered a third country. In order to maintain business continuity, AXIS Specialty Europe submitted an application to the Prudential Regulatory Authority (the "PRA") in 2018 for authorization of a third country branch. As this application is still pending, AXIS Specialty Europe entered into the PRA's Temporary Permissions Regime (the "TPR"), under which it is able to maintain business continuity. AXIS Specialty Europe will remain in the TPR, fully regulated by the PRA and the Financial Conduct Authority ("FCA"), until the earlier of the third year anniversary of its admission to the TPR and the date the PRA application has been fully assessed and approved.
Effective January 1, 2019, Compagnie Belge d’Assurances Aviation NV/SA merged into AXIS Specialty Europe by way of merger by absorption and dissolved without going into liquidation (the "Aviabel Merger"). In connection with the Aviabel Merger, AXIS Specialty Europe established two new branches in Belgium and the Netherlands (see "Belgium" and the "Netherlands" below).
AXIS Specialty Europe has local regulatory permission to carry on insurance business in Jersey and has reinsurance permissions in India, China, Argentina, Mexico, Panama, Paraguay, Chile, Honduras, Ecuador, Colombia and Guatemala.
AXIS Re SE
AXIS Re SE is a European public limited liability company incorporated as a reinsurer under the laws of Ireland. AXIS Re SE is also a Societas Europaea (SE), or European society company, registered in accordance with E.U. law. AXIS Re SE is authorized by the CBI as a composite reinsurer (non-life and life) in accordance with the Insurance Acts 1909 to 2000, as amended, repealed or replaced, the Central Bank Acts 1942 – 2014, as amended, repealed or replaced, and E.U. regulation applicable to reinsurance and statutory instruments made thereunder. AXIS Re SE is authorized to transact reinsurance throughout the E.U. and the EEA and is subject to Solvency II.
AXIS Re SE conducts business through its branch in Zurich, Switzerland, trading as AXIS Re Europe (see "Switzerland" below).
AXIS Re SE Escritório de Representação No Brasil Ltda. was established in Brazil as a subsidiary of AXIS Re SE to facilitate the Brazilian Superintendence of Private Insurance ("SUSEP") regulatory requirements for approval of a representative office of AXIS Re SE and for the registration of AXIS Re SE with SUSEP as an Admitted Reinsurer.
AXIS Re SE's representative offices in France and Spain were closed during 2019.
AXIS Re SE has reinsurance permissions in Argentina, Bolivia, Brazil, China, Chile, Colombia, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, India, Mexico, Nicaragua, Panama, Paraguay, Peru and Venezuela.
AXIS Specialty Holdings Ireland Limited
AXIS Specialty Holdings Ireland Limited is the limited liability holding company for AXIS Specialty Europe and AXIS Re SE, each incorporated under the laws of Ireland, Contessa Limited, a U.K. licensed insurance intermediary, and AXIS Reinsurance (DIFC) Limited, a Dubai licensed insurance intermediary.
AXIS Specialty Bermuda may write reinsurance under Solvency II equivalence granted to Bermuda by the E.U.
AXIS Managing Agency Ltd. is eligible to write insurance (except permanent health) and reinsurance business in Ireland through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" below).
AXIS Specialty Global Holdings Limited
AXIS Specialty Global Holdings Limited is the limited liability holding company for AXIS Capital's U.S. Insurance subsidiaries.
U.K. and Lloyd's of London
In the U.K., under the Financial Services and Markets Act 2000 ("FSMA"), no person may carry on a regulated activity unless authorized or exempt. Effecting or intermediating contracts of insurance or reinsurance are regulated activities requiring authorization. Effecting contracts of insurance requires authorization by the PRA and is regulated by the FCA. Intermediating contracts of insurance requires authorization by the FCA.
Under the Financial Services Act 2012, the FCA is a conduct regulator for all U.K. firms carrying on regulated activity in the U.K. while the PRA is the prudential regulator of U.K. banks, building societies, credit unions, insurers and major investment firms. As a prudential regulator, the PRA's general objective is to promote the safety and soundness of the firms it regulates. The PRA rules require financial firms to hold sufficient capital and have adequate risk controls in place.
The FCA's statutory strategic objective is to ensure that relevant markets function well and have operational objectives to protect consumers, protect financial markets and promote competition. It makes rules covering how the firm must be managed and requirements relating to the firm’s systems and controls, how business must be conducted and the firm’s arrangements to manage financial crime risk. The PRA and the FCA require regular and ad hoc reporting and monitor compliance with their respective rulebooks through a variety of means including the collection of data, industry reviews and site visits. The directors and senior managers of AXIS Managing Agency Ltd. must be "approved persons" under FSMA, making them directly and personally accountable for ensuring compliance with the requirements of the PRA and the FCA.
AXIS Managing Agency Ltd.
AXIS Managing Agency Ltd. is authorized and regulated by the PRA and regulated by the FCA to conduct insurance and reinsurance business and is a Lloyd's managing agent authorized by Lloyd's to manage our syndicates, Syndicate 1686 and Syndicate 2007. AXIS Managing Agency Ltd. is also the managing agent for SPA 6129, a third-party Lloyd's special purpose arrangement.
To consolidate our Lloyd’s business under Syndicate 1686, Syndicate 2007 ceased accepting new business and was placed into run-off on January 1, 2019. The final underwriting year of Syndicate 2007 and SPA 6129 will close by way of a reinsurance to close arrangement which took effect on January 1, 2021.
Lloyd’s is a society of corporate and individual members which underwrite insurance and reinsurance as members of syndicates. A syndicate is made up of one or more members that form a group to accept insurance and reinsurance risks. Each syndicate is managed by a managing agent. Managing agents write insurance business on behalf of the members of the syndicate, which members receive profits or bear losses in proportion to their respective shares in the syndicate for each underwriting year of account.
Lloyd’s is subject to U.K. law and is authorized under the FSMA. The Lloyd’s Act 1982 defines the governance structure and rules under which the society operates. Under the Lloyd's Act 1982, the Council of Lloyd’s is responsible for the management and supervision of the Lloyd’s market and supports the Lloyd's market. Lloyd's manages and protects the Lloyd's network of international licenses. Lloyd's agrees to syndicates' business plans and evaluates performance against
those plans. Syndicates are required to underwrite only in accordance with their agreed business plans. If they fail to do so, Lloyd’s can take a range of actions including, as a last resort, prohibiting a syndicate from underwriting. Lloyd’s also monitors syndicates’ compliance with Lloyd’s minimum standards and responsible for setting both member and central capital levels.
Lloyd’s has a global network of licenses and authorizations, and underwriters at Lloyd's may write business in and from countries where Lloyd’s has authorized status or exemptions available to non-admitted insurers or reinsurers. Lloyd’s licenses can only be used if the Syndicate Business Forecast, agreed annually with Lloyd’s, names those countries.
AXIS Managing Agency Ltd. operates an underwriting division at Lloyd’s Insurance Company (China) Limited, a wholly owned subsidiary of the Corporation of Lloyd’s which allows it to underwrite reinsurance in China.
AXIS Corporate Capital UK Limited
Until December 31, 2018, AXIS Corporate Capital UK Limited was the sole corporate member of Syndicate 1686. Effective January 1, 2019, both AXIS Corporate Capital UK Limited and AXIS Corporate Capital UK II Limited are corporate members of Syndicate 1686, providing 70% and 30% capital support, respectively. Syndicate 1686 is managed by AXIS Managing Agency Ltd.
AXIS Corporate Capital UK II Limited
(formerly Novae Corporate Underwriting Limited)
Following the acquisition of Novae Group Limited, management of Syndicate 2007 was transferred to AXIS Managing Agency Ltd. AXIS Corporate Capital UK II Limited is the sole corporate member of Syndicate 2007.
AXIS Underwriting Limited
AXIS Underwriting Limited, formerly known as Novae Underwriting Limited, is authorized and regulated by the FCA as an insurance intermediary and underwrites insurance at Lloyd's on behalf of Syndicate 1686.
Contessa Limited
Effective December 2019, Contessa Limited ceased writing insurance on behalf of AXIS Specialty Europe. Contessa Limited will continue to manage the AXIS Specialty Europe book of business on a run-off basis.
In January 2021, Contessa Limited surrendered its license as an insurance intermediary with the FCA.
AXIS Specialty UK Holdings Limited
AXIS Specialty UK Holdings Limited is a limited liability holding company for AXIS Managing Agency Ltd., AXIS Corporate Capital UK Limited and Novae Group Limited, and is incorporated under the laws of England and Wales.
Regulatory Impact Due to Brexit
On June 23, 2016, the U.K. voted to exit the E.U. ("Brexit") and on December 31, 2020, the U.K. completed its withdrawal from the E.U. Although an agreement was reached between the E.U. and the U.K., this agreement does not cover financial services. The parties have committed to enter into a Memorandum of Understanding covering financial services by March 2021. The following addresses the current impact to our insurers and reinsurers as a result of the U.K.'s withdrawal from the E.U.
Insurance
AXIS Specialty Europe established its branch in the U.K. pursuant to the right to Freedom of Establishment under E.U. law. As it was anticipated that AXIS Specialty Europe would lose its authorization to conduct business in the U.K. as a result of the U.K.'s exit from the E.U., an application for authorization of a third country branch was submitted to the PRA in 2018. As this application is still pending, AXIS Specialty Europe entered into the TPR to obtain temporary authorization. Under the TPR, AXIS Specialty Europe has authority to operate as a third country branch in the U.K. and is fully regulated by the PRA and FCA. As a result, AXS Specialty Europe's operations in the U.K. have been able to continue without interruption.
In preparation for Brexit, Lloyd’s established Lloyd's Insurance Company S.A in Brussels ("Lloyd’s Brussels") to retain access to the EEA markets and transferred all EEA risks to Lloyd’s Brussels.Lloyd's Brussels has been approved by the National Bank of Belgium ("NBB") and the Belgian conduct regulator, the Financial Services and Markets Authority ("Belgian FSMA") with authorization to write non-life insurance risks throughout the EEA. Effective with Brexit, all EEA risks are written by Lloyd’s Brussels.AXIS Managing Agency Ltd. has retained its access to the EEA markets through Lloyd's Brussels.
In January 2021, Lloyd’s Brussels updated Lloyd’s managing agents on its ongoing discussions with Lloyd’s, NBB and the Belgian FSMA regarding Lloyd’s Brussels’ operating model and the activities performed on behalf of Lloyd’s Brussels by Lloyd’s managing agents. We continue to monitor these discussions and are prepared to address any required changes to our operating model in the U.K. or the EEA.
Reinsurance
AXIS Managing Agency Ltd. remains able to conduct non-life facultative, proportional and excess of loss reinsurance throughout the EEA via Lloyd’s Brussels. The E.U. has not yet granted equivalence to the U.K. under Solvency II, however the review is ongoing and a decision is expected in the coming months.
AXIS Re SE currently transacts reinsurance business in the EEA pursuant to European law. In November 2020, the U.K. granted equivalence under Solvency II to EEA supervised reinsurers, including AXIS Re SE, allowing such reinsurers to continue operations without interruption.
Switzerland
AXIS Re SE's branch in Zurich, Switzerland trades as AXIS Re Europe and is registered in Zurich as AXIS Re SE, Dublin (Zurich branch). The CBI remains responsible for the prudential supervision of the branch. The Swiss Financial Market Supervisory Authority does not impose additional regulation upon a Swiss branch of an EEA reinsurer.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write all classes of insurance business, except life, sickness and legal expenses, and is authorized to write all classes of reinsurance business in Switzerland.
Singapore
AXIS Specialty Bermuda conducts insurance and reinsurance business from its branch in Singapore, AXIS Specialty Limited (Singapore Branch), subject to the supervision of the BMA and the MAS which imposes significant regulations relating to capital adequacy, risk management, governance and audit and actuarial requirements. AXIS Specialty Limited (Singapore Branch) is registered by ACRA as a foreign company in Singapore and regulated by ACRA pursuant to the Singapore Companies Act.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write insurance from Singapore with the exception of certain compulsory classes and life business. Singapore business may also be written from outside Singapore in certain circumstances where it is placed with a Singapore intermediary licensed by the MAS to place business at Lloyd's or by dealing directly with the insured.
Canada
AXIS Re U.S. conducts insurance and reinsurance business from AXIS Reinsurance Company (Canadian Branch), its branch in Canada, subject to the supervision of the New York State Department of Financial Services and the Office of the Superintendent of Financial Institutions Canada ("OSFI"), the federal regulatory authority that supervises federal Canadian and non-Canadian insurance companies operating in Canada pursuant to the Insurance Companies Act (Canada). The branch is authorized by OSFI to transact insurance and reinsurance. In addition, the branch is subject to the laws and regulations of each of the provinces and territories in which it is licensed.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses subject to the laws and regulations of each of the provinces and territories in which it is licensed and to write insurance in or from Canada, with the following exceptions: hail insurance in respect of crop in the province of Quebec; home warranty insurance in the province of British Columbia; life insurance; credit protection insurance; title insurance; surety; and mortgage default insurance. Syndicate 1686, through Lloyd's, is authorized to write reinsurance in or from Canada subject to certain restrictions relating to life reinsurance.
Belgium
AXIS Specialty Europe conducts insurance from its Belgium branch, AXIS Specialty Europe SE (Belgium Branch), which is subject to CBI prudential supervision and limited regulation by the NBB.
AXIS Specialty Europe also has permission to write insurance and reinsurance on a Freedom of Services basis in Belgium.
AXIS Re SE has permission to write reinsurance on a Freedom of Services basis in Belgium.
AXIS Managing Agency Ltd. is eligible to write insurance (except permanent health) and reinsurance business in Belgium through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" above).
Netherlands
AXIS Specialty Europe conducts insurance from its Netherlands branch, AXIS Specialty Europe SE (Netherlands Branch), which is subject to CBI prudential supervision and limited regulation by the Dutch National Bank.
AXIS Specialty Europe has permission to write insurance and reinsurance on a Freedom of Services basis in the Netherlands.
AXIS Re SE has permission to write reinsurance on a Freedom of Services basis in the Netherlands.
AXIS Managing Agency Ltd. is eligible to write insurance (except permanent health) and reinsurance business in the Netherlands through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" above).
Dubai
AXIS Reinsurance (DIFC) Limited was granted a prudential Category 4 license by the Dubai Financial Services Authority in December 2017 and operated as an intermediary under binding authority granted by the Board of Directors of AXIS Re SE to underwrite accident and health reinsurance. In December 2020, AXIS Reinsurance (DIFC) Limited surrendered its license and is currently in liquidation proceedings.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write reinsurance in or from Dubai with certain exceptions.
Non-Admitted Insurance and Reinsurance
The Company also insures and reinsures risks in many countries, including the above countries, pursuant to regulatory permissions and exemptions available to non-admitted insurers and reinsurers.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write insurance and reinsurance business where Lloyd's has authorized status or pursuant to regulatory exemptions available to non-admitted insurers and reinsurers.
TRADEMARKS
We use our trademarks, including among others, our "AXIS" trademarks for the global marketing of our products and services, and we believe that we sufficiently safeguard our trademark portfolio to protect our rights.
HUMAN CAPITAL MANAGEMENT
As a company, AXIS Capital’s mission is not only to deliver outstanding financial results, but also to help our clients, brokers and partners navigate the challenges of a volatile world. We believe our employees distinguish us from our competitors and are critical to our success as an insurance and reinsurance company that leads with purpose. Our workforce’s strength is grounded in our One AXIS culture, which celebrates collaboration, diversity and integrity, as well as relentless execution, continuous learning, adapting and improving. We recognize that our strength lies in our people, and therefore, one of our core strategies is to invest in and support our employees, including the following areas of focus:
Health, Safety and Wellness
We are committed to the health, safety and wellness of our workforce. In response to the ongoing COVID-19 pandemic, most of our employees have worked remotely since March 2020, and we suspended all nonessential business travel. We provided employees with an office and technology stipend to assist with the transition to working from home and have developed educational tools and materials focused on the well-being of our employees, including remote working best practices, leadership of virtual teams and managing stress while working from home. We also offered flexible work schedules, added half-day well-being days and allowed flexibility with paid time off and sick leave policies for employees directly impacted by COVID-19. We are carefully reviewing and monitoring health information and shelter-in-place orders in the regions in which we operate, and we have reopened certain of our offices only on an optional and limited basis and in accordance with the rules and regulations of the applicable jurisdiction. Our Board of Directors is focused on our response to the COVID-19 pandemic, receiving regular updates on the health and safety of employees, protocols to address actual or suspected COVID-19 exposures or cases and the status of any return to work decisions.
Diversity, Equity and Inclusion
We see diversity, equity and inclusion as a strategic imperative that is core to our business and our culture. We believe that encouraging a wide range of experiences, backgrounds and perspectives and ensuring equal treatment for all makes AXIS a more rewarding place to work, enables us to attract talented teammates, enriches our perspectives and makes us stronger as a global organization. Below are strategies and initiatives enacted in 2020 to further the advancement of our diverse, equitable and inclusive culture:
•Diversity & Inclusion Council: We established a Diversity & Inclusion Council comprised of global employees representing a full spectrum of experiences and viewpoints. The Council was established to ensure that employees with diverse perspectives and backgrounds can share their thoughts, ideas and recommendations. The Council is supported by an ancillary group of D&I Advocates who actively engage and promote the work of the Council.
•Educational Initiatives: AXIS is committed to diversity, equity and inclusion educational initiatives and offers them through varying mediums. Initiatives included:
◦Mandatory unconscious bias training for all employees;
◦Monthly "knowledge tests" on various diversity, equity and inclusion topics for all employees;
◦Informational toolkits serving as quick reference guides; and
◦The establishment of an anti-racism resource center.
The year was highlighted by a global forum on racial justice and equality with an external moderator and panel of AXIS colleagues.
•Recruitment: We continued to broaden our recruiting strategies to identify, source and develop a diverse pipeline of candidates. Initiatives included:
◦Establishing and enhancing existing relationships with diverse universities and external professional organizations;
◦Participating in diverse apprenticeship programs in Bermuda, London and the U.S.;
◦Further building out our internship program with strong diverse representation;
◦Providing recruitment training and manager coaching with a focus on enhancing managers’ effectiveness at recruiting diverse candidates; and
◦Ensuring management succession plans have diverse representation.
•Advocacy: AXIS participated in the Lloyd's Dive In festival, a festival for diversity and inclusion in the insurance sector, by sponsoring and participating in local committees in Atlanta, Bermuda, London, New York and Zurich.
•Tracking:We established quarterly measurement of diverse hiring, turnover, promotions, succession planning and candidate slates. In support of this work, we measure gender pay gap semi-annually and conduct annual pay audits. We also continued to partner with a human capital analytics firm that advises companies with respect to diversity, equity and inclusion metrics to help us set, track and consistently improve our diversity, equity and inclusion.
•Disclosure: We believe transparency will play a critical role in driving action by shining light on the areas where we can increase underrepresented populations in our workforce. In 2020, AXIS participated in the Bloomberg Gender Equality Index (the "GEI"), an index of public companies committed to disclosing their efforts to achieve gender equality, to build
greater parity between genders within our organization. This participation, in turn, earned AXIS inclusion in the 2021 GEI.
Talent Development
At AXIS, investing in our people is a top priority. We provide our employees with a variety of professional development resources to help them achieve their career goals. Some of our 2020 initiatives in furtherance of this goal are described below:
•Career Mobility Within the Organization: In 2020, 20% of our open positions were filled by internal candidates.
•AXIS Academy: We provide our employees access to AXIS Academy, which serves as our learning and development hub and reflects our commitment to continuing education. AXIS Academy includes over 5,000 online training courses.
•Professional Development: We also offer financial assistance for external professional development opportunities and tuition reimbursement for certain part-time business-related degree programs.
•Early Careers Program: Our Early Careers Program aims to build a strong pipeline of early career talent through our internship and development programs.
•AXIS Careers: We created AXIS Careers to ensure our people feel empowered to "own their careers" – offering a comprehensive suite of professional development tools, resources and training modules to help navigate career experiences and upskilling across our global organization. This includes leadership development, mentoring, and job secondments, shadows and swaps.
Employee Engagement
We understand that employee engagement leads to a more satisfying and fulfilling workplace and motivates employees to do their best work. Our employee engagement initiatives include: (i) AXIS Applause (our global recognition program to recognize the contributions of other AXIS members), (ii) community building events for AXIS employees and their families and (iii) our employee-led charitable giving program which helps our employees give back to their communities.
During 2020, we conducted an enterprise-wide engagement survey, measuring engagement and inclusion. Managers and teams reflected on the survey results and developed enterprise-wide and local action plans to address areas identified for growth.
Compensation and Benefits
To attract and retain our industry’s top talent, we offer employees a total rewards program that is designed to incentivize exceptional performance and deliver equal pay for equal work. Our compensation packages align with our pay-for-performance philosophy and are assessed on an annual basis through year-end performance reviews. Our packages are also regularly benchmarked against similarly sized insurance, reinsurance and financial services companies in each of our talent markets. Compensation components include market competitive salaries and short-term annual incentive programs (i.e., bonus payments) and, for senior level employees, long-term incentives such as equity grants. Our comprehensive benefits packages include medical plans for employees and their families, flexible spending accounts, retirement savings plans with employer contributions and work-life benefits, including parental leave policies, flexible work arrangements for eligible employees and charitable matching programs.
Succession Planning
We have a robust talent and succession planning process. On an annual basis, management conducts a talent and succession plan for each member of our Executive Committee and their direct reports, focusing on high performing and high potential talent, diverse talent, and the succession plan for each position. On an annual basis, our Board of Directors receives a comprehensive succession plan for each member of our Executive Committee. In light of the COVID-19 pandemic, in 2020, the Compensation Committee also received a report on the emergency succession plan for the Executive Committee.
Employees
At December 31, 2020, we had 1,921 employees. During fiscal year 2020, the number of employees increased by approximately 17%, primarily due to increases in our Business Technology Solutions team in our newly opened Halifax, Nova Scotia office. During fiscal 2020, our voluntary turnover rate was approximately 8%.
Below is an approximate summary of our employees by region at December 31, 2020:
| | | | | | | | | | | |
| | | |
| | Employees | |
| | | |
| North America | 1,212 | |
| Europe, Middle East and Africa | 677 | |
| Asia Pacific | 32 | |
| Total employees | 1,921 | |
| | | |
At December 31, 2020, our global employees had approximately the following gender demographics:
| | | | | | | | | | | | | | |
| | | | |
| | Women | Men | |
| | | | |
| Total employees(1) | 43% | 55% | |
| | | | |
(1)2% of employees did not identify.
At December 31, 2020, our U.S. employees had approximately the following racial and ethnic demographics:
| | | | | | | | | | | |
| | | |
| | All U.S. Employees(2)(3) | |
| | | |
| Black / African American | 14% | |
| Asian | 10% | |
| Hispanic / Latinx | 4% | |
| White | 59% | |
| Multiracial, Native American and Pacific Islander | 2% | |
| | | |
(2)This information is presented for U.S. employees only. We continue to gather global demographic information to demonstrate our racial and ethnic diversity.
(3)11% of employees did not identify.
INFORMATION SECURITY
Information security is one of our highest priorities. Our information security ecosystem is designed to evolve with the changing security threat environment through ongoing assessment and measurement. We use commercial and proprietary security monitoring technologies and techniques to continuously monitor and respond to cyber threats. We also regularly engage independent third-party security auditors to test our systems and controls against relevant security standards and regulations.
Our employees and contractors are required to comply with our IT End User policy and certify their compliance annually. Information security awareness training is mandatory for all new hires and for existing employees and contractors on a regular basis.
Our Board of Directors, along with the Risk Committee and Audit Committee of the Board of Directors, oversee our information security program. In 2020, our Board of Directors received periodic updates throughout the year on cybersecurity matters, and these updates are part of the Board of Directors' standing agenda.
AVAILABLE INFORMATION
Our Internet website address is www.axiscapital.com. Information contained in our website is not part of this report.
We make available free of charge, through our internet website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Current copies of the charter for each of our Audit Committee, Corporate Governance and Nominating Committee, Compensation Committee, Finance Committee, Executive Committee and Risk Committee, as well as our Corporate Governance Guidelines and Code of Business Conduct, are available on our internet website at www.axiscapital.com.
RISK AND CAPITAL MANAGEMENT
Risk Management Framework – Overview
Mission and Objectives
The mission of Enterprise Risk Management ("ERM") at the Company is to promptly identify, measure,assess, manage, monitor and report and monitor risks that affect the achievement of our strategic, operational and financial objectives. The key objectives of our risk management framework are to:
•Protect our capital base and earnings by monitoring our risks against our stated risk appetite and limits;
•Promote a sound risk management culture through disciplined and informed risk taking;
•Enhance value creation and contribute to an optimal risk-return profile by providing the basis for efficient capital deployment;
•Support our group-wide decision-making process by providing reliable and timely risk information; and
•Safeguard our reputation.
The risk management framework applies to all lines of business and corporate functions across our insurance and reinsurance segments.
Risk Governance
At the heart of our risk management framework is a governance process with responsibilities for taking,identifying, assessing, managing, monitoring and reporting risks. We articulate the roles and responsibilities for risk management throughout the organization, from the Board of Directors and the Chief Executive Officer to our business and functional areas,corporate functions, thus embedding risk management throughout the businessCompany (refer to 'Risk Governance and Risk Management Organization' below).
To support our governance process, we rely on our documented policies and guidelines.procedures. Our risk policies are a formal set of documents we use to specify our approach and risk mitigation/control philosophy for managing individual and aggregate risks. We also have procedures to approve exceptions and procedures for referring risk issues to senior management and the Board of Directors. Our qualitative and quantitative risk reporting framework provides transparency and early warning indicators to senior management with regard to our overall risk profile, adherence to risk appetite and associated limits and improvement actions both at an operating entity and Group level.
Various governance and control bodies coordinate to help ensure that objectives are being achieved, risks are identified, and appropriately managed, and internal controls are in place and operating effectively.
Internal Capital Model
An important aspect of our risk management framework is our internal capital model. Utilizing this modeling framework provides us with a holistic view of the capital we put at risk in any year by allowing us to understand the relative interaction
among the known risks impacting us. This integrated approach recognizes that a single risk factor can affect different sub-portfolios and that different risk factors can have different mutual dependencies. We continuously review and update our model and its parameters as our risk landscape and external environment continue to evolve.
As well as being used to measure internal risk capital (refer to 'Capital Management' below), our internal capital model is used as a tool in managing our business, planning capital allocations, portfolio monitoring, reinsurance and retrocession (collectively referred to as "reinsurance") purchasing and investment asset allocations.
Our internal capital model is an integral part of the business planning process which provides an assessment as to whether our prospective business and investment strategies are in line with our defined risk appetite and objectives at both the group and operating entity level. The model also provides a basis for optimizing our risk-return profile by providing consistent risk measurement across the Group. The model outputs are reviewed and supplemented with management’s judgment and business experience and expertise.
Risk Diversification
As a global insurer and reinsurer with a wide product offering across different businesses, diversification is a key component of our business model and risk framework. Diversification enhances our ability to manage our risks by limiting the impact of
a single event and contributing to relatively stable long-term results and our general risk profile. The degree to which the diversification effect can be realized depends not only on the correlation between risks but also the level of relative concentration of those risks. Therefore, our aim is to maintain a balanced risk profile without any disproportionately large risks. Our internal capital model considers the level of correlation and diversification between individual risks and we measure concentration risk consistently across our business units in terms of pre and pre/post diversified internal risk capital requirements.
Risk Appetite and Limit Framework
Our integrated risk management framework considers material risks that arise from operating our business.operations. Large risks that might accumulate and have the potential to produce substantial losses are subject to our group-wide risk appetite and limit framework. Our risk appetite, as authorized by ourthe Board of Directors, represents the amount of risk that we are willing to accept within the constraints imposed by our capital resources as well as the expectations of our stakeholders as to the type of riskrisks we hold within our business. At an annual aggregated level, we also monitor and manage the potential financial loss from the accumulation of risk exposure in any one year.
Specific risk limits are defined and translated into a consistent framework across our identified risk categories and across our operating entities and are intended to limit the impact of individual risk types or accumulations of risk. Individual limits are established through an iterative process to ensure that the overall framework complies with our group-wide requirements on capital adequacy and risk accumulation.
We monitor risk through, for example, risk dashboards and limit consumption reports. These are intended to allow us to detect potential deviations from our internal risk limits at an early stage.
External Perspectives
Various external stakeholders, among them regulators, rating agencies, investors and accounting bodies, place emphasis on the importance of sound risk management in the insurance/reinsurance industry. We monitor developments in the external environment and evolve our risk management practices accordingly.
Insurance Risk Governance
Insurance risk is the inherent uncertainty as to the occurrence, amount and Risk Management Organizationtiming of insurance and reinsurance liabilities transferred to us through the underwriting process.
•The key elementsinsurance/reinsurance business is historically cyclical, and we expect to experience periods with excess underwriting capacity and unfavorable premium rates.
•We may be adversely impacted by a wide variety of our governance framework, as it relates specificallynatural catastrophes or man-made catastrophes. The incidence and severity of catastrophes are inherently unpredictable and losses from catastrophes could be substantial. Our exposure to risk management, are described below.natural catastrophe losses may be increased by climate change, where we may have exposure to physical, transition and liability risks.
Board of Directors’ Level
The Risk Committee of the Board ("Risk Committee") assists the Board of Directors in overseeing the integrity and effectiveness of our ERM framework and ensuring that our risk assumption and risk mitigation activities are consistent with that framework. The Risk Committee reviews, approves and monitors our overall risk strategy, risk appetite and key risk limits and receives regular reports from the Group Risk Management function ("Group Risk") to ensure any significant risk issues are being addressed by management. The Risk Committee further reviews, with management and Internal Audit, the Group’s general policies and procedures and satisfies itself that effective systems of risk management and controls are established and maintained. Among its other responsibilities, the Risk Committee also reviews and approves our annual Own Risk and Solvency Assessment ("ORSA") report. The Risk Committee assesses the independence and objectivity of our Group Risk function, approves its terms of reference and reviews its ongoing activities.
Following a recommendation•We may be adversely affected by the Chief Executive Officer, the Risk Committee also conducts a revieweffects of emerging claims and provides a recommendation to the Boardcoverage issues and/or if actual claims exceed our loss reserves. The actual final cost of Directors regarding the appointment and/or removal of the Chief Risk Officer. The Risk Committee meets with the Chief Risk Officer in separate executive sessions on a regular basis.
The Finance Committee of our Board oversees the Group’s investment of funds and adequacy of financing facilities. This includes approval of the Group’s strategic asset allocation plan. The Audit Committee of our Board, which is supported by our internal audit function, is responsible for overseeing internal controls and compliance procedures, and also reviews with management and the Chairman of the Risk Committee, the Group’s guidelines and policies regarding risk assessment and risk management.
Group Executive Level
Our management Executive Committee formulates our business objectives and risk strategy within the overall risk appetite set by our Board. It allocates capital resources and sets limits across the Group, with the objective of balancing return and risk. While the management Executive Committee is responsible overall for risk management, it has delegated some authority to the executive level Risk Management Committee ("RMC") consisting of the Chief Executive Officer, Chief Financial Officer, Chief Strategy Officer, Chief Underwriting Officer, Chief Executive Officers of each segment, Chief Risk Officer, Chief Actuary and General Counsel.
The RMC is responsible for overseeing the integrity and effectiveness of the Group's ERM framework and ensuring that the Group's risk assumption and risk mitigation activities are consistent with that framework, including a review of the annual business plan relative to our risk limits. In addition to the RMC, there is an established framework of separate yet complementary management committees and subcommittees, focusing on particular aspects of ERM including the following:
Management Committees
The Business Council oversees underwriting strategy and performance, establishes return targets, and manages risk/exposure constraints across each line of business, in line with the Company’s strategic goals.
The Product Boards for each major line of business aim to develop a coherent strategy for portfolio management, set underwriting guidelines and risk appetite, and leverage expertise across the multiple geographies that we operate in. The boards also oversee exposure management frameworks and view of risk.
The Investment & Finance Committee oversees the Group’s investment activities by, among other things, monitoring market risks, the performance of our investment managers and the Group’s asset-liability management, liquidity positions and investment policies and guidelines. The Investment & Finance Committee also prepares the Group’s strategic asset allocation and presents it to the Finance Committee of the Board for approval.
The Capital Management Committee oversees the integrity and effectiveness of the Company’s Capital Management Policy, including the capital management policies of the Company’s legal entities and branches, and oversees the availability of capital within the Group.
The Group Reserve Committee ensures appropriate oversight and challenge of the Group and Segment Reserves, led by the Group Chief Reserving Actuary.
RMC Sub-Committees
The Reinsurance Security Committee ("RSC") sets out the financial security requirements of our reinsurance counterparties and approves our counterparties, as needed.
The Internal Model Committee oversees the Group's Internal Model framework, including the key model assumptions, methodology and validation framework.
The Operational Risk Committee oversees the Group's Operational Risk framework for the identification, management, mitigation and measurement of operational risk and facilitates the embedding of effective operational risk management practices throughout the Group.
The Emerging Risks Working Group oversees the processes for identifying, assessing and monitoring current and potential emerging risks.
Group Risk Management Organization
As a general principle, management in each of our business units is responsible in the first instance for both the risks and returns of its decisions. Management is the 'owner' of risk management processes and is responsible for managing our business within defined risk limits.
Our Chief Risk Officer reports to the Chief Financial Officer and the Chairman of the Board Risk Committee, leads our independent Group Risk function, and is responsible for oversight and implementation of the Group's ERM frameworksettling outstanding claims, as well as providing guidanceclaims expected to arise from the unexpired period of risk is uncertain. There are many other factors that would cause loss reserves to increase or decrease, which include, but are not limited to emerging claims and support for risk management practices. Group Risk is responsible for developing methodscoverage issues such as changes in claim severity, changes in the expected level of reported claims, judicial action changing the scope and/or liability of coverage, changes in the legislative, regulatory, social and processes for identifying, measuring, managingeconomic environment, and reporting risk. This forms the basis for informing the Risk Committeeunexpected changes in loss inflation.
•We may be adversely impacted by inflation. Our operations, like those of other insurers and RMC of the Group’s risk profile. Group Risk develops our risk management framework and oversees the adherence to
this framework at the Group and operating entity level. Our Chief Risk Officer regularly reports risk mattersreinsurers, are susceptible to the Chief Financial Officer, management Executive Committee, RMCeffects of inflation because premiums are established before the ultimate amounts of losses and loss expenses are known.
•We may be adversely affected by the Risk Committee.
Internal Audit, an independent, objective function, reports to the Audit Committee of the Board on the effectivenessfailure of our risk management framework. This includes assurance thatloss limitation strategy, including the use of reinsurance.
•We may be adversely affected by the failure of models used to support key business risks have been adequately identified and managed appropriately and that our system of internal control is operating effectively. Internal Audit also provides independent assurance around the validation of our internal capital model and coordinates risk-based audits, compliance reviews, and other specific initiatives to evaluate and address risk within targeted areas of our business.decisions.
Our risk governance structure is further complemented by our legal department which seeks to mitigate legal and regulatory compliance risks with support from other departments. This includes ensuring that significant developments in law and regulation are observed and that we react appropriately to impending legislative and regulatory changes and applicable court rulings.
Risk Landscape
Our risk landscape comprises strategic, insurance, credit, market, operational, liquidity and other risks that arise as a result of doing business. We provide definitions of these risk categories in the following sections as well as our related risk management. Across these risk categories, we identify and evaluate emerging threats and opportunities through a framework that includes the assessment of potential surprise factors that could affect known loss potentials.
Our risk landscape is reviewed on a regular basis to ensure that it remains up-to date based on the evolving risk profile of the Company. In addition, we undertake ongoing risk assessments across all enterprise risks, the output of which is captured in our risk register which is reviewed and reported through our governance structure.
Strategic Risk
Strategic risks are risks that affect or are created by an organization’s business strategy and strategic objectives. Our review of strategic risk is a broad one that evaluates not only internal and external challenges that might cause our chosen strategy to fail but also evaluates major risks that could affect our long-term positionperformance and performance.position.
•We may be adversely affected by competition and consolidation in the insurance and reinsurance industry. Increased competition could result in fewer submissions, lower premium rates, less favorable policy terms and conditions and greater costs of customer acquisition and retention.
•We have been and may continue to be adversely affected by a deterioration in global economic conditions. Economic uncertainty and market turmoil has affected and may in the future affect, among other aspects of our business, the demand for and claims made under our products, the ability of customers, counterparties and others to establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital resources and our investment performance and portfolio. A persistent low interest rate environment may reduce our profitability as investment income falls.
•We may be adversely affected by the exit of the U.K. from the E.U.
•We may be adversely affected by loss of business provided by a major broker.
•We may be adversely affected by a downgrade in our financial strength or credit rating. If we experience a credit rating downgrade, withdrawal or negative watch/outlook in the future, we could incur higher borrowing costs and may have more limited means to access capital. It could also result in a substantial loss of business for us.
Market Risk
Market risk is the risk that our financial instruments may be negatively impacted by movements in financial market prices or rates.
•Our investment and derivative instrument portfolios may be adversely impacted by capital markets risk related to changes in equity prices, interest rates, credit spreads and other factors.
•Our operating results may be adversely affected by currency fluctuations.
Liquidity Risk
Liquidity risk is the risk that we may not have sufficient financial resources to meet our obligations when they are due, or would have to incur excessive costs to do so.
•Our underwriting activities may expose us to liquidity risk. This stems mainly from the need to cover potential extreme loss events and regulatory constraints that limit the flow of funds within the Group.
Credit Risk
Credit risk represents the risk of incurring financial loss due to the diminished creditworthiness (reduced financial strength and, ultimately, possibly default) of our third-party counterparties.
•We may be adversely impacted if we are unable to collect amounts due to us from our counterparties – most materially reinsurers, but also including brokers, agents and customers.
Operational Risk
Operational risk represents the risk of loss as a result of inadequate processes, system failures, human error or external events, including but not limited to direct or indirect financial loss, reputational damage, customer dissatisfaction and legal and regulatory penalties.
•We may be adversely impacted by failure of the processes, people or systems that we rely on to maintain our operations and manage the operational risks inherent to our business, including those outsourced to third parties.
Regulatory Risk
Regulatory risk represents the risk arising from our failure to comply with legal, statutory or regulatory obligations.
•Our insurance and reinsurance subsidiaries conduct business globally and are subject to varying degrees of regulation in multiple jurisdictions. We may be adversely affected if we fail to comply fully with, or obtain exemption, from relevant regulations.
Risks Related to the Ownership of our Securities
•In addition to the risks to our business listed above, there are certain other risks related to the ownership of our securities for example relating to our holding company structure or provisions in our organizational documents and bye-laws.
Risks Related to Taxation
•We may be adversely impacted by changes in tax rules, or changes in the interpretation of existing tax rules in the multiple jurisdictions in which we operate.
Readers should carefully consider the risks noted above together with the risks detailed in Item 1A, 'Risk Factors' and all of the other information included in this report.
Website and Social Media Disclosure
We use our website (www.axiscapital.com) and our corporate Twitter (@AXIS_Capital) and LinkedIn (AXIS Capital) accounts as channels of distribution of Company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, e-mail alerts and other information about AXIS Capital may be received when enrolled in our "E-mail Alerts" program, which can be found in the Investor Information section of our website (www.axiscapital.com). The contents of our website and social media channels are not part of this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
In this Form 10-K, references to "AXIS Capital" refer to AXIS Capital Holdings Limited and references to "we", "us", "our", "AXIS", the "Group" or the "Company" refer to AXIS Capital Holdings Limited and its direct and indirect subsidiaries and branches, including: AXIS Specialty Holdings Bermuda Limited, AXIS Specialty Limited ("AXIS Specialty Bermuda"), AXIS Specialty Limited (Singapore Branch), AXIS Specialty Investments Limited, AXIS Specialty Investments II Limited, AXIS Specialty UK Holdings Limited, AXIS Managing Agency Ltd., AXIS Corporate Capital UK Limited (corporate member which provides 70% capital support to AXIS Syndicate 1686 ("Syndicate 1686")), Novae Group Limited, AXIS UK Services Limited, AXIS Underwriting Limited, AXIS Corporate Capital UK II Limited (sole corporate member of Novae Syndicate 2007 ("Syndicate 2007") and corporate member which provides 30% capital support to Syndicate 1686), AXIS Ventures Limited ("AXIS Ventures"), AXIS Reinsurance Managers Limited ("AXIS Reinsurance Managers"), AXIS Specialty Holdings Ireland Limited, AXIS Specialty Europe SE ("AXIS Specialty Europe"), AXIS Specialty Europe SE (U.K. Branch), AXIS Specialty Europe SE (Belgium Branch), AXIS Specialty Europe SE (Netherlands Branch), AXIS Reinsurance (DIFC) Limited, AXIS Re SE, AXIS Re SE, Dublin (Zurich Branch) ("AXIS Re Europe"), AXIS Re SE Escritório de Representação No Brasil Ltda., Contessa Limited, AXIS Specialty Global Holdings Limited, AXIS Specialty U.S. Holdings, Inc., AXIS Reinsurance Company ("AXIS Re U.S."), AXIS Reinsurance Company (Canadian Branch), AXIS Specialty U.S. Services, Inc., AXIS Specialty U.S. Services, Inc. (U.K. Branch), AXIS Specialty Canada Services, ULC, AXIS Group Services, Inc., AXIS Specialty Underwriters, Inc., AXIS Insurance Company ("AXIS Insurance Co."), AXIS Surplus Insurance Company ("AXIS Surplus"), AXIS Specialty Insurance Company ("AXIS Specialty U.S."), Ternian Insurance Group LLC, AXIS Specialty Finance LLC and AXIS Specialty Finance PLC, unless the context suggests otherwise.
Unless otherwise noted, tabular dollars are in thousands. Amounts may not reconcile due to rounding differences.
General
AXIS provides a broad range of specialty lines insurance and treaty reinsurance to our clients on a worldwide basis, through operating subsidiaries and branch networks based in Bermuda, the United States ("U.S."), Europe, Singapore and Canada. Our underwriting operations are organized around our global underwriting platforms, AXIS Insurance and AXIS Re.
The markets in which we operate have historically been cyclical. During periods of excess underwriting capacity, defined by the availability of capital, competition can result in lower pricing and less favorable policy terms and conditions for insurers and reinsurers. During periods of reduced underwriting capacity, pricing, and policy terms and conditions are generally more favorable for insurers and reinsurers. Historically, underwriting capacity has been impacted by several factors, including industry losses, catastrophes, changes in legal and regulatory guidelines, investment results and the ratings and financial strength of competitors. In 2020, we leveraged firming market conditions to increase our relevance in a select number of attractive specialty lines and treaty reinsurance markets and we continued to re-balance our portfolio towards less volatile lines of business.
At December 31, 2020, we had common shareholders’ equity of $4.7 billion, total capital of $6.6 billion and total assets of $25.9 billion.
Our Business Strategy
We are a hybrid specialty lines insurance and treaty reinsurance company that is a leader in many of the markets where we choose to compete. We provide our clients and distribution partners with a broad range of risk transfer products and services, and meaningful capacity, backed by excellent financial strength. We manage our portfolio holistically, aiming to construct the optimum portfolio of risks, consistent with our risk appetite and the development of our franchise. We nurture an ethical, entrepreneurial and disciplined culture that promotes outstanding client service, intelligent risk taking and the achievement of superior risk-adjusted returns for our shareholders. We believe itthat the achievement of our objectives will position us as a global leader in specialty risks.
We aim to execute on our business strategy through the following multi-pronged approach:
We offer a diversified range of products and services across market segments and geographies: Our position as a well-balanced hybrid specialty lines insurance and treaty reinsurance company gives us insight into the opportunities and challenges in a variety of markets. We are headquartered in Bermuda and have locations across the U.S., Canada and Europe including Dublin, London, Zurich and Brussels. We are actively pursuing opportunities throughout Latin America, mainly through our Miami office, which enables us to deliver a full range of facultative and treaty reinsurance solutions in Latin America. Our Singapore office serves as our regional hub in Asia and provides specialty insurance and reinsurance solutions in the Asia Pacific region.
We underwrite a balanced portfolio of risks, including complex and volatile lines,moderating overall volatility with risk limits, diversification and risk management: Risk management is imperativea strategic priority embedded in our organizational structure and we are continuously monitoring, reviewing and refining our enterprise risk management practices. We combine judgment and experience with data-driven analysis, enhancing our overall risk selection process.
We modulate our risk appetite and deployment of capital across the underwriting cycle, commensurate with available market opportunities and returns: In response to market dynamics, we recognize opportunities as they develop and react quickly as new trends emerge. Our risk analytics provide important and continuous feedback, further assisting with the ongoing assessment of our risk appetite and strategic capital deployment. We have been successful in extending our product lines, finding new distribution channels and entering new geographies. When we do not find sufficiently attractive uses for our capital, we return excess capital to our shareholders through share repurchases or dividends.
We develop and maintain deep, trusting and mutually beneficial relationships with clients and distribution partners, offering high levels of service and effective solutions for risk management needs: Our management team has extensive industry experience, deep product knowledge and long-standing market relationships. We primarily transact in specialty markets, where risks are complex. We invest in data and technology capabilities and tools to empower our underwriters and enhance the service that we provide to our customers. Our intellectual capital and proven client-service capability attract clients and distribution partners looking for solutions.
We maintain excellent financial strength, characterized by financial discipline and transparency: Our total capital of $6.6 billion at December 31, 2020, as well as our high-quality and liquid investment portfolio and our operating subsidiary ratings of "A+" ("Strong") by Standard & Poor's and "A" ("Excellent") by the A.M. Best Company, Inc. ("A.M. Best") are key indicators of our financial strength.
We attract, develop, retain and motivate teams of experts: We aim to attract and retain the top talent in the industry and to motivate our employees to make decisions that are in the best interest of our clients and shareholders. We nurture an ethical, risk-aware, achievement-oriented culture that promotes professionalism, responsibility, integrity, discipline and entrepreneurship. As a result, we believe that our staff is well-positioned to make the best underwriting and strategic decisions for AXIS.
In 2020, our key metrics for performance measurement included operating return on average common equity ("operating ROACE") which is reconciled to the most comparable GAAP financial measure, return on average common equity ("ROACE"), in Item 7 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures Reconciliation' on an annual basis and relative total shareholder return ("TSR") over the long-term. We believe that the successful execution against long-term strategic plans should drive an increase in TSR over the long-term, and that TSR directly correlates to other relevant key performance metrics, including book value per diluted common share adjusted for dividends. Our goal is to achieve top-quintile industry operating ROACE and growth in book value per diluted common share adjusted for dividends, with volatility consistent with the industry average across underwriting cycles.
Segment Information
Our underwriting operations are organized around our global underwriting platforms, AXIS Insurance and AXIS Re. We have determined that we have two reportable segments, insurance and reinsurance. We do not allocate assets by segment, with the exception of goodwill and intangible assets.
Refer to Item 7 'Management’s Discussion and Analysis of Financial Condition and Results of Operations' for additional information relating to our reportable segments and Item 8, Note 3 to the Consolidated Financial Statements 'Segment Information' for additional information relating to our reportable segments and a description of the geographic distribution of gross premiums written based on the location of our subsidiaries.
The table below presents gross premiums written in each of our reportable segments for each of the most recent three years.
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| Year ended December 31, | 2020 | | 2019 | | 2018 | |
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| Insurance | $ | 4,018,399 | | | $ | 3,675,931 | | | $ | 3,797,592 | | |
| Reinsurance | 2,808,539 | | | 3,222,927 | | | 3,112,473 | | |
| Total | $ | 6,826,938 | | | $ | 6,898,858 | | | $ | 6,910,065 | | |
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Insurance Segment
Lines of Business and Distribution
Our insurance segment offers specialty insurance products to a variety of niche markets on a worldwide basis. The following are the lines of business in our insurance segment:
•Property: provides physical loss or damage, business interruption and machinery breakdown cover for virtually all types of property, including commercial buildings, residential premises, construction projects and onshore renewable energy installations. This line of business includes primary and excess risks, some of which are catastrophe-exposed.
•Marine: provides cover for traditional marine classes, including offshore energy, renewable offshore energy, cargo, liability, recreational marine, fine art, specie, and hull war. Offshore energy coverage includes physical damage, business interruption, operator's extra expense and liability coverage for all aspects of offshore upstream energy, from exploration and construction through the operation and distribution phases.
•Terrorism: provides cover for physical damage and business interruption of an insured following an act of terrorism and includes kidnap and ransom, and crisis management insurance.
•Aviation: provides hull and liability, and specific war cover primarily for passenger airlines but also for cargo operations, general aviation operations, airports, aviation authorities, security firms and product manufacturers.
•Credit and Political Risk: provides credit and political risk insurance products for banks, commodity traders, corporations and multilateral and export credit agencies. Cover is provided for a range of risks including sovereign default, credit default, political violence, currency inconvertibility and non-transfer, expropriation, aircraft non-repossession and contract frustration due to political events.
•Professional Lines: provides directors’ and officers’ liability, errors and omissions liability, employment practices liability, fiduciary liability, crime, professional indemnity, cyber and privacy insurance, medical malpractice and other financial insurance related covers for commercial enterprises, financial institutions, not-for-profit organizations and other professional service providers. This business is predominantly written on a claims-made basis.
•Liability: primarily targets primary and low to mid-level excess and umbrella commercial liability risks in the U.S. wholesale markets in addition to primary and excess of loss employers, public, and products liability business predominately in the U.K. Target industry sectors include construction, manufacturing, transportation and trucking, and other services.
•Accident and Health: includes accidental death, travel insurance and specialty health products for employer and affinity groups.
•Discontinued Lines - Novae: includes those lines of business that Novae exited or placed into run-off in the fourth quarter of 2016 and in the first quarter of 2017. These discontinued insurance lines include financial institutions, professional indemnity, international liability, and international direct and facultative property.
We produce business primarily through wholesale and retail brokers worldwide. Some of our insurance products are also distributed through managing general agents ("MGAs") and managing general underwriters ("MGUs"). In the U.S., we have the ability to write business on an admitted basis using forms and rates filed with state insurance regulators and on a non-admitted or surplus lines basis which provides flexibility in forms and rates, as these are not filed with state regulators. Our ability to write business on a non-admitted basis in the U.S. provides us with the pricing flexibility needed to write non-standard coverages. Substantially all of our insurance business is subject to aggregate limits, in addition to event limits.
Gross premiums written by broker, shown individually where premiums by broker were 10% or more of the total in any of the last three years, were as follows:
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| Years ended December 31, | 2020 | | 2019 | | 2018 | |
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| Marsh & McLennan Companies Inc. | $ | 496,913 | | | 12 | % | | $ | 434,108 | | | 12 | % | | $ | 380,238 | | | 10 | % | |
| Aon plc | 485,113 | | | 12 | % | | 393,645 | | | 11 | % | | 405,281 | | | 11 | % | |
| Other brokers | 2,310,687 | | | 58 | % | | 2,015,822 | | | 54 | % | | 2,067,447 | | | 54 | % | |
| Managing general agencies and underwriters | 725,686 | | | 18 | % | | 832,356 | | | 23 | % | | 944,626 | | | 25 | % | |
| Total | $ | 4,018,399 | | | 100 | % | | $ | 3,675,931 | | | 100 | % | | $ | 3,797,592 | | | 100 | % | |
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No insured accounted for more than 10% of the gross premiums written in the insurance segment.
Competitive Environment
In our insurance segment, where competition is focused on price, service, and availability in the form of capacity, appetite and distribution, among other considerations, we compete globally and locally with U.S. and non-U.S carriers. We believe we can achieve positive differentiation through underwriting expertise in our chosen lines of business and market segments, providing customized solutions for our strategic partners, and top caliber claim service levels to our customers. In addition, our investment in building an agile business model is expected to further position us to capitalize on opportunities and more quickly bring innovative products and services to market while advancing our efforts to strengthen our portfolio and drive profitable growth.
Reinsurance Segment
Lines of Business and Distribution
Our reinsurance segment provides treaty reinsurance to insurance companies on a worldwide basis, written on an excess of loss and a proportional basis. For excess of loss business, we typically indemnify the reinsured for a portion of losses, individually and in the aggregate, in excess of a specified individual or aggregate loss deductible. For proportional business, we assume an agreed percentage of the underlying premiums and accept liability for the same percentage of losses and loss expenses. Our business is primarily produced through reinsurance brokers worldwide. The following are the lines of business in our reinsurance segment:
•Catastrophe: provides protection for most catastrophic losses that are covered in the underlying insurance policies written by our cedants. The underlying policies principally cover property-related exposures but other exposures including workers compensation and personal accident are also covered. The principal perils covered by policies in this portfolio include hurricane and windstorm, earthquake, flood, tornado, hail and fire. In some instances, terrorism may be a covered peril or the only peril. This business is written on a proportional and excess of loss basis.
•Property: provides protection for property damage and related losses resulting from natural and man-made perils that are covered in the underlying personal and commercial lines insurance policies written by our cedants. The predominant exposure is property damage but other risks, including business interruption and other non-property losses, may also be covered when we developarising from a strategy, we think aboutcovered peril. The most significant perils covered by policies in this portfolio include windstorm, tornado and earthquake, but other perils such as freezes, riots, flood, industrial explosions, fire, hail and a number of other loss events are also included. This business is written on a proportional and excess of loss basis.
•Professional Lines: providesprotection for directors’ and officers’ liability, employment practices liability, medical malpractice, professional indemnity, environmental liability, cyber, and miscellaneous errors and omissions insurance risks. The underlying business is predominantly written on a claims-made basis. This business is written on a proportional and excess of loss basis.
•Credit and Surety: provides reinsurance of trade credit insurance products and includes proportional and excess of loss structures. The underlying insurance indemnifies sellers of goods and services in the event of a payment default by the buyer of those goods and services. Surety reinsurance provides protection for losses arising from a broad array of surety bonds issued by insurers to satisfy regulatory demands or contract obligations in a variety of jurisdictions around the world. Mortgage reinsurance is also provided to mortgage guaranty insurers and U.S. government-sponsored entities for losses related to credit risk transfer into the private sector.
•Motor: provides protection to insurers for motor liability and property damage losses arising out of any one occurrence. A loss occurrence can involve one or many claimants where the ceding insurer aggregates the claims from the occurrence. Traditional proportional and non-proportional reinsurance as well as structured solutions are offered.
•Liability: provides protection to insurers of admitted casualty business, excess and surplus lines casualty business and specialty casualty programs. The primary focus of the underlying business is general liability, workers' compensation, auto liability and excess casualty.
•Agriculture: provides protection for risks associated with the production of food and fiber on a global basis for primary insurance companies writing multi-peril crop insurance, crop hail and named peril covers, as well as custom risk transfer mechanisms for agricultural dependent industries with exposures to crop yield and/or price deviations. This business is written on a proportional and aggregate stop loss reinsurance basis.
•Engineering: provides protection for all types of construction risks and risks associated with erection, testing and commissioning of machinery and plants during the construction stage. This line of business also includes cover for losses arising from operational failures of machinery, plant and equipment and electronic equipment as well as business interruption. We decided to exit this line of business in 2020.
•Marine and Aviation: includes specialty marine classes such as cargo, hull, pleasure craft, marine liability, inland marine and offshore energy. The principal perils covered by policies in this portfolio include physical loss, damage and/or liability arising from natural perils of the seas or land, man-made events including fire and explosion, stranding/sinking/salvage, pollution, shipowners and maritime employers liability. This business is written on a non-proportional and proportional basis. Aviation provides cover for airline, aerospace and general aviation exposures. This business is written on a proportional and non-proportional basis.
•Accident and Health: includes personal accident, specialty health, accidental death, travel, life and disability reinsurance products which are offered on a proportional and catastrophic or per life excess of loss basis.
•Discontinued Lines - Novae: includes those lines of business that strategyNovae exited or placed into run-off in the fourth quarter of 2016 and in the first quarter of 2017. These discontinued reinsurance lines include motor reinsurance, general liability reinsurance and international facultative property.
Gross premiums written by broker, shown individually where premiums by broker were 10% or more of the total in any of the last three years, were as follows:
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| Years ended December 31, | 2020 | | 2019 | | 2018 | |
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| Marsh & McLennan Companies Inc. | $ | 818,821 | | | 29 | % | | $ | 838,617 | | | 26 | % | | $ | 779,375 | | | 25 | % | |
| Aon plc | 694,712 | | | 25 | % | | 887,602 | | | 28 | % | | 765,779 | | | 25 | % | |
| Willis Tower Watson PLC | 435,498 | | | 16 | % | | 403,402 | | | 13 | % | | 361,983 | | | 12 | % | |
| Other brokers | 582,368 | | | 20 | % | | 795,352 | | | 24 | % | | 864,601 | | | 28 | % | |
| Direct | 105,777 | | | 4 | % | | 135,614 | | | 4 | % | | 178,568 | | | 6 | % | |
| Managing general agencies and underwriters | 171,363 | | | 6 | % | | 162,339 | | | 5 | % | | 162,167 | | | 5 | % | |
| Total | $ | 2,808,539 | | | 100 | % | | $ | 3,222,927 | | | 100 | % | | $ | 3,112,473 | | | 100 | % | |
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No cedant accounted for more than 10% of the gross premiums written in the reinsurance segment.
Competitive Environment
In our reinsurance segment, competition tends to be focused on availability, service, financial strength and price. We compete with major U.S. and non-U.S. reinsurers and reinsurance departments of numerous multi-line insurance organizations. In addition to traditional market participants, we also compete with new market entrants supported by alternative capital sources offering risk transfer solutions on a collateralized or other non-traditional basis. Our clients may also acquire reinsurance protection through capital market products such as catastrophe bonds and insurance loss warranties. We believe that we achieve a competitive advantage through our diversified global product offerings, responsiveness to customer needs and ability to provide sophisticated and innovative products. We offer excellent claims management, strong financial strength ratings and an ability to leverage our balance sheet and relationships with strategic capital partners to provide meaningful capacity.
Cash and Investments
We seek to balance the investment portfolios’ objectives of increasing book value with the generation of relatively stable investment income, while providing sufficient liquidity to meet our claims and other obligations. Liquidity needs arising from potential claims are of primary importance and are considered in asset class participation and the asset allocation process. A significant portion of our investment portfolio is dedicated to investment grade fixed maturities that will generate cash flows that match expected claim payouts.
To diversify risk and optimize the growth in book value, we may invest in other asset classes such as equity securities, high yield securities and alternative investments (e.g. private equity funds) which provide higher potential total rates of return. These individual investment classes involve varying degrees of risk, including the potential for more volatile returns and reduced liquidity. However, as part of a balanced portfolio, they also provide diversification from interest rate and credit risk.
With regard to our investment portfolio, we primarily utilize third-party investment managers for security selection and trade execution functions, subject to guidelines and objectives for each asset class. This enables us to actively manage our investment portfolio with access to top performers specializing in various products and markets. We select the managers based on various criteria including investment style, performance history and corporate governance. In addition, we monitor approved investment asset classes for each subsidiary through analysis of our operating environment, including expected volatility of cash flows, overall capital position, regulatory and rating agency considerations. The Finance Committee of our Board of Directors approves overall group asset allocation targets and investment policy to ensure that they are consistent with our overall goals, strategies and objectives. We also have an Investment and Finance Committee, comprised of members of our senior management team, which oversees the implementation of our investment strategy.
Refer to Item 7 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cash and Investments' and Item 8, Note 5 to the Consolidated Financial Statements 'Investments' for additional information regarding our investment portfolio.
Refer to 'Risk and Capital Management' for additional information regarding the management of investment risk.
REGULATION
General
The business of insurance and reinsurance is regulated in most countries, although the degree and type of regulation varies significantly from one jurisdiction to another. In addition, some jurisdictions are currently evaluating changes to their regulation and we are monitoring these potential developments. To the extent we are aware of impending changes in regulation, designated project teams prepare us to comply on a timely basis with such anticipated changes. The following describes the current material regulations under which the Company operates.
Bermuda
Our Bermuda insurance operating subsidiary, AXIS Specialty Bermuda, is a Class 4 general business insurer subject to the Insurance Act 1978 of Bermuda and related regulations, as amended (the "Insurance Act"). The Insurance Act provides that no person may carry on any insurance or reinsurance business in or from within Bermuda unless registered as an insurer by the Bermuda Monetary Authority (the "BMA") under the Insurance Act. The Insurance Act imposes upon Bermuda insurance companies solvency and liquidity standards and auditing and reporting requirements, and grants the BMA powers to supervise, investigate, require information and demand the production of documents and intervene in the affairs of insurance companies. Significant requirements pertaining to Class 4 insurers include the appointment of an independent auditor, the appointment of a loss reserve specialist, the appointment of a principal representative in Bermuda, the filing of annual Statutory Financial Returns, the filing of annual GAAP financial statements, the filing of an annual capital and solvency return, compliance with minimum and enhanced capital requirements, compliance with certain restrictions on reductions of capital and the payment of dividends and distributions, compliance with group solvency and supervision rules, if applicable, and compliance with the Insurance Code of Conduct. On July 30, 2018, the Insurance Amendment (No. 2) Act 2018 amended the Insurance Act to provide for the prior payment of policyholders' liabilities ahead of general unsecured creditors in the event of the liquidation or winding up of an insurer. Effective January 1, 2019, this amendment applies to general business insurers and provides that, subject to certain statutorily preferred debts, the insurance debts of an insurer must be paid in priority to all other unsecured debts of the insurer. Insurance debt is defined as a debt to which an insurer is or may become liable pursuant to an insurance contract, excluding debts owed to an insurer under an insurance contract where the insurer is the person insured.
Effective January 1, 2016, the BMA was granted full "equivalence" under Solvency II (refer to"Ireland" below) for Bermuda’s commercial insurance sector, including Class 4 insurers.
The BMA acts as group supervisor of AXIS Capital and has designated AXIS Specialty Bermuda as the ‘designated insurer’ of the Group. In accordance with the group supervision and insurance group solvency rules, AXIS Capital is required to prepare and submit annual audited group GAAP financial statements, an annual group Statutory Financial Return, an annual group Capital and Solvency Return and quarterly group unaudited GAAP financial statements, and to appoint both a group actuary and a group auditor. AXIS Capital also files an annual capital and solvency return and must ensure compliance with minimum and enhanced capital requirements.
Effective September 23, 2020, AXIS Ventures Reinsurance Limited deregistered as a Class 3A insurer with the BMA and AXIS Ventures deregistered as an insurance manager with the BMA. AXIS Ventures Reinsurance Limited is currently pending dissolution.
AXIS Reinsurance Managers is regulated by the BMA as an insurance manager. Insurance managers are subject to the Insurance Act which provides that no person may carry on business as an insurance manager unless registered with the BMA under the Insurance Act. Insurance managers are required to comply with the Insurance Manager Code of Conduct.
AXIS Capital, AXIS Specialty Bermuda, AXIS Specialty Holdings Bermuda Limited, AXIS Specialty Investments Limited, AXIS Ventures, AXIS Specialty Investments II Limited and AXIS Reinsurance Managers must comply with provisions of the Bermuda Companies Act 1981, as amended (the "Companies Act"), regulating the payment of dividends and distributions. A Bermuda company may not declare or pay a dividend or make a distribution out of contributed surplus if there are reasonable grounds for believing that: (a) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the company’s assets would thereby be less than its liabilities.
The Singapore branch of AXIS Specialty Bermuda, AXIS Specialty Limited (Singapore Branch), established in 2008, is regulated by the Monetary Authority of Singapore (the "MAS") pursuant to The Insurance Act of Singapore, which imposes significant regulations relating to capital adequacy, risk management, governance, audit and actuarial requirements. AXIS Specialty Limited (Singapore Branch) is registered by the Accounting and Corporate Regulatory Authority ("ACRA") as a foreign company in Singapore and is also regulated by ACRA pursuant to the Singapore Companies Act. Prior to establishing its Singapore branch, AXIS Specialty Bermuda had maintained a representative office in Singapore since 2004.
AXIS Specialty Bermuda has reinsurance permissions in China and the Netherlands. AXIS Specialty Limited (Singapore Branch) has separate reinsurance permissions in China.
AXIS Re SE may write reinsurance in Bermuda under Solvency II equivalence between Bermuda and the E.U.
AXIS Managing Agency Ltd. may write general insurance and reinsurance in Bermuda using Lloyd's of London ("Lloyd's") licenses (refer to "U.K. and Lloyd's of London" below).
United States
U.S. Insurance Holding Company Regulation of AXIS Capital’s Insurance Subsidiaries
As members of an insurance holding company system, each of AXIS Insurance Co., AXIS Re U.S., AXIS Specialty U.S. and AXIS Surplus, collectively AXIS Capital’s U.S. insurance subsidiaries (collectively, the "U.S. Insurance Subsidiaries") are subject to the insurance holding company system laws and regulations of the states in which they do business. These laws generally require each of the U.S. Insurance Subsidiaries to register with its domestic state insurance department and to furnish financial and other information which may materially affect the operations, management or financial condition within the holding company system. All transactions within a holding company system that involve an insurance company must be fair and equitable. Notice to the applicable insurance department is required prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and an entity in its holding company system, and certain transactions may not be consummated without the department’s prior approval.
State Insurance Regulation
AXIS Re U.S. is licensed to transact insurance and reinsurance throughout the U.S. and in Puerto Rico. AXIS Re U.S. is also authorized to transact insurance and reinsurance throughout Canada through its Canadian branch and has reinsurance permissions in Argentina, Brazil, China, Columbia, Ecuador, Guam, Guatemala, Honduras, Panama, India and Mexico. AXIS Insurance Co. is licensed to transact insurance and reinsurance throughout the U.S. AXIS Specialty U.S. is licensed to transact insurance and reinsurance throughout the U.S., except California, Iowa, Maine, New Mexico, New York and Wyoming. AXIS Surplus is eligible to write insurance on a surplus lines basis throughout the U.S., Puerto Rico and the U.S. Virgin Islands.
Our U.S. Insurance Subsidiaries also are subject to regulation and supervision by their respective states of domicile and by other jurisdictions in which they do business. The regulations generally are derived from statutes that delegate regulatory and supervisory powers to an insurance official. The regulatory framework varies from state to state, but generally relates to approval of policy forms and rates, the standards of solvency that must be met and maintained, including risk-based capital standards, material transactions between an insurer and its affiliates, the licensing of insurers, agents and brokers, restrictions on insurance policy terminations, the nature of and limitations on the amount of certain investments, limitations on the net amount of insurance of a single risk compared to the insurer’s surplus, deposits of securities for the benefit of policyholders, methods of accounting, periodic examinations of the financial condition and market conduct of insurance companies, the form and content of reports of financial condition required to be filed, reserves for unearned premiums, losses, expenses and other obligations.
Our U.S. Insurance Subsidiaries are required to file detailed quarterly statutory financial statements with state insurance regulators in each of the states in which they conduct business. In addition, the U.S. Insurance Subsidiaries’ operations and accounts are subject to financial condition and market conduct examination at regular intervals by state regulators.
Regulators and rating agencies use statutory surplus as a measure to assess our U.S. Insurance Subsidiaries’ ability to support business operations and pay dividends. Our U.S. Insurance Subsidiaries are subject to various state statutory and regulatory restrictions that limit the amount of dividends that may be paid from earned surplus without prior approval from regulatory authorities. These restrictions differ by state, but generally are based on calculations using statutory surplus, statutory net
income and investment income. In addition, many state regulators use the National Association of Insurance Commissioners promulgated risk-based capital requirements as a means of identifying insurance companies which may be under-capitalized.
Although generally the insurance industry is not directly regulated by the federal government, federal legislation and initiatives can affect the industry and our business. Certain sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank") pertain to the regulation and business of insurance. Specifically, the Federal Insurance Office ("FIO") has limited authority to collect information and report on the business of insurance to Congress. In addition, Dodd-Frank contains the Non-Admitted and Reinsurance Reform Act of 2010 ("NRRA"). NRRA attempts to coordinate the payment of surplus lines taxes, simplify the granting of alien insurers to become surplus lines authorized and coordinates the credit for certain reinsurance. The Company continues to monitor the implementation of Dodd-Frank.
Ternian Insurance Group LLC, a leading provider of voluntary, limited benefit, affordable health plans and other employee benefits coverage for hourly and part-time workers and their families, is an authorized insurance producer in all 50 states of the U.S. except Hawaii. As a resident insurance producer in Arizona, Ternian Insurance Group LLC is subject to regulation and supervision by the Arizona Department of Insurance and is also subject to the regulation and supervision of the other states in which Ternian transacts business.
AXIS Specialty Underwriters, Inc., a Florida licensed reinsurance intermediary, is subject to regulation and supervision by the Florida Department of Financial Services. AXIS Specialty Underwriters, Inc. operates as the Latin American and Caribbean regional coverholder for Syndicate 1686, providing facultative reinsurance coverage to the Latin American and Caribbean market.
U.S. Authorizations of our Non-U.S. Insurance Subsidiaries
The insurance laws of each state of the U.S. regulate or prohibit the sale of insurance and reinsurance by insurers and reinsurers that are not admitted to do business within their jurisdictions, or conduct business pursuant to exemptions. AXIS Specialty Europe is eligible to write surplus lines business throughout the U.S. and in Puerto Rico. AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to (i) write surplus lines business throughout the U.S. and in all U.S. territories, (ii) write insurance business, except life insurance business, in the states of Illinois, Kentucky and in the U.S. Virgin Islands and (iii) write non-life reinsurance business throughout the U.S. and in all U.S. territories, except for accident and health reinsurance in New York.
In addition to the regulatory requirements imposed by the jurisdictions in which they are licensed, reinsurers’ business operations are affected by regulatory requirements in various states of the U.S. governing "credit for reinsurance" that are imposed on their ceding companies. In general, a ceding company obtaining reinsurance from a reinsurer that is licensed, accredited or approved by the jurisdiction or state in which the ceding company files statutory financial statements is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company’s liability for unearned premiums (which is that portion of premiums written which applies to the unexpired portion of the policy period), loss reserves and loss expense reserves ceded to the reinsurer. The great majority of states, however, permit a credit to statutory surplus resulting from reinsurance obtained from a non-licensed or non-accredited reinsurer to be recognized to the extent that the reinsurer provides a letter of credit, trust fund or other acceptable security arrangement. A few states do not allow credit for reinsurance ceded to non-licensed reinsurers except in certain limited circumstances, and others impose additional requirements that make it difficult to become accredited. In connection with the establishment of a Multi-Beneficiary Reinsurance Trust, AXIS Specialty Bermuda obtained accredited or trusteed reinsurer status in all U.S. jurisdictions except for New York.
Ireland
Our Ireland domiciled insurer and reinsurer are subject to the Solvency II Directive (Directive 2009/138/EC), as amended. Solvency II represents a consolidation and modernization of existing European Commission Solvency I insurance and reinsurance regulation and supervision and includes a harmonized risk-based solvency and reporting regime for the insurance/reinsurance sector. Solvency II covers three main areas: (i) the valuation of assets and liabilities and related solvency capital requirements; (ii) governance requirements including key functions of compliance, internal audit, actuarial and risk management; and (iii) legal entity and European Union ("E.U.") group reporting and disclosure requirements including public disclosures. The capital requirement must be computed using the Solvency II standard formula unless the Central Bank of Ireland ("CBI") has previously authorized a company to use its own internal model. Certain of our European legal entities are subject to Solvency II.
AXIS Specialty Europe
AXIS Specialty Europe is a European public limited liability company incorporated as a non-life insurer under the laws of Ireland. It is a Societas Europaea (SE), or European society company, and has been registered in accordance with E.U. law. As a SE company, AXIS Specialty Europe can more easily merge with companies in European member states and also transfer its domicile to other member states of the E.U. AXIS Specialty Europe is authorized and regulated by the CBI pursuant to the Insurance Acts 1909 to 2000, as amended, repealed or replaced, the Central Bank Acts 1942 – 2014, as amended, repealed or replaced, and E.U. regulation relating to general insurance and statutory instruments made thereunder. AXIS Specialty Europe is authorized to conduct business in 16 non-life insurance classes throughout the E.U. and the European Economic Area ("EEA"), which includes each of the member countries of the E.U. with the addition of Iceland, Liechtenstein and Norway. AXIS Specialty Europe may also write reinsurance business within the classes of insurance business for which it is authorized.
AXIS Specialty Europe is subject to Solvency II. In accordance with Solvency II, AXIS Specialty Europe is permitted to provide insurance services to clients located in any EEA Member State ("Freedom of Services"), subject to compliance with any "general good requirements" as may be established by the applicable EEA Member State regulator. AXIS Specialty Europe has notified the CBI of its intention to provide insurance services on a Freedom of Services basis in all EEA countries.
Solvency II also permits AXIS Specialty Europe to carry on insurance business in any EEA Member State under the principle of "Freedom of Establishment" subject to the prior approval of the CBI. AXIS Specialty Europe operates under Freedom of Establishment in the U.K., Belgium and the Netherlands through its branches established in each of these jurisdictions.
AXIS Specialty Europe's U.K. branch transacts general insurance business in the U.K., trading as AXIS Specialty London. The U.K. withdrew from the E.U. on December 31, 2020 and is now considered a third country. In order to maintain business continuity, AXIS Specialty Europe submitted an application to the Prudential Regulatory Authority (the "PRA") in 2018 for authorization of a third country branch. As this application is still pending, AXIS Specialty Europe entered into the PRA's Temporary Permissions Regime (the "TPR"), under which it is able to maintain business continuity. AXIS Specialty Europe will remain in the TPR, fully regulated by the PRA and the Financial Conduct Authority ("FCA"), until the earlier of the third year anniversary of its admission to the TPR and the date the PRA application has been fully assessed and approved.
Effective January 1, 2019, Compagnie Belge d’Assurances Aviation NV/SA merged into AXIS Specialty Europe by way of merger by absorption and dissolved without going into liquidation (the "Aviabel Merger"). In connection with the Aviabel Merger, AXIS Specialty Europe established two new branches in Belgium and the Netherlands (see "Belgium" and the "Netherlands" below).
AXIS Specialty Europe has local regulatory permission to carry on insurance business in Jersey and has reinsurance permissions in India, China, Argentina, Mexico, Panama, Paraguay, Chile, Honduras, Ecuador, Colombia and Guatemala.
AXIS Re SE
AXIS Re SE is a European public limited liability company incorporated as a reinsurer under the laws of Ireland. AXIS Re SE is also a Societas Europaea (SE), or European society company, registered in accordance with E.U. law. AXIS Re SE is authorized by the CBI as a composite reinsurer (non-life and life) in accordance with the Insurance Acts 1909 to 2000, as amended, repealed or replaced, the Central Bank Acts 1942 – 2014, as amended, repealed or replaced, and E.U. regulation applicable to reinsurance and statutory instruments made thereunder. AXIS Re SE is authorized to transact reinsurance throughout the E.U. and the EEA and is subject to Solvency II.
AXIS Re SE conducts business through its branch in Zurich, Switzerland, trading as AXIS Re Europe (see "Switzerland" below).
AXIS Re SE Escritório de Representação No Brasil Ltda. was established in Brazil as a subsidiary of AXIS Re SE to facilitate the Brazilian Superintendence of Private Insurance ("SUSEP") regulatory requirements for approval of a representative office of AXIS Re SE and for the registration of AXIS Re SE with SUSEP as an Admitted Reinsurer.
AXIS Re SE's representative offices in France and Spain were closed during 2019.
AXIS Re SE has reinsurance permissions in Argentina, Bolivia, Brazil, China, Chile, Colombia, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, India, Mexico, Nicaragua, Panama, Paraguay, Peru and Venezuela.
AXIS Specialty Holdings Ireland Limited
AXIS Specialty Holdings Ireland Limited is the limited liability holding company for AXIS Specialty Europe and AXIS Re SE, each incorporated under the laws of Ireland, Contessa Limited, a U.K. licensed insurance intermediary, and AXIS Reinsurance (DIFC) Limited, a Dubai licensed insurance intermediary.
AXIS Specialty Bermuda may write reinsurance under Solvency II equivalence granted to Bermuda by the E.U.
AXIS Managing Agency Ltd. is eligible to write insurance (except permanent health) and reinsurance business in Ireland through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" below).
AXIS Specialty Global Holdings Limited
AXIS Specialty Global Holdings Limited is the limited liability holding company for AXIS Capital's U.S. Insurance subsidiaries.
U.K. and Lloyd's of London
In the U.K., under the Financial Services and Markets Act 2000 ("FSMA"), no person may carry on a regulated activity unless authorized or exempt. Effecting or intermediating contracts of insurance or reinsurance are regulated activities requiring authorization. Effecting contracts of insurance requires authorization by the PRA and is regulated by the FCA. Intermediating contracts of insurance requires authorization by the FCA.
Under the Financial Services Act 2012, the FCA is a conduct regulator for all U.K. firms carrying on regulated activity in the U.K. while the PRA is the prudential regulator of U.K. banks, building societies, credit unions, insurers and major investment firms. As a prudential regulator, the PRA's general objective is to promote the safety and soundness of the firms it regulates. The PRA rules require financial firms to hold sufficient capital and have adequate risk controls in place.
The FCA's statutory strategic objective is to ensure that relevant markets function well and have operational objectives to protect consumers, protect financial markets and promote competition. It makes rules covering how the firm must be managed and requirements relating to the firm’s systems and controls, how business must be conducted and the firm’s arrangements to manage financial crime risk. The PRA and the FCA require regular and ad hoc reporting and monitor compliance with their respective rulebooks through a variety of means including the collection of data, industry reviews and site visits. The directors and senior managers of AXIS Managing Agency Ltd. must be "approved persons" under FSMA, making them directly and personally accountable for ensuring compliance with the requirements of the PRA and the FCA.
AXIS Managing Agency Ltd.
AXIS Managing Agency Ltd. is authorized and regulated by the PRA and regulated by the FCA to conduct insurance and reinsurance business and is a Lloyd's managing agent authorized by Lloyd's to manage our syndicates, Syndicate 1686 and Syndicate 2007. AXIS Managing Agency Ltd. is also the managing agent for SPA 6129, a third-party Lloyd's special purpose arrangement.
To consolidate our Lloyd’s business under Syndicate 1686, Syndicate 2007 ceased accepting new business and was placed into run-off on January 1, 2019. The final underwriting year of Syndicate 2007 and SPA 6129 will close by way of a reinsurance to close arrangement which took effect on January 1, 2021.
Lloyd’s is a society of corporate and individual members which underwrite insurance and reinsurance as members of syndicates. A syndicate is made up of one or more members that form a group to accept insurance and reinsurance risks. Each syndicate is managed by a managing agent. Managing agents write insurance business on behalf of the members of the syndicate, which members receive profits or bear losses in proportion to their respective shares in the syndicate for each underwriting year of account.
Lloyd’s is subject to U.K. law and is authorized under the FSMA. The Lloyd’s Act 1982 defines the governance structure and rules under which the society operates. Under the Lloyd's Act 1982, the Council of Lloyd’s is responsible for the management and supervision of the Lloyd’s market and supports the Lloyd's market. Lloyd's manages and protects the Lloyd's network of international licenses. Lloyd's agrees to syndicates' business plans and evaluates performance against
those plans. Syndicates are required to underwrite only in accordance with their agreed business plans. If they fail to do so, Lloyd’s can take a range of actions including, as a last resort, prohibiting a syndicate from underwriting. Lloyd’s also monitors syndicates’ compliance with Lloyd’s minimum standards and responsible for setting both member and central capital levels.
Lloyd’s has a global network of licenses and authorizations, and underwriters at Lloyd's may write business in and from countries where Lloyd’s has authorized status or exemptions available to non-admitted insurers or reinsurers. Lloyd’s licenses can only be used if the Syndicate Business Forecast, agreed annually with Lloyd’s, names those countries.
AXIS Managing Agency Ltd. operates an underwriting division at Lloyd’s Insurance Company (China) Limited, a wholly owned subsidiary of the Corporation of Lloyd’s which allows it to underwrite reinsurance in China.
AXIS Corporate Capital UK Limited
Until December 31, 2018, AXIS Corporate Capital UK Limited was the sole corporate member of Syndicate 1686. Effective January 1, 2019, both AXIS Corporate Capital UK Limited and AXIS Corporate Capital UK II Limited are corporate members of Syndicate 1686, providing 70% and 30% capital support, respectively. Syndicate 1686 is managed by AXIS Managing Agency Ltd.
AXIS Corporate Capital UK II Limited
(formerly Novae Corporate Underwriting Limited)
Following the acquisition of Novae Group Limited, management of Syndicate 2007 was transferred to AXIS Managing Agency Ltd. AXIS Corporate Capital UK II Limited is the sole corporate member of Syndicate 2007.
AXIS Underwriting Limited
AXIS Underwriting Limited, formerly known as Novae Underwriting Limited, is authorized and regulated by the FCA as an insurance intermediary and underwrites insurance at Lloyd's on behalf of Syndicate 1686.
Contessa Limited
Effective December 2019, Contessa Limited ceased writing insurance on behalf of AXIS Specialty Europe. Contessa Limited will continue to manage the AXIS Specialty Europe book of business on a run-off basis.
In January 2021, Contessa Limited surrendered its license as an insurance intermediary with the FCA.
AXIS Specialty UK Holdings Limited
AXIS Specialty UK Holdings Limited is a limited liability holding company for AXIS Managing Agency Ltd., AXIS Corporate Capital UK Limited and Novae Group Limited, and is incorporated under the laws of England and Wales.
Regulatory Impact Due to Brexit
On June 23, 2016, the U.K. voted to exit the E.U. ("Brexit") and on December 31, 2020, the U.K. completed its withdrawal from the E.U. Although an agreement was reached between the E.U. and the U.K., this agreement does not cover financial services. The parties have committed to enter into a Memorandum of Understanding covering financial services by March 2021. The following addresses the current impact to our insurers and reinsurers as a result of the U.K.'s withdrawal from the E.U.
Insurance
AXIS Specialty Europe established its branch in the U.K. pursuant to the right to Freedom of Establishment under E.U. law. As it was anticipated that AXIS Specialty Europe would lose its authorization to conduct business in the U.K. as a result of the U.K.'s exit from the E.U., an application for authorization of a third country branch was submitted to the PRA in 2018. As this application is still pending, AXIS Specialty Europe entered into the TPR to obtain temporary authorization. Under the TPR, AXIS Specialty Europe has authority to operate as a third country branch in the U.K. and is fully regulated by the PRA and FCA. As a result, AXS Specialty Europe's operations in the U.K. have been able to continue without interruption.
In preparation for Brexit, Lloyd’s established Lloyd's Insurance Company S.A in Brussels ("Lloyd’s Brussels") to retain access to the EEA markets and transferred all EEA risks to Lloyd’s Brussels.Lloyd's Brussels has been approved by the National Bank of Belgium ("NBB") and the Belgian conduct regulator, the Financial Services and Markets Authority ("Belgian FSMA") with authorization to write non-life insurance risks throughout the EEA. Effective with Brexit, all EEA risks are written by Lloyd’s Brussels.AXIS Managing Agency Ltd. has retained its access to the EEA markets through Lloyd's Brussels.
In January 2021, Lloyd’s Brussels updated Lloyd’s managing agents on its ongoing discussions with Lloyd’s, NBB and the Belgian FSMA regarding Lloyd’s Brussels’ operating model and the activities performed on behalf of Lloyd’s Brussels by Lloyd’s managing agents. We continue to monitor these discussions and are prepared to address any required changes to our operating model in the U.K. or the EEA.
Reinsurance
AXIS Managing Agency Ltd. remains able to conduct non-life facultative, proportional and excess of loss reinsurance throughout the EEA via Lloyd’s Brussels. The E.U. has not yet granted equivalence to the U.K. under Solvency II, however the review is ongoing and a decision is expected in the coming months.
AXIS Re SE currently transacts reinsurance business in the EEA pursuant to European law. In November 2020, the U.K. granted equivalence under Solvency II to EEA supervised reinsurers, including AXIS Re SE, allowing such reinsurers to continue operations without interruption.
Switzerland
AXIS Re SE's branch in Zurich, Switzerland trades as AXIS Re Europe and is registered in Zurich as AXIS Re SE, Dublin (Zurich branch). The CBI remains responsible for the prudential supervision of the branch. The Swiss Financial Market Supervisory Authority does not impose additional regulation upon a Swiss branch of an EEA reinsurer.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write all classes of insurance business, except life, sickness and legal expenses, and is authorized to write all classes of reinsurance business in Switzerland.
Singapore
AXIS Specialty Bermuda conducts insurance and reinsurance business from its branch in Singapore, AXIS Specialty Limited (Singapore Branch), subject to the supervision of the BMA and the MAS which imposes significant regulations relating to capital adequacy, risk management, governance and audit and actuarial requirements. AXIS Specialty Limited (Singapore Branch) is registered by ACRA as a foreign company in Singapore and regulated by ACRA pursuant to the Singapore Companies Act.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write insurance from Singapore with the exception of certain compulsory classes and life business. Singapore business may also be written from outside Singapore in certain circumstances where it is placed with a Singapore intermediary licensed by the MAS to place business at Lloyd's or by dealing directly with the insured.
Canada
AXIS Re U.S. conducts insurance and reinsurance business from AXIS Reinsurance Company (Canadian Branch), its branch in Canada, subject to the supervision of the New York State Department of Financial Services and the Office of the Superintendent of Financial Institutions Canada ("OSFI"), the federal regulatory authority that supervises federal Canadian and non-Canadian insurance companies operating in Canada pursuant to the Insurance Companies Act (Canada). The branch is authorized by OSFI to transact insurance and reinsurance. In addition, the branch is subject to the laws and regulations of each of the provinces and territories in which it is licensed.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses subject to the laws and regulations of each of the provinces and territories in which it is licensed and to write insurance in or from Canada, with the following exceptions: hail insurance in respect of crop in the province of Quebec; home warranty insurance in the province of British Columbia; life insurance; credit protection insurance; title insurance; surety; and mortgage default insurance. Syndicate 1686, through Lloyd's, is authorized to write reinsurance in or from Canada subject to certain restrictions relating to life reinsurance.
Belgium
AXIS Specialty Europe conducts insurance from its Belgium branch, AXIS Specialty Europe SE (Belgium Branch), which is subject to CBI prudential supervision and limited regulation by the NBB.
AXIS Specialty Europe also has permission to write insurance and reinsurance on a Freedom of Services basis in Belgium.
AXIS Re SE has permission to write reinsurance on a Freedom of Services basis in Belgium.
AXIS Managing Agency Ltd. is eligible to write insurance (except permanent health) and reinsurance business in Belgium through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" above).
Netherlands
AXIS Specialty Europe conducts insurance from its Netherlands branch, AXIS Specialty Europe SE (Netherlands Branch), which is subject to CBI prudential supervision and limited regulation by the Dutch National Bank.
AXIS Specialty Europe has permission to write insurance and reinsurance on a Freedom of Services basis in the Netherlands.
AXIS Re SE has permission to write reinsurance on a Freedom of Services basis in the Netherlands.
AXIS Managing Agency Ltd. is eligible to write insurance (except permanent health) and reinsurance business in the Netherlands through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" above).
Dubai
AXIS Reinsurance (DIFC) Limited was granted a prudential Category 4 license by the Dubai Financial Services Authority in December 2017 and operated as an intermediary under binding authority granted by the Board of Directors of AXIS Re SE to underwrite accident and health reinsurance. In December 2020, AXIS Reinsurance (DIFC) Limited surrendered its license and is currently in liquidation proceedings.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write reinsurance in or from Dubai with certain exceptions.
Non-Admitted Insurance and Reinsurance
The Company also insures and reinsures risks in many countries, including the above countries, pursuant to regulatory permissions and exemptions available to non-admitted insurers and reinsurers.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write insurance and reinsurance business where Lloyd's has authorized status or pursuant to regulatory exemptions available to non-admitted insurers and reinsurers.
TRADEMARKS
We use our trademarks, including among others, our "AXIS" trademarks for the global marketing of our products and services, and we believe that we sufficiently safeguard our trademark portfolio to protect our rights.
HUMAN CAPITAL MANAGEMENT
As a company, AXIS Capital’s mission is not only to deliver outstanding financial results, but also to help our clients, brokers and partners navigate the challenges of a volatile world. We believe our employees distinguish us from our competitors and are critical to our success as an insurance and reinsurance company that leads with purpose. Our workforce’s strength is grounded in our One AXIS culture, which celebrates collaboration, diversity and integrity, as well as relentless execution, continuous learning, adapting and improving. We recognize that our strength lies in our people, and therefore, one of our core strategies is to invest in and support our employees, including the following areas of focus:
Health, Safety and Wellness
We are committed to the health, safety and wellness of our workforce. In response to the ongoing COVID-19 pandemic, most of our employees have worked remotely since March 2020, and we suspended all nonessential business travel. We provided employees with an office and technology stipend to assist with the transition to working from home and have developed educational tools and materials focused on the well-being of our employees, including remote working best practices, leadership of virtual teams and managing stress while working from home. We also offered flexible work schedules, added half-day well-being days and allowed flexibility with paid time off and sick leave policies for employees directly impacted by COVID-19. We are carefully reviewing and monitoring health information and shelter-in-place orders in the regions in which we operate, and we have reopened certain of our offices only on an optional and limited basis and in accordance with the rules and regulations of the applicable jurisdiction. Our Board of Directors is focused on our response to the COVID-19 pandemic, receiving regular updates on the health and safety of employees, protocols to address actual or suspected COVID-19 exposures or cases and the status of any return to work decisions.
Diversity, Equity and Inclusion
We see diversity, equity and inclusion as a strategic imperative that is core to our business and our culture. We believe that encouraging a wide range of experiences, backgrounds and perspectives and ensuring equal treatment for all makes AXIS a more rewarding place to work, enables us to attract talented teammates, enriches our perspectives and makes us stronger as a global organization. Below are strategies and initiatives enacted in 2020 to further the advancement of our diverse, equitable and inclusive culture:
•Diversity & Inclusion Council: We established a Diversity & Inclusion Council comprised of global employees representing a full spectrum of experiences and viewpoints. The Council was established to ensure that employees with diverse perspectives and backgrounds can share their thoughts, ideas and recommendations. The Council is supported by an ancillary group of D&I Advocates who actively engage and promote the work of the Council.
•Educational Initiatives: AXIS is committed to diversity, equity and inclusion educational initiatives and offers them through varying mediums. Initiatives included:
◦Mandatory unconscious bias training for all employees;
◦Monthly "knowledge tests" on various diversity, equity and inclusion topics for all employees;
◦Informational toolkits serving as quick reference guides; and
◦The establishment of an anti-racism resource center.
The year was highlighted by a global forum on racial justice and equality with an external moderator and panel of AXIS colleagues.
•Recruitment: We continued to broaden our recruiting strategies to identify, source and develop a diverse pipeline of candidates. Initiatives included:
◦Establishing and enhancing existing relationships with diverse universities and external professional organizations;
◦Participating in diverse apprenticeship programs in Bermuda, London and the U.S.;
◦Further building out our internship program with strong diverse representation;
◦Providing recruitment training and manager coaching with a focus on enhancing managers’ effectiveness at recruiting diverse candidates; and
◦Ensuring management succession plans have diverse representation.
•Advocacy: AXIS participated in the Lloyd's Dive In festival, a festival for diversity and inclusion in the insurance sector, by sponsoring and participating in local committees in Atlanta, Bermuda, London, New York and Zurich.
•Tracking:We established quarterly measurement of diverse hiring, turnover, promotions, succession planning and candidate slates. In support of this work, we measure gender pay gap semi-annually and conduct annual pay audits. We also continued to partner with a human capital analytics firm that advises companies with respect to diversity, equity and inclusion metrics to help us set, track and consistently improve our diversity, equity and inclusion.
•Disclosure: We believe transparency will play a critical role in driving action by shining light on the areas where we can increase underrepresented populations in our workforce. In 2020, AXIS participated in the Bloomberg Gender Equality Index (the "GEI"), an index of public companies committed to disclosing their efforts to achieve gender equality, to build
greater parity between genders within our organization. This participation, in turn, earned AXIS inclusion in the 2021 GEI.
Talent Development
At AXIS, investing in our people is a top priority. We provide our employees with a variety of professional development resources to help them achieve their career goals. Some of our 2020 initiatives in furtherance of this goal are described below:
•Career Mobility Within the Organization: In 2020, 20% of our open positions were filled by internal candidates.
•AXIS Academy: We provide our employees access to AXIS Academy, which serves as our learning and development hub and reflects our commitment to continuing education. AXIS Academy includes over 5,000 online training courses.
•Professional Development: We also offer financial assistance for external professional development opportunities and tuition reimbursement for certain part-time business-related degree programs.
•Early Careers Program: Our Early Careers Program aims to build a strong pipeline of early career talent through our internship and development programs.
•AXIS Careers: We created AXIS Careers to ensure our people feel empowered to "own their careers" – offering a comprehensive suite of professional development tools, resources and training modules to help navigate career experiences and upskilling across our global organization. This includes leadership development, mentoring, and job secondments, shadows and swaps.
Employee Engagement
We understand that employee engagement leads to a more satisfying and fulfilling workplace and motivates employees to do their best work. Our employee engagement initiatives include: (i) AXIS Applause (our global recognition program to recognize the contributions of other AXIS members), (ii) community building events for AXIS employees and their families and (iii) our employee-led charitable giving program which helps our employees give back to their communities.
During 2020, we conducted an enterprise-wide engagement survey, measuring engagement and inclusion. Managers and teams reflected on the survey results and developed enterprise-wide and local action plans to address areas identified for growth.
Compensation and Benefits
To attract and retain our industry’s top talent, we offer employees a total rewards program that is designed to incentivize exceptional performance and deliver equal pay for equal work. Our compensation packages align with our pay-for-performance philosophy and are assessed on an annual basis through year-end performance reviews. Our packages are also regularly benchmarked against similarly sized insurance, reinsurance and financial services companies in each of our talent markets. Compensation components include market competitive salaries and short-term annual incentive programs (i.e., bonus payments) and, for senior level employees, long-term incentives such as equity grants. Our comprehensive benefits packages include medical plans for employees and their families, flexible spending accounts, retirement savings plans with employer contributions and work-life benefits, including parental leave policies, flexible work arrangements for eligible employees and charitable matching programs.
Succession Planning
We have a robust talent and succession planning process. On an annual basis, management conducts a talent and succession plan for each member of our Executive Committee and their direct reports, focusing on high performing and high potential talent, diverse talent, and the succession plan for each position. On an annual basis, our Board of Directors receives a comprehensive succession plan for each member of our Executive Committee. In light of the COVID-19 pandemic, in 2020, the Compensation Committee also received a report on the emergency succession plan for the Executive Committee.
Employees
At December 31, 2020, we had 1,921 employees. During fiscal year 2020, the number of employees increased by approximately 17%, primarily due to increases in our Business Technology Solutions team in our newly opened Halifax, Nova Scotia office. During fiscal 2020, our voluntary turnover rate was approximately 8%.
Below is an approximate summary of our employees by region at December 31, 2020:
| | | | | | | | | | | |
| | | |
| | Employees | |
| | | |
| North America | 1,212 | |
| Europe, Middle East and Africa | 677 | |
| Asia Pacific | 32 | |
| Total employees | 1,921 | |
| | | |
At December 31, 2020, our global employees had approximately the following gender demographics:
| | | | | | | | | | | | | | |
| | | | |
| | Women | Men | |
| | | | |
| Total employees(1) | 43% | 55% | |
| | | | |
(1)2% of employees did not identify.
At December 31, 2020, our U.S. employees had approximately the following racial and ethnic demographics:
| | | | | | | | | | | |
| | | |
| | All U.S. Employees(2)(3) | |
| | | |
| Black / African American | 14% | |
| Asian | 10% | |
| Hispanic / Latinx | 4% | |
| White | 59% | |
| Multiracial, Native American and Pacific Islander | 2% | |
| | | |
(2)This information is presented for U.S. employees only. We continue to gather global demographic information to demonstrate our racial and ethnic diversity.
(3)11% of employees did not identify.
INFORMATION SECURITY
Information security is one of our highest priorities. Our information security ecosystem is designed to evolve with the changing security threat environment through ongoing assessment and measurement. We use commercial and proprietary security monitoring technologies and techniques to continuously monitor and respond to cyber threats. We also regularly engage independent third-party security auditors to test our systems and controls against relevant security standards and regulations.
Our employees and contractors are required to comply with our IT End User policy and certify their compliance annually. Information security awareness training is mandatory for all new hires and for existing employees and contractors on a regular basis.
Our Board of Directors, along with the Risk Committee and Audit Committee of the Board of Directors, oversee our information security program. In 2020, our Board of Directors received periodic updates throughout the year on cybersecurity matters, and these updates are part of the Board of Directors' standing agenda.
AVAILABLE INFORMATION
Our Internet website address is www.axiscapital.com. Information contained in our website is not part of this report.
We make available free of charge, through our internet website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Current copies of the charter for each of our Audit Committee, Corporate Governance and Nominating Committee, Compensation Committee, Finance Committee, Executive Committee and Risk Committee, as well as our Corporate Governance Guidelines and Code of Business Conduct, are available on our internet website at www.axiscapital.com.
RISK AND CAPITAL MANAGEMENT
Risk Management Framework – Overview
Mission and Objectives
The mission of Enterprise Risk Management ("ERM") at the Company is to promptly identify, assess, manage, monitor and report risks that affect the achievement of our strategic, operational and financial objectives. The key objectives of our risk management framework are to:
•Protect our capital base and earnings by monitoring our risks against our stated risk appetite and limits;
•Promote a sound risk management culture through disciplined and informed risk taking;
•Enhance value creation and contribute to an optimal risk-return profile by providing the basis for efficient capital deployment;
•Support our group-wide decision-making process by providing reliable and timely risk information; and
•Safeguard our reputation.
The risk management framework applies to all lines of business and corporate functions across our insurance and reinsurance segments.
Risk Governance
At the heart of our risk management framework is a governance process with responsibilities for identifying, assessing, managing, monitoring and reporting risks. We articulate roles and responsibilities for risk management throughout the organization, from the Board of Directors and the Chief Executive Officer to our business and corporate functions, thus embedding risk management throughout the Company (refer to 'Risk Governance and Risk Management Organization' below).
To support our governance process, we rely on our documented policies and procedures. Our risk policies are a formal set of documents we use to specify our approach and risk mitigation/control philosophy for managing individual and aggregate risks. We also have procedures to approve exceptions and procedures for referring risk issues to senior management and the Board of Directors. Our qualitative and quantitative risk reporting framework provides transparency and early warning indicators to senior management with regard to our overall risk profile, adherence to risk appetite and limits and improvement actions at an operating entity and Group level.
Various governance and control bodies coordinate to help ensure that objectives are being achieved, risks are identified, and appropriately managed, and internal controls are in place and operating effectively.
Internal Capital Model
An important aspect of our risk management framework is our internal capital model. Utilizing this modeling framework provides us with a holistic view of the capital we put at risk in any year by allowing us to understand the relative interaction
among the known risks impacting us. This integrated approach recognizes that a single risk factor can affect different sub-portfolios and that we think aboutdifferent risk factors can have different mutual dependencies. We continuously review and update our model and its parameters as our risk landscape and external environment continue to evolve.
As well as being used to measure internal risk capital (refer to 'Capital Management' below), our internal capital model is used as a tool in managing our business, planning capital allocations, portfolio monitoring, reinsurance and retrocession (collectively referred to as "reinsurance") purchasing and investment asset allocations.
Our internal capital model is an integral part of the business planning process which provides an assessment as to whether our prospective business and investment strategies are in line with our defined risk appetite and objectives at the group and operating entity level. The model also provides a basis for optimizing our risk-return profile by providing consistent risk measurement across the Group. The model outputs are reviewed and supplemented with management’s judgment and business experience and expertise.
Risk Diversification
As a global insurer and reinsurer with a wide product offering across different businesses, diversification is a key component of our business model and risk framework. Diversification enhances our ability to manage our risks that are minimized by followinglimiting the impact of a particular strategy. We also view strategicsingle event and contributing to relatively stable long-term results and our general risk profile. The degree to which the diversification effect can be realized depends not only ason the negative impact of riskcorrelation between risks but also the sub-optimizationlevel of gain. Fundamentally,relative concentration of those risks. Therefore, our aim is to maintain a balanced risk profile without any disproportionately large risks. Our internal capital model considers the level of correlation and diversification between individual risks and we believemeasure concentration risk consistently across our business in terms of pre/post diversified internal risk capital requirements.
Risk Appetite and Limit Framework
Our integrated risk management framework considers material risks that if we figure out botharise from our operations. Large risks that might accumulate and have the value protectionpotential to produce substantial losses are subject to our group-wide risk appetite and limit framework. Our risk appetite, as authorized by the value creation partBoard of Directors, represents the amount of risk that we are set up for success.
A strategy function was formedwilling to accept within the constraints imposed by our capital resources as partwell as the expectations of our enterprise-wide transformationstakeholders as to the type of risks we hold within our business. At an annual aggregated level, we also monitor and manage the potential financial loss from the accumulation of risk exposure in any one year.
Specific risk limits are defined and translated into a consistent framework across our identified risk categories and across our operating entities and are intended to limit the impact of individual risk types or accumulations of risk. Individual limits are established through an iterative process to ensure that the prioritizationoverall framework complies with our group-wide requirements on capital adequacy and coordinationrisk accumulation.
We monitor risk through, for example, risk dashboards and limit consumption reports. These are intended to allow us to detect potential deviations from our internal risk limits at an early stage.
External Perspectives
Various external stakeholders, among them regulators, rating agencies, investors and accounting bodies, place emphasis on the importance of enterprise-wide resources is done efficiently and effectively to drive targeted strategic outcomes. On no less than a quarterly basis, the Executive Committee of the Company meets and receives holistic information about execution against strategy and makes decisions to adjust and/or advance strategy. In addition, strategies employed throughout our business units, in support of the broader enterprise strategy, are reviewedsound risk management in the context of a broader governance structure, byinsurance/reinsurance industry. We monitor developments in the Business Councilexternal environment and business unit leadership and are ultimately approved by the Board of Directors.evolve our risk management practices accordingly.
Insurance Risk
Insurance risk is the inherent uncertainty as to the occurrence, amount and timing of insurance and reinsurance liabilities transferred to us through the underwriting process.
•The insurance/reinsurance business is historically cyclical, and we expect to experience periods with excess underwriting capacity and unfavorable premium rates.
•We may be adversely impacted by a wide variety of natural catastrophes or man-made catastrophes. The incidence and severity of catastrophes are inherently unpredictable and losses from catastrophes could be substantial. Our exposure to natural catastrophe losses may be increased by climate change, where we may have exposure to physical, transition and liability risks.
•We may be adversely affected by the effects of emerging claims and coverage issues and/or if actual claims exceed our loss reserves. The actual final cost of settling outstanding claims, as well as claims expected to arise from the unexpired period of risk is uncertain. There are many other factors that would cause loss reserves to increase or decrease, which include, but are not limited to emerging claims and coverage issues such as changes in claim severity, changes in the expected level of reported claims, judicial action changing the scope and/or liability of coverage, changes in the legislative, regulatory, social and economic environment, and unexpected changes in loss inflation.
•We may be adversely impacted by inflation. Our operations, like those of other insurers and reinsurers, are susceptible to the effects of inflation because premiums are established before the ultimate amounts of losses and loss expenses are known.
•We may be adversely affected by the failure of our loss limitation strategy, including the use of reinsurance.
•We may be adversely affected by the failure of models used to support key decisions.
Strategic Risk
Strategic risks affect or are created by an organization’s business strategy and strategic objectives. Our review of strategic risk evaluates not only internal and external challenges that might cause our chosen strategy to fail but also evaluates major risks that could affect our long-term performance and position.
•We may be adversely affected by competition and consolidation in the insurance and reinsurance industry. Increased competition could result in fewer submissions, lower premium rates, less favorable policy terms and conditions and greater costs of customer acquisition and retention.
•We have been and may continue to be adversely affected by a deterioration in global economic conditions. Economic uncertainty and market turmoil has affected and may in the future affect, among other aspects of our business, the demand for and claims made under our products, the ability of customers, counterparties and others to establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital resources and our investment performance and portfolio. A persistent low interest rate environment may reduce our profitability as investment income falls.
•We may be adversely affected by the exit of the U.K. from the E.U.
•We may be adversely affected by loss of business provided by a major broker.
•We may be adversely affected by a downgrade in our financial strength or credit rating. If we experience a credit rating downgrade, withdrawal or negative watch/outlook in the future, we could incur higher borrowing costs and may have more limited means to access capital. It could also result in a substantial loss of business for us.
Market Risk
Market risk is the risk that our financial instruments may be negatively impacted by movements in financial market prices or rates.
•Our investment and derivative instrument portfolios may be adversely impacted by capital markets risk related to changes in equity prices, interest rates, credit spreads and other factors.
•Our operating results may be adversely affected by currency fluctuations.
Liquidity Risk
Liquidity risk is the risk that we may not have sufficient financial resources to meet our obligations when they are due, or would have to incur excessive costs to do so.
•Our underwriting activities may expose us to liquidity risk. This stems mainly from the need to cover potential extreme loss events and regulatory constraints that limit the flow of funds within the Group.
Credit Risk
Credit risk represents the risk of incurring financial loss due to the diminished creditworthiness (reduced financial strength and, ultimately, possibly default) of our third-party counterparties.
•We may be adversely impacted if we are unable to collect amounts due to us from our counterparties – most materially reinsurers, but also including brokers, agents and customers.
Operational Risk
Operational risk represents the risk of loss as a result of inadequate processes, system failures, human error or external events, including but not limited to direct or indirect financial loss, reputational damage, customer dissatisfaction and legal and regulatory penalties.
•We may be adversely impacted by failure of the processes, people or systems that we rely on to maintain our operations and manage the operational risks inherent to our business, including those outsourced to third parties.
Regulatory Risk
Regulatory risk represents the risk arising from our failure to comply with legal, statutory or regulatory obligations.
•Our insurance and reinsurance subsidiaries conduct business globally and are subject to varying degrees of regulation in multiple jurisdictions. We may be adversely affected if we fail to comply fully with, or obtain exemption, from relevant regulations.
Risks Related to the Ownership of our Securities
•In addition to the risks to our business listed above, there are certain other risks related to the ownership of our securities for example relating to our holding company structure or provisions in our organizational documents and bye-laws.
Risks Related to Taxation
•We may be adversely impacted by changes in tax rules, or changes in the interpretation of existing tax rules in the multiple jurisdictions in which we operate.
Readers should carefully consider the risks noted above together with the risks detailed in Item 1A, 'Risk Factors' and all of the other information included in this report.
Website and Social Media Disclosure
We use our website (www.axiscapital.com) and our corporate Twitter (@AXIS_Capital) and LinkedIn (AXIS Capital) accounts as channels of distribution of Company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, e-mail alerts and other information about AXIS Capital may be received when enrolled in our "E-mail Alerts" program, which can be found in the Investor Information section of our website (www.axiscapital.com). The contents of our website and social media channels are not part of this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
In this Form 10-K, references to "AXIS Capital" refer to AXIS Capital Holdings Limited and references to "we", "us", "our", "AXIS", the "Group" or the "Company" refer to AXIS Capital Holdings Limited and its direct and indirect subsidiaries and branches, including: AXIS Specialty Holdings Bermuda Limited, AXIS Specialty Limited ("AXIS Specialty Bermuda"), AXIS Specialty Limited (Singapore Branch), AXIS Specialty Investments Limited, AXIS Specialty Investments II Limited, AXIS Specialty UK Holdings Limited, AXIS Managing Agency Ltd., AXIS Corporate Capital UK Limited (corporate member which provides 70% capital support to AXIS Syndicate 1686 ("Syndicate 1686")), Novae Group Limited, AXIS UK Services Limited, AXIS Underwriting Limited, AXIS Corporate Capital UK II Limited (sole corporate member of Novae Syndicate 2007 ("Syndicate 2007") and corporate member which provides 30% capital support to Syndicate 1686), AXIS Ventures Limited ("AXIS Ventures"), AXIS Reinsurance Managers Limited ("AXIS Reinsurance Managers"), AXIS Specialty Holdings Ireland Limited, AXIS Specialty Europe SE ("AXIS Specialty Europe"), AXIS Specialty Europe SE (U.K. Branch), AXIS Specialty Europe SE (Belgium Branch), AXIS Specialty Europe SE (Netherlands Branch), AXIS Reinsurance (DIFC) Limited, AXIS Re SE, AXIS Re SE, Dublin (Zurich Branch) ("AXIS Re Europe"), AXIS Re SE Escritório de Representação No Brasil Ltda., Contessa Limited, AXIS Specialty Global Holdings Limited, AXIS Specialty U.S. Holdings, Inc., AXIS Reinsurance Company ("AXIS Re U.S."), AXIS Reinsurance Company (Canadian Branch), AXIS Specialty U.S. Services, Inc., AXIS Specialty U.S. Services, Inc. (U.K. Branch), AXIS Specialty Canada Services, ULC, AXIS Group Services, Inc., AXIS Specialty Underwriters, Inc., AXIS Insurance Company ("AXIS Insurance Co."), AXIS Surplus Insurance Company ("AXIS Surplus"), AXIS Specialty Insurance Company ("AXIS Specialty U.S."), Ternian Insurance Group LLC, AXIS Specialty Finance LLC and AXIS Specialty Finance PLC, unless the context suggests otherwise.
Unless otherwise noted, tabular dollars are in thousands. Amounts may not reconcile due to rounding differences.
General
AXIS provides a broad range of specialty lines insurance and treaty reinsurance to our clients on a worldwide basis, through operating subsidiaries and branch networks based in Bermuda, the United States ("U.S."), Europe, Singapore and Canada. Our underwriting operations are organized around our global underwriting platforms, AXIS Insurance and AXIS Re.
The markets in which we operate have historically been cyclical. During periods of excess underwriting capacity, defined by the availability of capital, competition can result in lower pricing and less favorable policy terms and conditions for insurers and reinsurers. During periods of reduced underwriting capacity, pricing, and policy terms and conditions are generally more favorable for insurers and reinsurers. Historically, underwriting capacity has been impacted by several factors, including industry losses, catastrophes, changes in legal and regulatory guidelines, investment results and the ratings and financial strength of competitors. In 2020, we leveraged firming market conditions to increase our relevance in a select number of attractive specialty lines and treaty reinsurance markets and we continued to re-balance our portfolio towards less volatile lines of business.
At December 31, 2020, we had common shareholders’ equity of $4.7 billion, total capital of $6.6 billion and total assets of $25.9 billion.
Our Business Strategy
We are a hybrid specialty lines insurance and treaty reinsurance company that is a leader in many of the markets where we choose to compete. We provide our clients and distribution partners with a broad range of risk transfer products and services, and meaningful capacity, backed by excellent financial strength. We manage our portfolio holistically, aiming to construct the optimum portfolio of risks, consistent with our risk appetite and the development of our franchise. We nurture an ethical, entrepreneurial and disciplined culture that promotes outstanding client service, intelligent risk taking and the achievement of superior risk-adjusted returns for our shareholders. We believe that the achievement of our objectives will position us as a global leader in specialty risks.
We aim to execute on our business strategy through the following multi-pronged approach:
We offer a diversified range of products and services across market segments and geographies: Our position as a well-balanced hybrid specialty lines insurance and treaty reinsurance company gives us insight into the opportunities and challenges in a variety of markets. We are headquartered in Bermuda and have locations across the U.S., Canada and Europe including Dublin, London, Zurich and Brussels. We are actively pursuing opportunities throughout Latin America, mainly through our Miami office, which enables us to deliver a full range of facultative and treaty reinsurance solutions in Latin America. Our Singapore office serves as our regional hub in Asia and provides specialty insurance and reinsurance solutions in the Asia Pacific region.
We underwrite a balanced portfolio of risks, including complex and volatile lines,moderating overall volatility with risk limits, diversification and risk management: Risk management is a strategic priority embedded in our organizational structure and we are continuously monitoring, reviewing and refining our enterprise risk management practices. We combine judgment and experience with data-driven analysis, enhancing our overall risk selection process.
We modulate our risk appetite and deployment of capital across the underwriting cycle, commensurate with available market opportunities and returns: In response to market dynamics, we recognize opportunities as they develop and react quickly as new trends emerge. Our risk analytics provide important and continuous feedback, further assisting with the ongoing assessment of our risk appetite and strategic capital deployment. We have been successful in extending our product lines, finding new distribution channels and entering new geographies. When we do not find sufficiently attractive uses for our capital, we return excess capital to our shareholders through share repurchases or dividends.
We develop and maintain deep, trusting and mutually beneficial relationships with clients and distribution partners, offering high levels of service and effective solutions for risk management needs: Our management team has extensive industry experience, deep product knowledge and long-standing market relationships. We primarily transact in specialty markets, where risks are complex. We invest in data and technology capabilities and tools to empower our underwriters and enhance the service that we provide to our customers. Our intellectual capital and proven client-service capability attract clients and distribution partners looking for solutions.
We maintain excellent financial strength, characterized by financial discipline and transparency: Our total capital of $6.6 billion at December 31, 2020, as well as our high-quality and liquid investment portfolio and our operating subsidiary ratings of "A+" ("Strong") by Standard & Poor's and "A" ("Excellent") by the A.M. Best Company, Inc. ("A.M. Best") are key indicators of our financial strength.
We attract, develop, retain and motivate teams of experts: We aim to attract and retain the top talent in the industry and to motivate our employees to make decisions that are in the best interest of our clients and shareholders. We nurture an ethical, risk-aware, achievement-oriented culture that promotes professionalism, responsibility, integrity, discipline and entrepreneurship. As a result, we believe that our staff is well-positioned to make the best underwriting and strategic decisions for AXIS.
In 2020, our key metrics for performance measurement included operating return on average common equity ("operating ROACE") which is reconciled to the most comparable GAAP financial measure, return on average common equity ("ROACE"), in Item 7 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures Reconciliation' on an annual basis and relative total shareholder return ("TSR") over the long-term. We believe that the successful execution against long-term strategic plans should drive an increase in TSR over the long-term, and that TSR directly correlates to other relevant key performance metrics, including book value per diluted common share adjusted for dividends. Our goal is to achieve top-quintile industry operating ROACE and growth in book value per diluted common share adjusted for dividends, with volatility consistent with the industry average across underwriting cycles.
Segment Information
Our underwriting operations are organized around our global underwriting platforms, AXIS Insurance and AXIS Re. We have determined that we have two reportable segments, insurance and reinsurance. We do not allocate assets by segment, with the exception of goodwill and intangible assets.
Refer to Item 7 'Management’s Discussion and Analysis of Financial Condition and Results of Operations' for additional information relating to our reportable segments and Item 8, Note 3 to the Consolidated Financial Statements 'Segment Information' for additional information relating to our reportable segments and a description of the geographic distribution of gross premiums written based on the location of our subsidiaries.
The table below presents gross premiums written in each of our reportable segments for each of the most recent three years.
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| | | | | | | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Insurance | $ | 4,018,399 | | | $ | 3,675,931 | | | $ | 3,797,592 | | |
| Reinsurance | 2,808,539 | | | 3,222,927 | | | 3,112,473 | | |
| Total | $ | 6,826,938 | | | $ | 6,898,858 | | | $ | 6,910,065 | | |
| | | | | | | |
Insurance Segment
Lines of Business and Distribution
Our insurance segment offers specialty insurance products to a variety of niche markets on a worldwide basis. The following are the lines of business in our insurance segment:
•Property: provides physical loss or damage, business interruption and machinery breakdown cover for virtually all types of property, including commercial buildings, residential premises, construction projects and onshore renewable energy installations. This line of business includes primary and excess risks, some of which are catastrophe-exposed.
•Marine: provides cover for traditional marine classes, including offshore energy, renewable offshore energy, cargo, liability, recreational marine, fine art, specie, and hull war. Offshore energy coverage includes physical damage, business interruption, operator's extra expense and liability coverage for all aspects of offshore upstream energy, from exploration and construction through the operation and distribution phases.
•Terrorism: provides cover for physical damage and business interruption of an insured following an act of terrorism and includes kidnap and ransom, and crisis management insurance.
•Aviation: provides hull and liability, and specific war cover primarily for passenger airlines but also for cargo operations, general aviation operations, airports, aviation authorities, security firms and product manufacturers.
•Credit and Political Risk: provides credit and political risk insurance products for banks, commodity traders, corporations and multilateral and export credit agencies. Cover is provided for a range of risks including sovereign default, credit default, political violence, currency inconvertibility and non-transfer, expropriation, aircraft non-repossession and contract frustration due to political events.
•Professional Lines: provides directors’ and officers’ liability, errors and omissions liability, employment practices liability, fiduciary liability, crime, professional indemnity, cyber and privacy insurance, medical malpractice and other financial insurance related covers for commercial enterprises, financial institutions, not-for-profit organizations and other professional service providers. This business is predominantly written on a claims-made basis.
•Liability: primarily targets primary and low to mid-level excess and umbrella commercial liability risks in the U.S. wholesale markets in addition to primary and excess of loss employers, public, and products liability business predominately in the U.K. Target industry sectors include construction, manufacturing, transportation and trucking, and other services.
•Accident and Health: includes accidental death, travel insurance and specialty health products for employer and affinity groups.
•Discontinued Lines - Novae: includes those lines of business that Novae exited or placed into run-off in the fourth quarter of 2016 and in the first quarter of 2017. These discontinued insurance lines include financial institutions, professional indemnity, international liability, and international direct and facultative property.
We produce business primarily through wholesale and retail brokers worldwide. Some of our insurance products are also distributed through managing general agents ("MGAs") and managing general underwriters ("MGUs"). In the U.S., we have the ability to write business on an admitted basis using forms and rates filed with state insurance regulators and on a non-admitted or surplus lines basis which provides flexibility in forms and rates, as these are not filed with state regulators. Our ability to write business on a non-admitted basis in the U.S. provides us with the pricing flexibility needed to write non-standard coverages. Substantially all of our insurance business is subject to aggregate limits, in addition to event limits.
Gross premiums written by broker, shown individually where premiums by broker were 10% or more of the total in any of the last three years, were as follows:
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| Years ended December 31, | 2020 | | 2019 | | 2018 | |
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| Marsh & McLennan Companies Inc. | $ | 496,913 | | | 12 | % | | $ | 434,108 | | | 12 | % | | $ | 380,238 | | | 10 | % | |
| Aon plc | 485,113 | | | 12 | % | | 393,645 | | | 11 | % | | 405,281 | | | 11 | % | |
| Other brokers | 2,310,687 | | | 58 | % | | 2,015,822 | | | 54 | % | | 2,067,447 | | | 54 | % | |
| Managing general agencies and underwriters | 725,686 | | | 18 | % | | 832,356 | | | 23 | % | | 944,626 | | | 25 | % | |
| Total | $ | 4,018,399 | | | 100 | % | | $ | 3,675,931 | | | 100 | % | | $ | 3,797,592 | | | 100 | % | |
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No insured accounted for more than 10% of the gross premiums written in the insurance segment.
Competitive Environment
In our insurance segment, where competition is focused on price, service, and availability in the form of capacity, appetite and distribution, among other considerations, we compete globally and locally with U.S. and non-U.S carriers. We believe we can achieve positive differentiation through underwriting expertise in our chosen lines of business and market segments, providing customized solutions for our strategic partners, and top caliber claim service levels to our customers. In addition, our investment in building an agile business model is expected to further position us to capitalize on opportunities and more quickly bring innovative products and services to market while advancing our efforts to strengthen our portfolio and drive profitable growth.
Reinsurance Segment
Lines of Business and Distribution
Our reinsurance segment provides treaty reinsurance to insurance companies on a worldwide basis, written on an excess of loss and a proportional basis. For excess of loss business, we typically indemnify the reinsured for a portion of losses, individually and in the aggregate, in excess of a specified individual or aggregate loss deductible. For proportional business, we assume an agreed percentage of the underlying premiums and accept liability for the same percentage of losses and loss expenses. Our business is primarily produced through reinsurance brokers worldwide. The following are the lines of business in our reinsurance segment:
•Catastrophe: provides protection for most catastrophic losses that are covered in the underlying insurance policies written by our cedants. The underlying policies principally cover property-related exposures but other exposures including workers compensation and personal accident are also covered. The principal perils covered by policies in this portfolio include hurricane and windstorm, earthquake, flood, tornado, hail and fire. In some instances, terrorism may be a covered peril or the only peril. This business is written on a proportional and excess of loss basis.
•Property: provides protection for property damage and related losses resulting from natural and man-made perils that are covered in the underlying personal and commercial lines insurance policies written by our cedants. The predominant exposure is property damage but other risks, including business interruption and other non-property losses, may also be covered when arising from a covered peril. The most significant perils covered by policies in this portfolio include windstorm, tornado and earthquake, but other perils such as freezes, riots, flood, industrial explosions, fire, hail and a number of other loss events are also included. This business is written on a proportional and excess of loss basis.
•Professional Lines: providesprotection for directors’ and officers’ liability, employment practices liability, medical malpractice, professional indemnity, environmental liability, cyber, and miscellaneous errors and omissions insurance risks. The underlying business is predominantly written on a claims-made basis. This business is written on a proportional and excess of loss basis.
•Credit and Surety: provides reinsurance of trade credit insurance products and includes proportional and excess of loss structures. The underlying insurance indemnifies sellers of goods and services in the event of a payment default by the buyer of those goods and services. Surety reinsurance provides protection for losses arising from a broad array of surety bonds issued by insurers to satisfy regulatory demands or contract obligations in a variety of jurisdictions around the world. Mortgage reinsurance is also provided to mortgage guaranty insurers and U.S. government-sponsored entities for losses related to credit risk transfer into the private sector.
•Motor: provides protection to insurers for motor liability and property damage losses arising out of any one occurrence. A loss occurrence can involve one or many claimants where the ceding insurer aggregates the claims from the occurrence. Traditional proportional and non-proportional reinsurance as well as structured solutions are offered.
•Liability: provides protection to insurers of admitted casualty business, excess and surplus lines casualty business and specialty casualty programs. The primary focus of the underlying business is general liability, workers' compensation, auto liability and excess casualty.
•Agriculture: provides protection for risks associated with the production of food and fiber on a global basis for primary insurance companies writing multi-peril crop insurance, crop hail and named peril covers, as well as custom risk transfer mechanisms for agricultural dependent industries with exposures to crop yield and/or price deviations. This business is written on a proportional and aggregate stop loss reinsurance basis.
•Engineering: provides protection for all types of construction risks and risks associated with erection, testing and commissioning of machinery and plants during the construction stage. This line of business also includes cover for losses arising from operational failures of machinery, plant and equipment and electronic equipment as well as business interruption. We decided to exit this line of business in 2020.
•Marine and Aviation: includes specialty marine classes such as cargo, hull, pleasure craft, marine liability, inland marine and offshore energy. The principal perils covered by policies in this portfolio include physical loss, damage and/or liability arising from natural perils of the seas or land, man-made events including fire and explosion, stranding/sinking/salvage, pollution, shipowners and maritime employers liability. This business is written on a non-proportional and proportional basis. Aviation provides cover for airline, aerospace and general aviation exposures. This business is written on a proportional and non-proportional basis.
•Accident and Health: includes personal accident, specialty health, accidental death, travel, life and disability reinsurance products which are offered on a proportional and catastrophic or per life excess of loss basis.
•Discontinued Lines - Novae: includes those lines of business that Novae exited or placed into run-off in the fourth quarter of 2016 and in the first quarter of 2017. These discontinued reinsurance lines include motor reinsurance, general liability reinsurance and international facultative property.
Gross premiums written by broker, shown individually where premiums by broker were 10% or more of the total in any of the last three years, were as follows:
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| Years ended December 31, | 2020 | | 2019 | | 2018 | |
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| Marsh & McLennan Companies Inc. | $ | 818,821 | | | 29 | % | | $ | 838,617 | | | 26 | % | | $ | 779,375 | | | 25 | % | |
| Aon plc | 694,712 | | | 25 | % | | 887,602 | | | 28 | % | | 765,779 | | | 25 | % | |
| Willis Tower Watson PLC | 435,498 | | | 16 | % | | 403,402 | | | 13 | % | | 361,983 | | | 12 | % | |
| Other brokers | 582,368 | | | 20 | % | | 795,352 | | | 24 | % | | 864,601 | | | 28 | % | |
| Direct | 105,777 | | | 4 | % | | 135,614 | | | 4 | % | | 178,568 | | | 6 | % | |
| Managing general agencies and underwriters | 171,363 | | | 6 | % | | 162,339 | | | 5 | % | | 162,167 | | | 5 | % | |
| Total | $ | 2,808,539 | | | 100 | % | | $ | 3,222,927 | | | 100 | % | | $ | 3,112,473 | | | 100 | % | |
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No cedant accounted for more than 10% of the gross premiums written in the reinsurance segment.
Competitive Environment
In our reinsurance segment, competition tends to be focused on availability, service, financial strength and price. We compete with major U.S. and non-U.S. reinsurers and reinsurance departments of numerous multi-line insurance organizations. In addition to traditional market participants, we also compete with new market entrants supported by alternative capital sources offering risk transfer solutions on a collateralized or other non-traditional basis. Our clients may also acquire reinsurance protection through capital market products such as catastrophe bonds and insurance loss warranties. We believe that we achieve a competitive advantage through our diversified global product offerings, responsiveness to customer needs and ability to provide sophisticated and innovative products. We offer excellent claims management, strong financial strength ratings and an ability to leverage our balance sheet and relationships with strategic capital partners to provide meaningful capacity.
Cash and Investments
We seek to balance the investment portfolios’ objectives of increasing book value with the generation of relatively stable investment income, while providing sufficient liquidity to meet our claims and other obligations. Liquidity needs arising from potential claims are of primary importance and are considered in asset class participation and the asset allocation process. A significant portion of our investment portfolio is dedicated to investment grade fixed maturities that will generate cash flows that match expected claim payouts.
To diversify risk and optimize the growth in book value, we may invest in other asset classes such as equity securities, high yield securities and alternative investments (e.g. private equity funds) which provide higher potential total rates of return. These individual investment classes involve varying degrees of risk, including the potential for more volatile returns and reduced liquidity. However, as part of a balanced portfolio, they also provide diversification from interest rate and credit risk.
With regard to our investment portfolio, we primarily utilize third-party investment managers for security selection and trade execution functions, subject to guidelines and objectives for each asset class. This enables us to actively manage our investment portfolio with access to top performers specializing in various products and markets. We select the managers based on various criteria including investment style, performance history and corporate governance. In addition, we monitor approved investment asset classes for each subsidiary through analysis of our operating environment, including expected volatility of cash flows, overall capital position, regulatory and rating agency considerations. The Finance Committee of our Board of Directors approves overall group asset allocation targets and investment policy to ensure that they are consistent with our overall goals, strategies and objectives. We also have an Investment and Finance Committee, comprised of members of our senior management team, which oversees the implementation of our investment strategy.
Refer to Item 7 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cash and Investments' and Item 8, Note 5 to the Consolidated Financial Statements 'Investments' for additional information regarding our investment portfolio.
Refer to 'Risk and Capital Management' for additional information regarding the management of investment risk.
REGULATION
General
The business of insurance and reinsurance is regulated in most countries, although the degree and type of regulation varies significantly from one jurisdiction to another. In addition, some jurisdictions are currently evaluating changes to their regulation and we are monitoring these potential developments. To the extent we are aware of impending changes in regulation, designated project teams prepare us to comply on a timely basis with such anticipated changes. The following describes the current material regulations under which the Company operates.
Bermuda
Our Bermuda insurance operating subsidiary, AXIS Specialty Bermuda, is a Class 4 general business insurer subject to the Insurance Act 1978 of Bermuda and related regulations, as amended (the "Insurance Act"). The Insurance Act provides that no person may carry on any insurance or reinsurance business in or from within Bermuda unless registered as an insurer by the Bermuda Monetary Authority (the "BMA") under the Insurance Act. The Insurance Act imposes upon Bermuda insurance companies solvency and liquidity standards and auditing and reporting requirements, and grants the BMA powers to supervise, investigate, require information and demand the production of documents and intervene in the affairs of insurance companies. Significant requirements pertaining to Class 4 insurers include the appointment of an independent auditor, the appointment of a loss reserve specialist, the appointment of a principal representative in Bermuda, the filing of annual Statutory Financial Returns, the filing of annual GAAP financial statements, the filing of an annual capital and solvency return, compliance with minimum and enhanced capital requirements, compliance with certain restrictions on reductions of capital and the payment of dividends and distributions, compliance with group solvency and supervision rules, if applicable, and compliance with the Insurance Code of Conduct. On July 30, 2018, the Insurance Amendment (No. 2) Act 2018 amended the Insurance Act to provide for the prior payment of policyholders' liabilities ahead of general unsecured creditors in the event of the liquidation or winding up of an insurer. Effective January 1, 2019, this amendment applies to general business insurers and provides that, subject to certain statutorily preferred debts, the insurance debts of an insurer must be paid in priority to all other unsecured debts of the insurer. Insurance debt is defined as a debt to which an insurer is or may become liable pursuant to an insurance contract, excluding debts owed to an insurer under an insurance contract where the insurer is the person insured.
Effective January 1, 2016, the BMA was granted full "equivalence" under Solvency II (refer to"Ireland" below) for Bermuda’s commercial insurance sector, including Class 4 insurers.
The BMA acts as group supervisor of AXIS Capital and has designated AXIS Specialty Bermuda as the ‘designated insurer’ of the Group. In accordance with the group supervision and insurance group solvency rules, AXIS Capital is required to prepare and submit annual audited group GAAP financial statements, an annual group Statutory Financial Return, an annual group Capital and Solvency Return and quarterly group unaudited GAAP financial statements, and to appoint both a group actuary and a group auditor. AXIS Capital also files an annual capital and solvency return and must ensure compliance with minimum and enhanced capital requirements.
Effective September 23, 2020, AXIS Ventures Reinsurance Limited deregistered as a Class 3A insurer with the BMA and AXIS Ventures deregistered as an insurance manager with the BMA. AXIS Ventures Reinsurance Limited is currently pending dissolution.
AXIS Reinsurance Managers is regulated by the BMA as an insurance manager. Insurance managers are subject to the Insurance Act which provides that no person may carry on business as an insurance manager unless registered with the BMA under the Insurance Act. Insurance managers are required to comply with the Insurance Manager Code of Conduct.
AXIS Capital, AXIS Specialty Bermuda, AXIS Specialty Holdings Bermuda Limited, AXIS Specialty Investments Limited, AXIS Ventures, AXIS Specialty Investments II Limited and AXIS Reinsurance Managers must comply with provisions of the Bermuda Companies Act 1981, as amended (the "Companies Act"), regulating the payment of dividends and distributions. A Bermuda company may not declare or pay a dividend or make a distribution out of contributed surplus if there are reasonable grounds for believing that: (a) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the company’s assets would thereby be less than its liabilities.
The Singapore branch of AXIS Specialty Bermuda, AXIS Specialty Limited (Singapore Branch), established in 2008, is regulated by the Monetary Authority of Singapore (the "MAS") pursuant to The Insurance Act of Singapore, which imposes significant regulations relating to capital adequacy, risk management, governance, audit and actuarial requirements. AXIS Specialty Limited (Singapore Branch) is registered by the Accounting and Corporate Regulatory Authority ("ACRA") as a foreign company in Singapore and is also regulated by ACRA pursuant to the Singapore Companies Act. Prior to establishing its Singapore branch, AXIS Specialty Bermuda had maintained a representative office in Singapore since 2004.
AXIS Specialty Bermuda has reinsurance permissions in China and the Netherlands. AXIS Specialty Limited (Singapore Branch) has separate reinsurance permissions in China.
AXIS Re SE may write reinsurance in Bermuda under Solvency II equivalence between Bermuda and the E.U.
AXIS Managing Agency Ltd. may write general insurance and reinsurance in Bermuda using Lloyd's of London ("Lloyd's") licenses (refer to "U.K. and Lloyd's of London" below).
United States
U.S. Insurance Holding Company Regulation of AXIS Capital’s Insurance Subsidiaries
As members of an insurance holding company system, each of AXIS Insurance Co., AXIS Re U.S., AXIS Specialty U.S. and AXIS Surplus, collectively AXIS Capital’s U.S. insurance subsidiaries (collectively, the "U.S. Insurance Subsidiaries") are subject to the insurance holding company system laws and regulations of the states in which they do business. These laws generally require each of the U.S. Insurance Subsidiaries to register with its domestic state insurance department and to furnish financial and other information which may materially affect the operations, management or financial condition within the holding company system. All transactions within a holding company system that involve an insurance company must be fair and equitable. Notice to the applicable insurance department is required prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and an entity in its holding company system, and certain transactions may not be consummated without the department’s prior approval.
State Insurance Regulation
AXIS Re U.S. is licensed to transact insurance and reinsurance throughout the U.S. and in Puerto Rico. AXIS Re U.S. is also authorized to transact insurance and reinsurance throughout Canada through its Canadian branch and has reinsurance permissions in Argentina, Brazil, China, Columbia, Ecuador, Guam, Guatemala, Honduras, Panama, India and Mexico. AXIS Insurance Co. is licensed to transact insurance and reinsurance throughout the U.S. AXIS Specialty U.S. is licensed to transact insurance and reinsurance throughout the U.S., except California, Iowa, Maine, New Mexico, New York and Wyoming. AXIS Surplus is eligible to write insurance on a surplus lines basis throughout the U.S., Puerto Rico and the U.S. Virgin Islands.
Our U.S. Insurance Subsidiaries also are subject to regulation and supervision by their respective states of domicile and by other jurisdictions in which they do business. The regulations generally are derived from statutes that delegate regulatory and supervisory powers to an insurance official. The regulatory framework varies from state to state, but generally relates to approval of policy forms and rates, the standards of solvency that must be met and maintained, including risk-based capital standards, material transactions between an insurer and its affiliates, the licensing of insurers, agents and brokers, restrictions on insurance policy terminations, the nature of and limitations on the amount of certain investments, limitations on the net amount of insurance of a single risk compared to the insurer’s surplus, deposits of securities for the benefit of policyholders, methods of accounting, periodic examinations of the financial condition and market conduct of insurance companies, the form and content of reports of financial condition required to be filed, reserves for unearned premiums, losses, expenses and other obligations.
Our U.S. Insurance Subsidiaries are required to file detailed quarterly statutory financial statements with state insurance regulators in each of the states in which they conduct business. In addition, the U.S. Insurance Subsidiaries’ operations and accounts are subject to financial condition and market conduct examination at regular intervals by state regulators.
Regulators and rating agencies use statutory surplus as a measure to assess our U.S. Insurance Subsidiaries’ ability to support business operations and pay dividends. Our U.S. Insurance Subsidiaries are subject to various state statutory and regulatory restrictions that limit the amount of dividends that may be paid from earned surplus without prior approval from regulatory authorities. These restrictions differ by state, but generally are based on calculations using statutory surplus, statutory net
income and investment income. In addition, many state regulators use the National Association of Insurance Commissioners promulgated risk-based capital requirements as a means of identifying insurance companies which may be under-capitalized.
Although generally the insurance industry is not directly regulated by the federal government, federal legislation and initiatives can affect the industry and our business. Certain sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank") pertain to the regulation and business of insurance. Specifically, the Federal Insurance Office ("FIO") has limited authority to collect information and report on the business of insurance to Congress. In addition, Dodd-Frank contains the Non-Admitted and Reinsurance Reform Act of 2010 ("NRRA"). NRRA attempts to coordinate the payment of surplus lines taxes, simplify the granting of alien insurers to become surplus lines authorized and coordinates the credit for certain reinsurance. The Company continues to monitor the implementation of Dodd-Frank.
Ternian Insurance Group LLC, a leading provider of voluntary, limited benefit, affordable health plans and other employee benefits coverage for hourly and part-time workers and their families, is an authorized insurance producer in all 50 states of the U.S. except Hawaii. As a resident insurance producer in Arizona, Ternian Insurance Group LLC is subject to regulation and supervision by the Arizona Department of Insurance and is also subject to the regulation and supervision of the other states in which Ternian transacts business.
AXIS Specialty Underwriters, Inc., a Florida licensed reinsurance intermediary, is subject to regulation and supervision by the Florida Department of Financial Services. AXIS Specialty Underwriters, Inc. operates as the Latin American and Caribbean regional coverholder for Syndicate 1686, providing facultative reinsurance coverage to the Latin American and Caribbean market.
U.S. Authorizations of our Non-U.S. Insurance Subsidiaries
The insurance laws of each state of the U.S. regulate or prohibit the sale of insurance and reinsurance by insurers and reinsurers that are not admitted to do business within their jurisdictions, or conduct business pursuant to exemptions. AXIS Specialty Europe is eligible to write surplus lines business throughout the U.S. and in Puerto Rico. AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to (i) write surplus lines business throughout the U.S. and in all U.S. territories, (ii) write insurance business, except life insurance business, in the states of Illinois, Kentucky and in the U.S. Virgin Islands and (iii) write non-life reinsurance business throughout the U.S. and in all U.S. territories, except for accident and health reinsurance in New York.
In addition to the regulatory requirements imposed by the jurisdictions in which they are licensed, reinsurers’ business operations are affected by regulatory requirements in various states of the U.S. governing "credit for reinsurance" that are imposed on their ceding companies. In general, a ceding company obtaining reinsurance from a reinsurer that is licensed, accredited or approved by the jurisdiction or state in which the ceding company files statutory financial statements is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company’s liability for unearned premiums (which is that portion of premiums written which applies to the unexpired portion of the policy period), loss reserves and loss expense reserves ceded to the reinsurer. The great majority of states, however, permit a credit to statutory surplus resulting from reinsurance obtained from a non-licensed or non-accredited reinsurer to be recognized to the extent that the reinsurer provides a letter of credit, trust fund or other acceptable security arrangement. A few states do not allow credit for reinsurance ceded to non-licensed reinsurers except in certain limited circumstances, and others impose additional requirements that make it difficult to become accredited. In connection with the establishment of a Multi-Beneficiary Reinsurance Trust, AXIS Specialty Bermuda obtained accredited or trusteed reinsurer status in all U.S. jurisdictions except for New York.
Ireland
Our Ireland domiciled insurer and reinsurer are subject to the Solvency II Directive (Directive 2009/138/EC), as amended. Solvency II represents a consolidation and modernization of existing European Commission Solvency I insurance and reinsurance regulation and supervision and includes a harmonized risk-based solvency and reporting regime for the insurance/reinsurance sector. Solvency II covers three main areas: (i) the valuation of assets and liabilities and related solvency capital requirements; (ii) governance requirements including key functions of compliance, internal audit, actuarial and risk management; and (iii) legal entity and European Union ("E.U.") group reporting and disclosure requirements including public disclosures. The capital requirement must be computed using the Solvency II standard formula unless the Central Bank of Ireland ("CBI") has previously authorized a company to use its own internal model. Certain of our European legal entities are subject to Solvency II.
AXIS Specialty Europe
AXIS Specialty Europe is a European public limited liability company incorporated as a non-life insurer under the laws of Ireland. It is a Societas Europaea (SE), or European society company, and has been registered in accordance with E.U. law. As a SE company, AXIS Specialty Europe can more easily merge with companies in European member states and also transfer its domicile to other member states of the E.U. AXIS Specialty Europe is authorized and regulated by the CBI pursuant to the Insurance Acts 1909 to 2000, as amended, repealed or replaced, the Central Bank Acts 1942 – 2014, as amended, repealed or replaced, and E.U. regulation relating to general insurance and statutory instruments made thereunder. AXIS Specialty Europe is authorized to conduct business in 16 non-life insurance classes throughout the E.U. and the European Economic Area ("EEA"), which includes each of the member countries of the E.U. with the addition of Iceland, Liechtenstein and Norway. AXIS Specialty Europe may also write reinsurance business within the classes of insurance business for which it is authorized.
AXIS Specialty Europe is subject to Solvency II. In accordance with Solvency II, AXIS Specialty Europe is permitted to provide insurance services to clients located in any EEA Member State ("Freedom of Services"), subject to compliance with any "general good requirements" as may be established by the applicable EEA Member State regulator. AXIS Specialty Europe has notified the CBI of its intention to provide insurance services on a Freedom of Services basis in all EEA countries.
Solvency II also permits AXIS Specialty Europe to carry on insurance business in any EEA Member State under the principle of "Freedom of Establishment" subject to the prior approval of the CBI. AXIS Specialty Europe operates under Freedom of Establishment in the U.K., Belgium and the Netherlands through its branches established in each of these jurisdictions.
AXIS Specialty Europe's U.K. branch transacts general insurance business in the U.K., trading as AXIS Specialty London. The U.K. withdrew from the E.U. on December 31, 2020 and is now considered a third country. In order to maintain business continuity, AXIS Specialty Europe submitted an application to the Prudential Regulatory Authority (the "PRA") in 2018 for authorization of a third country branch. As this application is still pending, AXIS Specialty Europe entered into the PRA's Temporary Permissions Regime (the "TPR"), under which it is able to maintain business continuity. AXIS Specialty Europe will remain in the TPR, fully regulated by the PRA and the Financial Conduct Authority ("FCA"), until the earlier of the third year anniversary of its admission to the TPR and the date the PRA application has been fully assessed and approved.
Effective January 1, 2019, Compagnie Belge d’Assurances Aviation NV/SA merged into AXIS Specialty Europe by way of merger by absorption and dissolved without going into liquidation (the "Aviabel Merger"). In connection with the Aviabel Merger, AXIS Specialty Europe established two new branches in Belgium and the Netherlands (see "Belgium" and the "Netherlands" below).
AXIS Specialty Europe has local regulatory permission to carry on insurance business in Jersey and has reinsurance permissions in India, China, Argentina, Mexico, Panama, Paraguay, Chile, Honduras, Ecuador, Colombia and Guatemala.
AXIS Re SE
AXIS Re SE is a European public limited liability company incorporated as a reinsurer under the laws of Ireland. AXIS Re SE is also a Societas Europaea (SE), or European society company, registered in accordance with E.U. law. AXIS Re SE is authorized by the CBI as a composite reinsurer (non-life and life) in accordance with the Insurance Acts 1909 to 2000, as amended, repealed or replaced, the Central Bank Acts 1942 – 2014, as amended, repealed or replaced, and E.U. regulation applicable to reinsurance and statutory instruments made thereunder. AXIS Re SE is authorized to transact reinsurance throughout the E.U. and the EEA and is subject to Solvency II.
AXIS Re SE conducts business through its branch in Zurich, Switzerland, trading as AXIS Re Europe (see "Switzerland" below).
AXIS Re SE Escritório de Representação No Brasil Ltda. was established in Brazil as a subsidiary of AXIS Re SE to facilitate the Brazilian Superintendence of Private Insurance ("SUSEP") regulatory requirements for approval of a representative office of AXIS Re SE and for the registration of AXIS Re SE with SUSEP as an Admitted Reinsurer.
AXIS Re SE's representative offices in France and Spain were closed during 2019.
AXIS Re SE has reinsurance permissions in Argentina, Bolivia, Brazil, China, Chile, Colombia, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, India, Mexico, Nicaragua, Panama, Paraguay, Peru and Venezuela.
AXIS Specialty Holdings Ireland Limited
AXIS Specialty Holdings Ireland Limited is the limited liability holding company for AXIS Specialty Europe and AXIS Re SE, each incorporated under the laws of Ireland, Contessa Limited, a U.K. licensed insurance intermediary, and AXIS Reinsurance (DIFC) Limited, a Dubai licensed insurance intermediary.
AXIS Specialty Bermuda may write reinsurance under Solvency II equivalence granted to Bermuda by the E.U.
AXIS Managing Agency Ltd. is eligible to write insurance (except permanent health) and reinsurance business in Ireland through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" below).
AXIS Specialty Global Holdings Limited
AXIS Specialty Global Holdings Limited is the limited liability holding company for AXIS Capital's U.S. Insurance subsidiaries.
U.K. and Lloyd's of London
In the U.K., under the Financial Services and Markets Act 2000 ("FSMA"), no person may carry on a regulated activity unless authorized or exempt. Effecting or intermediating contracts of insurance or reinsurance are regulated activities requiring authorization. Effecting contracts of insurance requires authorization by the PRA and is regulated by the FCA. Intermediating contracts of insurance requires authorization by the FCA.
Under the Financial Services Act 2012, the FCA is a conduct regulator for all U.K. firms carrying on regulated activity in the U.K. while the PRA is the prudential regulator of U.K. banks, building societies, credit unions, insurers and major investment firms. As a prudential regulator, the PRA's general objective is to promote the safety and soundness of the firms it regulates. The PRA rules require financial firms to hold sufficient capital and have adequate risk controls in place.
The FCA's statutory strategic objective is to ensure that relevant markets function well and have operational objectives to protect consumers, protect financial markets and promote competition. It makes rules covering how the firm must be managed and requirements relating to the firm’s systems and controls, how business must be conducted and the firm’s arrangements to manage financial crime risk. The PRA and the FCA require regular and ad hoc reporting and monitor compliance with their respective rulebooks through a variety of means including the collection of data, industry reviews and site visits. The directors and senior managers of AXIS Managing Agency Ltd. must be "approved persons" under FSMA, making them directly and personally accountable for ensuring compliance with the requirements of the PRA and the FCA.
AXIS Managing Agency Ltd.
AXIS Managing Agency Ltd. is authorized and regulated by the PRA and regulated by the FCA to conduct insurance and reinsurance business and is a Lloyd's managing agent authorized by Lloyd's to manage our syndicates, Syndicate 1686 and Syndicate 2007. AXIS Managing Agency Ltd. is also the managing agent for SPA 6129, a third-party Lloyd's special purpose arrangement.
To consolidate our Lloyd’s business under Syndicate 1686, Syndicate 2007 ceased accepting new business and was placed into run-off on January 1, 2019. The final underwriting year of Syndicate 2007 and SPA 6129 will close by way of a reinsurance to close arrangement which took effect on January 1, 2021.
Lloyd’s is a society of corporate and individual members which underwrite insurance and reinsurance as members of syndicates. A syndicate is made up of one or more members that form a group to accept insurance and reinsurance risks. Each syndicate is managed by a managing agent. Managing agents write insurance business on behalf of the members of the syndicate, which members receive profits or bear losses in proportion to their respective shares in the syndicate for each underwriting year of account.
Lloyd’s is subject to U.K. law and is authorized under the FSMA. The Lloyd’s Act 1982 defines the governance structure and rules under which the society operates. Under the Lloyd's Act 1982, the Council of Lloyd’s is responsible for the management and supervision of the Lloyd’s market and supports the Lloyd's market. Lloyd's manages and protects the Lloyd's network of international licenses. Lloyd's agrees to syndicates' business plans and evaluates performance against
those plans. Syndicates are required to underwrite only in accordance with their agreed business plans. If they fail to do so, Lloyd’s can take a range of actions including, as a last resort, prohibiting a syndicate from underwriting. Lloyd’s also monitors syndicates’ compliance with Lloyd’s minimum standards and responsible for setting both member and central capital levels.
Lloyd’s has a global network of licenses and authorizations, and underwriters at Lloyd's may write business in and from countries where Lloyd’s has authorized status or exemptions available to non-admitted insurers or reinsurers. Lloyd’s licenses can only be used if the Syndicate Business Forecast, agreed annually with Lloyd’s, names those countries.
AXIS Managing Agency Ltd. operates an underwriting division at Lloyd’s Insurance Company (China) Limited, a wholly owned subsidiary of the Corporation of Lloyd’s which allows it to underwrite reinsurance in China.
AXIS Corporate Capital UK Limited
Until December 31, 2018, AXIS Corporate Capital UK Limited was the sole corporate member of Syndicate 1686. Effective January 1, 2019, both AXIS Corporate Capital UK Limited and AXIS Corporate Capital UK II Limited are corporate members of Syndicate 1686, providing 70% and 30% capital support, respectively. Syndicate 1686 is managed by AXIS Managing Agency Ltd.
AXIS Corporate Capital UK II Limited
(formerly Novae Corporate Underwriting Limited)
Following the acquisition of Novae Group Limited, management of Syndicate 2007 was transferred to AXIS Managing Agency Ltd. AXIS Corporate Capital UK II Limited is the sole corporate member of Syndicate 2007.
AXIS Underwriting Limited
AXIS Underwriting Limited, formerly known as Novae Underwriting Limited, is authorized and regulated by the FCA as an insurance intermediary and underwrites insurance at Lloyd's on behalf of Syndicate 1686.
Contessa Limited
Effective December 2019, Contessa Limited ceased writing insurance on behalf of AXIS Specialty Europe. Contessa Limited will continue to manage the AXIS Specialty Europe book of business on a run-off basis.
In January 2021, Contessa Limited surrendered its license as an insurance intermediary with the FCA.
AXIS Specialty UK Holdings Limited
AXIS Specialty UK Holdings Limited is a limited liability holding company for AXIS Managing Agency Ltd., AXIS Corporate Capital UK Limited and Novae Group Limited, and is incorporated under the laws of England and Wales.
Regulatory Impact Due to Brexit
On June 23, 2016, the U.K. voted to exit the E.U. ("Brexit") and on December 31, 2020, the U.K. completed its withdrawal from the E.U. Although an agreement was reached between the E.U. and the U.K., this agreement does not cover financial services. The parties have committed to enter into a Memorandum of Understanding covering financial services by March 2021. The following addresses the current impact to our insurers and reinsurers as a result of the U.K.'s withdrawal from the E.U.
Insurance
AXIS Specialty Europe established its branch in the U.K. pursuant to the right to Freedom of Establishment under E.U. law. As it was anticipated that AXIS Specialty Europe would lose its authorization to conduct business in the U.K. as a result of the U.K.'s exit from the E.U., an application for authorization of a third country branch was submitted to the PRA in 2018. As this application is still pending, AXIS Specialty Europe entered into the TPR to obtain temporary authorization. Under the TPR, AXIS Specialty Europe has authority to operate as a third country branch in the U.K. and is fully regulated by the PRA and FCA. As a result, AXS Specialty Europe's operations in the U.K. have been able to continue without interruption.
In preparation for Brexit, Lloyd’s established Lloyd's Insurance Company S.A in Brussels ("Lloyd’s Brussels") to retain access to the EEA markets and transferred all EEA risks to Lloyd’s Brussels.Lloyd's Brussels has been approved by the National Bank of Belgium ("NBB") and the Belgian conduct regulator, the Financial Services and Markets Authority ("Belgian FSMA") with authorization to write non-life insurance risks throughout the EEA. Effective with Brexit, all EEA risks are written by Lloyd’s Brussels.AXIS Managing Agency Ltd. has retained its access to the EEA markets through Lloyd's Brussels.
In January 2021, Lloyd’s Brussels updated Lloyd’s managing agents on its ongoing discussions with Lloyd’s, NBB and the Belgian FSMA regarding Lloyd’s Brussels’ operating model and the activities performed on behalf of Lloyd’s Brussels by Lloyd’s managing agents. We continue to monitor these discussions and are prepared to address any required changes to our operating model in the U.K. or the EEA.
Reinsurance
AXIS Managing Agency Ltd. remains able to conduct non-life facultative, proportional and excess of loss reinsurance throughout the EEA via Lloyd’s Brussels. The E.U. has not yet granted equivalence to the U.K. under Solvency II, however the review is ongoing and a decision is expected in the coming months.
AXIS Re SE currently transacts reinsurance business in the EEA pursuant to European law. In November 2020, the U.K. granted equivalence under Solvency II to EEA supervised reinsurers, including AXIS Re SE, allowing such reinsurers to continue operations without interruption.
Switzerland
AXIS Re SE's branch in Zurich, Switzerland trades as AXIS Re Europe and is registered in Zurich as AXIS Re SE, Dublin (Zurich branch). The CBI remains responsible for the prudential supervision of the branch. The Swiss Financial Market Supervisory Authority does not impose additional regulation upon a Swiss branch of an EEA reinsurer.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write all classes of insurance business, except life, sickness and legal expenses, and is authorized to write all classes of reinsurance business in Switzerland.
Singapore
AXIS Specialty Bermuda conducts insurance and reinsurance business from its branch in Singapore, AXIS Specialty Limited (Singapore Branch), subject to the supervision of the BMA and the MAS which imposes significant regulations relating to capital adequacy, risk management, governance and audit and actuarial requirements. AXIS Specialty Limited (Singapore Branch) is registered by ACRA as a foreign company in Singapore and regulated by ACRA pursuant to the Singapore Companies Act.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write insurance from Singapore with the exception of certain compulsory classes and life business. Singapore business may also be written from outside Singapore in certain circumstances where it is placed with a Singapore intermediary licensed by the MAS to place business at Lloyd's or by dealing directly with the insured.
Canada
AXIS Re U.S. conducts insurance and reinsurance business from AXIS Reinsurance Company (Canadian Branch), its branch in Canada, subject to the supervision of the New York State Department of Financial Services and the Office of the Superintendent of Financial Institutions Canada ("OSFI"), the federal regulatory authority that supervises federal Canadian and non-Canadian insurance companies operating in Canada pursuant to the Insurance Companies Act (Canada). The branch is authorized by OSFI to transact insurance and reinsurance. In addition, the branch is subject to the laws and regulations of each of the provinces and territories in which it is licensed.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses subject to the laws and regulations of each of the provinces and territories in which it is licensed and to write insurance in or from Canada, with the following exceptions: hail insurance in respect of crop in the province of Quebec; home warranty insurance in the province of British Columbia; life insurance; credit protection insurance; title insurance; surety; and mortgage default insurance. Syndicate 1686, through Lloyd's, is authorized to write reinsurance in or from Canada subject to certain restrictions relating to life reinsurance.
Belgium
AXIS Specialty Europe conducts insurance from its Belgium branch, AXIS Specialty Europe SE (Belgium Branch), which is subject to CBI prudential supervision and limited regulation by the NBB.
AXIS Specialty Europe also has permission to write insurance and reinsurance on a Freedom of Services basis in Belgium.
AXIS Re SE has permission to write reinsurance on a Freedom of Services basis in Belgium.
AXIS Managing Agency Ltd. is eligible to write insurance (except permanent health) and reinsurance business in Belgium through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" above).
Netherlands
AXIS Specialty Europe conducts insurance from its Netherlands branch, AXIS Specialty Europe SE (Netherlands Branch), which is subject to CBI prudential supervision and limited regulation by the Dutch National Bank.
AXIS Specialty Europe has permission to write insurance and reinsurance on a Freedom of Services basis in the Netherlands.
AXIS Re SE has permission to write reinsurance on a Freedom of Services basis in the Netherlands.
AXIS Managing Agency Ltd. is eligible to write insurance (except permanent health) and reinsurance business in the Netherlands through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" above).
Dubai
AXIS Reinsurance (DIFC) Limited was granted a prudential Category 4 license by the Dubai Financial Services Authority in December 2017 and operated as an intermediary under binding authority granted by the Board of Directors of AXIS Re SE to underwrite accident and health reinsurance. In December 2020, AXIS Reinsurance (DIFC) Limited surrendered its license and is currently in liquidation proceedings.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write reinsurance in or from Dubai with certain exceptions.
Non-Admitted Insurance and Reinsurance
The Company also insures and reinsures risks in many countries, including the above countries, pursuant to regulatory permissions and exemptions available to non-admitted insurers and reinsurers.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write insurance and reinsurance business where Lloyd's has authorized status or pursuant to regulatory exemptions available to non-admitted insurers and reinsurers.
TRADEMARKS
We use our trademarks, including among others, our "AXIS" trademarks for the global marketing of our products and services, and we believe that we sufficiently safeguard our trademark portfolio to protect our rights.
HUMAN CAPITAL MANAGEMENT
As a company, AXIS Capital’s mission is not only to deliver outstanding financial results, but also to help our clients, brokers and partners navigate the challenges of a volatile world. We believe our employees distinguish us from our competitors and are critical to our success as an insurance and reinsurance company that leads with purpose. Our workforce’s strength is grounded in our One AXIS culture, which celebrates collaboration, diversity and integrity, as well as relentless execution, continuous learning, adapting and improving. We recognize that our strength lies in our people, and therefore, one of our core strategies is to invest in and support our employees, including the following areas of focus:
Health, Safety and Wellness
We are committed to the health, safety and wellness of our workforce. In response to the ongoing COVID-19 pandemic, most of our employees have worked remotely since March 2020, and we suspended all nonessential business travel. We provided employees with an office and technology stipend to assist with the transition to working from home and have developed educational tools and materials focused on the well-being of our employees, including remote working best practices, leadership of virtual teams and managing stress while working from home. We also offered flexible work schedules, added half-day well-being days and allowed flexibility with paid time off and sick leave policies for employees directly impacted by COVID-19. We are carefully reviewing and monitoring health information and shelter-in-place orders in the regions in which we operate, and we have reopened certain of our offices only on an optional and limited basis and in accordance with the rules and regulations of the applicable jurisdiction. Our Board of Directors is focused on our response to the COVID-19 pandemic, receiving regular updates on the health and safety of employees, protocols to address actual or suspected COVID-19 exposures or cases and the status of any return to work decisions.
Diversity, Equity and Inclusion
We see diversity, equity and inclusion as a strategic imperative that is core to our business and our culture. We believe that encouraging a wide range of experiences, backgrounds and perspectives and ensuring equal treatment for all makes AXIS a more rewarding place to work, enables us to attract talented teammates, enriches our perspectives and makes us stronger as a global organization. Below are strategies and initiatives enacted in 2020 to further the advancement of our diverse, equitable and inclusive culture:
•Diversity & Inclusion Council: We established a Diversity & Inclusion Council comprised of global employees representing a full spectrum of experiences and viewpoints. The Council was established to ensure that employees with diverse perspectives and backgrounds can share their thoughts, ideas and recommendations. The Council is supported by an ancillary group of D&I Advocates who actively engage and promote the work of the Council.
•Educational Initiatives: AXIS is committed to diversity, equity and inclusion educational initiatives and offers them through varying mediums. Initiatives included:
◦Mandatory unconscious bias training for all employees;
◦Monthly "knowledge tests" on various diversity, equity and inclusion topics for all employees;
◦Informational toolkits serving as quick reference guides; and
◦The establishment of an anti-racism resource center.
The year was highlighted by a global forum on racial justice and equality with an external moderator and panel of AXIS colleagues.
•Recruitment: We continued to broaden our recruiting strategies to identify, source and develop a diverse pipeline of candidates. Initiatives included:
◦Establishing and enhancing existing relationships with diverse universities and external professional organizations;
◦Participating in diverse apprenticeship programs in Bermuda, London and the U.S.;
◦Further building out our internship program with strong diverse representation;
◦Providing recruitment training and manager coaching with a focus on enhancing managers’ effectiveness at recruiting diverse candidates; and
◦Ensuring management succession plans have diverse representation.
•Advocacy: AXIS participated in the Lloyd's Dive In festival, a festival for diversity and inclusion in the insurance sector, by sponsoring and participating in local committees in Atlanta, Bermuda, London, New York and Zurich.
•Tracking:We established quarterly measurement of diverse hiring, turnover, promotions, succession planning and candidate slates. In support of this work, we measure gender pay gap semi-annually and conduct annual pay audits. We also continued to partner with a human capital analytics firm that advises companies with respect to diversity, equity and inclusion metrics to help us set, track and consistently improve our diversity, equity and inclusion.
•Disclosure: We believe transparency will play a critical role in driving action by shining light on the areas where we can increase underrepresented populations in our workforce. In 2020, AXIS participated in the Bloomberg Gender Equality Index (the "GEI"), an index of public companies committed to disclosing their efforts to achieve gender equality, to build
greater parity between genders within our organization. This participation, in turn, earned AXIS inclusion in the 2021 GEI.
Talent Development
At AXIS, investing in our people is a top priority. We provide our employees with a variety of professional development resources to help them achieve their career goals. Some of our 2020 initiatives in furtherance of this goal are described below:
•Career Mobility Within the Organization: In 2020, 20% of our open positions were filled by internal candidates.
•AXIS Academy: We provide our employees access to AXIS Academy, which serves as our learning and development hub and reflects our commitment to continuing education. AXIS Academy includes over 5,000 online training courses.
•Professional Development: We also offer financial assistance for external professional development opportunities and tuition reimbursement for certain part-time business-related degree programs.
•Early Careers Program: Our Early Careers Program aims to build a strong pipeline of early career talent through our internship and development programs.
•AXIS Careers: We created AXIS Careers to ensure our people feel empowered to "own their careers" – offering a comprehensive suite of professional development tools, resources and training modules to help navigate career experiences and upskilling across our global organization. This includes leadership development, mentoring, and job secondments, shadows and swaps.
Employee Engagement
We understand that employee engagement leads to a more satisfying and fulfilling workplace and motivates employees to do their best work. Our employee engagement initiatives include: (i) AXIS Applause (our global recognition program to recognize the contributions of other AXIS members), (ii) community building events for AXIS employees and their families and (iii) our employee-led charitable giving program which helps our employees give back to their communities.
During 2020, we conducted an enterprise-wide engagement survey, measuring engagement and inclusion. Managers and teams reflected on the survey results and developed enterprise-wide and local action plans to address areas identified for growth.
Compensation and Benefits
To attract and retain our industry’s top talent, we offer employees a total rewards program that is designed to incentivize exceptional performance and deliver equal pay for equal work. Our compensation packages align with our pay-for-performance philosophy and are assessed on an annual basis through year-end performance reviews. Our packages are also regularly benchmarked against similarly sized insurance, reinsurance and financial services companies in each of our talent markets. Compensation components include market competitive salaries and short-term annual incentive programs (i.e., bonus payments) and, for senior level employees, long-term incentives such as equity grants. Our comprehensive benefits packages include medical plans for employees and their families, flexible spending accounts, retirement savings plans with employer contributions and work-life benefits, including parental leave policies, flexible work arrangements for eligible employees and charitable matching programs.
Succession Planning
We have a robust talent and succession planning process. On an annual basis, management conducts a talent and succession plan for each member of our Executive Committee and their direct reports, focusing on high performing and high potential talent, diverse talent, and the succession plan for each position. On an annual basis, our Board of Directors receives a comprehensive succession plan for each member of our Executive Committee. In light of the COVID-19 pandemic, in 2020, the Compensation Committee also received a report on the emergency succession plan for the Executive Committee.
Employees
At December 31, 2020, we had 1,921 employees. During fiscal year 2020, the number of employees increased by approximately 17%, primarily due to increases in our Business Technology Solutions team in our newly opened Halifax, Nova Scotia office. During fiscal 2020, our voluntary turnover rate was approximately 8%.
Below is an approximate summary of our employees by region at December 31, 2020:
| | | | | | | | | | | |
| | | |
| | Employees | |
| | | |
| North America | 1,212 | |
| Europe, Middle East and Africa | 677 | |
| Asia Pacific | 32 | |
| Total employees | 1,921 | |
| | | |
At December 31, 2020, our global employees had approximately the following gender demographics:
| | | | | | | | | | | | | | |
| | | | |
| | Women | Men | |
| | | | |
| Total employees(1) | 43% | 55% | |
| | | | |
(1)2% of employees did not identify.
At December 31, 2020, our U.S. employees had approximately the following racial and ethnic demographics:
| | | | | | | | | | | |
| | | |
| | All U.S. Employees(2)(3) | |
| | | |
| Black / African American | 14% | |
| Asian | 10% | |
| Hispanic / Latinx | 4% | |
| White | 59% | |
| Multiracial, Native American and Pacific Islander | 2% | |
| | | |
(2)This information is presented for U.S. employees only. We continue to gather global demographic information to demonstrate our racial and ethnic diversity.
(3)11% of employees did not identify.
INFORMATION SECURITY
Information security is one of our highest priorities. Our information security ecosystem is designed to evolve with the changing security threat environment through ongoing assessment and measurement. We use commercial and proprietary security monitoring technologies and techniques to continuously monitor and respond to cyber threats. We also regularly engage independent third-party security auditors to test our systems and controls against relevant security standards and regulations.
Our employees and contractors are required to comply with our IT End User policy and certify their compliance annually. Information security awareness training is mandatory for all new hires and for existing employees and contractors on a regular basis.
Our Board of Directors, along with the Risk Committee and Audit Committee of the Board of Directors, oversee our information security program. In 2020, our Board of Directors received periodic updates throughout the year on cybersecurity matters, and these updates are part of the Board of Directors' standing agenda.
AVAILABLE INFORMATION
Our Internet website address is www.axiscapital.com. Information contained in our website is not part of this report.
We make available free of charge, through our internet website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Current copies of the charter for each of our Audit Committee, Corporate Governance and Nominating Committee, Compensation Committee, Finance Committee, Executive Committee and Risk Committee, as well as our Corporate Governance Guidelines and Code of Business Conduct, are available on our internet website at www.axiscapital.com.
RISK AND CAPITAL MANAGEMENT
Risk Management Framework – Overview
Mission and Objectives
The mission of Enterprise Risk Management ("ERM") at the Company is to promptly identify, assess, manage, monitor and report risks that affect the achievement of our strategic, operational and financial objectives. The key objectives of our risk management framework are to:
•Protect our capital base and earnings by monitoring our risks against our stated risk appetite and limits;
•Promote a sound risk management culture through disciplined and informed risk taking;
•Enhance value creation and contribute to an optimal risk-return profile by providing the basis for efficient capital deployment;
•Support our group-wide decision-making process by providing reliable and timely risk information; and
•Safeguard our reputation.
The risk management framework applies to all lines of business and corporate functions across our insurance and reinsurance segments.
Risk Governance
At the heart of our risk management framework is a governance process with responsibilities for identifying, assessing, managing, monitoring and reporting risks. We articulate roles and responsibilities for risk management throughout the organization, from the Board of Directors and the Chief Executive Officer to our business and corporate functions, thus embedding risk management throughout the Company (refer to 'Risk Governance and Risk Management Organization' below).
To support our governance process, we rely on our documented policies and procedures. Our risk policies are a formal set of documents we use to specify our approach and risk mitigation/control philosophy for managing individual and aggregate risks. We also have procedures to approve exceptions and procedures for referring risk issues to senior management and the Board of Directors. Our qualitative and quantitative risk reporting framework provides transparency and early warning indicators to senior management with regard to our overall risk profile, adherence to risk appetite and limits and improvement actions at an operating entity and Group level.
Various governance and control bodies coordinate to help ensure that objectives are being achieved, risks are identified, and appropriately managed, and internal controls are in place and operating effectively.
Internal Capital Model
An important aspect of our risk management framework is our internal capital model. Utilizing this modeling framework provides us with a holistic view of the capital we put at risk in any year by allowing us to understand the relative interaction
among the known risks impacting us. This integrated approach recognizes that a single risk factor can affect different sub-portfolios and that different risk factors can have different mutual dependencies. We continuously review and update our model and its parameters as our risk landscape and external environment continue to evolve.
As well as being used to measure internal risk capital (refer to 'Capital Management' below), our internal capital model is used as a tool in managing our business, planning capital allocations, portfolio monitoring, reinsurance and retrocession (collectively referred to as "reinsurance") purchasing and investment asset allocations.
Our internal capital model is an integral part of the business planning process which provides an assessment as to whether our prospective business and investment strategies are in line with our defined risk appetite and objectives at the group and operating entity level. The model also provides a basis for optimizing our risk-return profile by providing consistent risk measurement across the Group. The model outputs are reviewed and supplemented with management’s judgment and business experience and expertise.
Risk Diversification
As a global insurer and reinsurer with a wide product offering across different businesses, diversification is a key component of our business model and risk framework. Diversification enhances our ability to manage our risks by limiting the impact of a single event and contributing to relatively stable long-term results and our general risk profile. The degree to which the diversification effect can be realized depends not only on the correlation between risks but also the level of relative concentration of those risks. Therefore, our aim is to maintain a balanced risk profile without any disproportionately large risks. Our internal capital model considers the level of correlation and diversification between individual risks and we measure concentration risk consistently across our business in terms of pre/post diversified internal risk capital requirements.
Risk Appetite and Limit Framework
Our integrated risk management framework considers material risks that arise from our operations. Large risks that might accumulate and have the potential to produce substantial losses are subject to our group-wide risk appetite and limit framework. Our risk appetite, as authorized by the Board of Directors, represents the amount of risk that we are willing to accept within the constraints imposed by our capital resources as well as the expectations of our stakeholders as to the type of risks we hold within our business. At an annual aggregated level, we also monitor and manage the potential financial loss from the accumulation of risk exposure in any one year.
Specific risk limits are defined and translated into a consistent framework across our identified risk categories and across our operating entities and are intended to limit the impact of individual risk types or accumulations of risk. Individual limits are established through an iterative process to ensure that the overall framework complies with our group-wide requirements on capital adequacy and risk accumulation.
We monitor risk through, for example, risk dashboards and limit consumption reports. These are intended to allow us to detect potential deviations from our internal risk limits at an early stage.
External Perspectives
Various external stakeholders, among them regulators, rating agencies, investors and accounting bodies, place emphasis on the importance of sound risk management in the insurance/reinsurance industry. We monitor developments in the external environment and evolve our risk management practices accordingly.
Risk Governance and Risk Management Organization
The key elements of our governance framework, as it relates specifically to risk management, are described below:
Board of Directors’ Level
The Risk Committee of the Board of Directors ("Risk Committee") assists the directors in overseeing the integrity and effectiveness of our ERM framework and ensuring that our risk assumption and risk mitigation activities are consistent with that framework. The Risk Committee reviews, approves and monitors our overall risk strategy, risk appetite and key risk limits and receives regular reports from the Group Risk Management function ("Group Risk") to ensure any significant risk issues are being addressed by management. The Risk Committee further reviews, with management and Internal Audit, the Group’s general policies and procedures and satisfies itself that effective systems of risk management and controls are established and maintained. Among its other responsibilities, the Risk Committee also reviews and approves our annual Own
Risk and Solvency Assessment ("ORSA") report. The Risk Committee assesses the independence and objectivity of our Group Risk function, approves its terms of reference and reviews its ongoing activities.
Following a recommendation by the Chief Executive Officer, the Risk Committee also conducts a review and provides a recommendation to the Board of Directors regarding the appointment and/or removal of the Chief Risk Officer. The Risk Committee meets with the Chief Risk Officer in separate executive sessions on a regular basis.
The Finance Committee of the Board of Directors oversees the Group’s investment of funds and adequacy of financing facilities. This includes approval of the Group’s strategic asset allocation plan. The Audit Committee of the Board of Directors, which is supported Internal Audit, is responsible for overseeing internal controls and compliance procedures, and also reviews with management and the Chairman of the Risk Committee, the Group’s policies regarding risk assessment and risk management.
Group Executive Level
The Executive Committee formulates our business objectives and risk strategy within the overall risk appetite set by the Board of Directors. It allocates capital resources and sets limits across the Group, with the objective of balancing return and risk. While the Executive Committee is responsible overall for risk management, it has delegated some authority to the executive level Risk Management Committee ("RMC") consisting of the Chief Executive Officer, Chief Financial Officer, Chief Strategy Officer, Head of Group Underwriting, Chief Executive Officers of each segment, Chief Risk Officer, Group Chief Actuary and General Counsel & Corporate Secretary.
The RMC is responsible for overseeing the integrity and effectiveness of the Group's ERM framework and ensuring that the Group's risk assumption and risk mitigation activities are consistent with that framework, including a review of the annual business plan relative to our risk limits. In addition to the RMC, there is an established framework of separate yet complementary management committees and subcommittees, focusing on particular aspects of ERM including the following:
Management Committees
•The Business Council oversees underwriting strategy and performance, establishes return targets and manages risk/exposure constraints across each line of business, consistent with the Company’s strategic goals.
•The Product Board for each major line of business aims to develop a coherent strategy for portfolio management, set underwriting guidelines and risk appetite and leverage expertise across the multiple geographies where we operate. The Product Boards also oversee exposure management frameworks and view of risk.
•The Investment & Finance Committee oversees the Group’s investment activities which includes monitoring market risks, the performance of our investment managers and the Group’s asset-liability management, liquidity positions and investment policies and guidelines. The Investment & Finance Committee also prepares the Group’s strategic asset allocation and presents it to the Finance Committee of the Board of Directors for approval.
•The Capital Management Committee oversees the integrity and effectiveness of the Company’s capital management policy, including the capital management policies of the Company’s legal entities and branches, and oversees the availability of capital within the Group.
•The Group Reserving Committee ensures appropriate oversight and challenge of the Group and Segment loss reserves.
RMC Sub-Committees
•The Natural Catastrophe Committee oversees the Group's natural catastrophe risk management framework, including the validation of modeling and accumulation practices.
•The Non-Natural Catastrophe Committee oversees the Group's non-natural catastrophe risk management framework, including the validation of modeling and accumulation practices.
•The Reinsurance Security Committee ("RSC") sets out the financial security requirements of our reinsurance counterparties and approves our counterparties, as needed.
•The Internal Model Committee oversees the Group's internal model framework, including the key model assumptions, methodology and validation framework.
•The Operational Risk Committee oversees the Group's operational risk framework for identifying, assessing, managing, monitoring and reporting of operational risk and facilitates the embedding of effective operational risk management practices throughout the Group.
•The Emerging Risks Working Group oversees the processes for identifying, assessing, managing, monitoring and reporting current and potential emerging risks.
•The Climate Change Working Group focuses specifically on climate-related risks and oversees the implementation of our climate risk management framework.
Group Risk Management Organization
As a general principle, management in each of our lines of business, segments and corporate functions is responsible in the first instance for the risks and returns of its decisions. Management is the 'owner' of risk management processes and is responsible for managing our business within defined risk limits.
The Chief Risk Officer reports to the Chief Financial Officer and the Chairman of the Risk Committee, leads our independent Group Risk function, and is responsible for oversight and implementation of the Group's ERM framework, as well as providing guidance and support for risk management practices. Group Risk is responsible for developing methods and processes for identifying, assessing, managing, monitoring and reporting risk. This forms the basis for informing the Risk Committee and RMC of the Group’s risk profile. Group Risk develops our risk management framework and oversees the adherence to this framework at the Group and operating entity level. Our Chief Risk Officer regularly reports risk matters to the Chief Financial Officer, Executive Committee, RMC and the Risk Committee.
Internal Audit, an independent, objective function, reports to the Audit Committee of the Board of Directors on the effectiveness of our risk management framework. This includes assurance that key business risks have been adequately identified and managed appropriately and that our system of internal control is operating effectively. Internal Audit also provides independent assurance around the validation of our internal capital model and coordinates risk-based audits, compliance reviews and other specific initiatives to evaluate and address risk within targeted areas of our business.
Our risk governance structure is further complemented by our legal team which seeks to mitigate legal and regulatory compliance risks with support from other teams. This includes ensuring that significant developments in law and regulation are observed and that we react appropriately to impending legislative and regulatory changes and applicable court rulings.
Risk Landscape
Our risk landscape comprises strategic, insurance, credit, market, operational and liquidity risks that arise as a result of doing business. We provide definitions of these risk categories as well as descriptions of management of these risks below. Across these risk categories, we identify and evaluate emerging threats and opportunities through a framework that includes the assessment of potential surprise factors that could affect exposures.
Our risk landscape is reviewed on a regular basis to ensure that it remains up-to-date based on the evolving risk profile of the Company. In addition, we undertake ongoing risk assessments across all enterprise risks, the output of which is captured in our risk register which is reviewed and reported through our governance structure.
Insurance Risk
Insurance risk is the inherent uncertainty as to the occurrence, amount and timing of insurance and reinsurance liabilities transferred to us through the underwriting process.
Since our inception in 2001, we have expanded our international presence, with underwriting offices in Bermuda, the U.S., Europe, Singapore Canada and the Middle East.Canada. Our disciplined underwriting approach coupled with a group-wide peer review process has enabled us to manage this growth in a controlled and consistent manner.
A key component of the Group's underwriting risk governance is our peer review processes which allow for a collaborative review of risk and pricing and ensures that underwriting is within established protocolsguidelines and guidelines.procedures. Underwriting guidelines are in place to provide a framework for consistent pricing and risk analysis and ensuring alignment to the Group's risk appetite. Limits are set on underwriting capacity, and cascade authority to individuals based on their specific roles and expertise.
We also have significant audit coverage across our lines of business, units, including Management Initiated Audits ("MIAs"). MIAs are audits of underwriting and claims files performed by teams independent of those who originated the transactions, the
purpose of which is to test the robustness of our underwriting claims and operatingclaims processes and to recognize any early indicators of future trends in our operational risk environment.
Reinsurance Purchasing
Another key component of our mitigation of insurance risk is the purchase of reinsurance to protect our short and long tail lines of business on both a treaty (covering a portfolio of risks) and facultative (single risk) basis, on both our short and long tail lines of business.basis.
For treaty reinsurance, we purchase both proportional and non-proportional cover. Under proportional reinsurance, we cede an agreed proportionpercentage of the premiums and the losses and loss expenses on the policies we underwrite. We primarily use proportional reinsurance on our liability, professional lines and cyber portfolios, as well as on select property portfolios, wherebywhere we protect against higher loss frequency rather than specific events. We also purchase proportional reinsurance on our assumed property catastrophe reinsurance portfolio, casualty, and credit and bondsurety portfolios, which includes cessions to our Strategic Capital Partners. We alsoIn addition, we use non-proportional reinsurance, whereby losses up to a certain amount (i.e. our retention) are borne by us. By using non-proportional reinsurance, we can limit our liability with a retention, which reflects our willingness and ability to bear risk, and is therefore in line with our risk appetite. We primarily purchase the following forms of non-proportional reinsurance:
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•Excess of loss per risk – the reinsurer indemnifies us for loss amounts of all individual policies effected, defined in the treaty terms and conditions. Per risk treaties are an effective means of risk mitigation against large single losses (e.g. a large fire claim).
• | Excess of loss per risk – the reinsurer indemnifies us for loss amounts of all individual policies effected, defined in the treaty terms and conditions. Per risk treaties are an effective means of risk mitigation against large single losses (e.g. a large fire claim). This includes the Northshore Re catastrophe bond program, which provides a combined $715 million of limit across the Group. Refer to Item 7 'Management’s Discussion and Analysis of Financial Condition and Results of Operations' – Underwriting Results – Consolidated – Underwriting Expenses' for further details.
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Catastrophe excess of loss – provides aggregate loss cover for our insurance portfolio against the accumulation of losses incurred from a single event (e.g. windstorm).
We have a centralized risk funding department, which coordinates external treaty reinsurance purchasing across the Group and is overseen by our Reinsurance Purchasing Group ("RPG"). The RPG, which includes, among others, our Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, Head of Group Underwriting and representatives from the business unit leadership team, approves each treaty placement, and aims to ensure that appropriate diversification exists within our RSC approved counterparty panels.
Facultative reinsurance is case by case risk transfer, whichtransfer. In certain circumstances, we may also use facultative reinsurance to complement treaty reinsurance by covering additional risks above and beyond what is already covered inby treaties. Facultative reinsurance is monitored by the risk funding department.team.
Natural Peril Catastrophe Risk
Natural catastrophes such as hurricanes, and windstorms, earthquakes, storms,floods, tornados, hail and floodsfire represent a challenge for risk management due to their accumulation potential and occurrence volatility. In managing natural catastrophe risk, our internal risk limit framework aims to limit both the loss of capital due to a single event and the loss of capital that would occur from multiple (but perhaps smaller events) in any year. Within this framework, we have an established risk limit for single event, single zone probable maximum loss ("PML") within defined zones and at various return periods. For example, at the 1-in-250-year return period, we are not willing to expose more than 20% of our prior quarter-end common-equity fromcommon equity to a single event within a single zone.
The table below shows our mean PML estimates forto a single natural peril catastrophe event within certain defined single zones which correspond to peak industry catastrophe exposures at January 1, 20202021 and 2019:2020:
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| | At January 1, (in millions of U.S. dollars) | 2020 | | 2019 | |
| | Single zone/single event | | Perils | 50 Year Return Period | | 100 Year Return Period | | 250 Year Return Period | | 50 Year Return Period | | 100 Year Return Period | | 250 Year Return Period | |
| | | | | | | | | | | | | | | | |
| | Southeast | | U.S. Hurricane | $ | 262 |
| | $ | 310 |
| | $ | 428 |
| | $ | 383 |
| | $ | 441 |
| | $ | 620 |
| |
| | Northeast | | U.S. Hurricane | 53 |
| | 145 |
| | 236 |
| | 52 |
| | 156 |
| | 290 |
| |
| | Mid-Atlantic | | U.S. Hurricane | 120 |
| | 214 |
| | 349 |
| | 133 |
| | 315 |
| | 449 |
| |
| | Gulf of Mexico | | U.S. Hurricane | 202 |
| | 249 |
| | 283 |
| | 258 |
| | 316 |
| | 394 |
| |
| | California | | Earthquake | 176 |
| | 249 |
| | 292 |
| | 253 |
| | 369 |
| | 468 |
| |
| | Europe | | Windstorm | 195 |
| | 238 |
| | 316 |
| | 231 |
| | 301 |
| | 376 |
| |
| | Japan | | Earthquake | 138 |
| | 247 |
| | 414 |
| | 147 |
| | 227 |
| | 359 |
| |
| | Japan | | Windstorm | 114 |
| | 195 |
| | 256 |
| | 60 |
| | 109 |
| | 158 |
| |
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| At January 1,
(in millions of U.S. dollars) | 2021 | | 2020 | |
| Single zone/single event | | Perils | 50 Year
Return
Period | | 100 Year
Return
Period | | 250 Year
Return
Period | | 50 Year
Return
Period | | 100 Year
Return
Period | | 250 Year
Return
Period | |
| | | | | | | | | | | | | | | |
| Southeast | | U.S. Hurricane | $ | 286 | | | $ | 408 | | | $ | 625 | | | $ | 262 | | | $ | 310 | | | $ | 428 | | |
| Northeast | | U.S. Hurricane | 42 | | | 115 | | | 262 | | | 53 | | | 145 | | | 236 | | |
| Mid-Atlantic | | U.S. Hurricane | 90 | | | 263 | | | 520 | | | 120 | | | 214 | | | 349 | | |
| Gulf of Mexico | | U.S. Hurricane | 175 | | | 263 | | | 431 | | | 202 | | | 249 | | | 283 | | |
| California | | Earthquake | 193 | | | 396 | | | 504 | | | 176 | | | 249 | | | 292 | | |
| Europe | | Windstorm | 136 | | | 182 | | | 240 | | | 195 | | | 238 | | | 316 | | |
| Japan | | Earthquake | 103 | | | 179 | | | 336 | | | 138 | | | 247 | | | 414 | | |
| Japan | | Windstorm | 113 | | | 186 | | | 220 | | | 114 | | | 195 | | | 256 | | |
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The return period refers to the frequency with which losses of a given amount or greater are expected to occur. A zone is a geographic area in which the insurance risks are considered to be correlated to a single catastrophic event. Estimated losses from a modeled event are grouped into a single zone, as shown above, based on where the majority of the total estimated industry loss is expected to occur. In managing zonal concentrations, we aim to ensure that the geography of single events is suitably captured, but distinct enough that they track specific types of events. For example, our definition of Southeast wind encompasses five states, including Florida, while our definition of Gulf Wind encompasses four states, including Texas.
Our PMLs take into account the fact that an event may trigger claims in a number of lines of business. For instance, our U.S. hurricane modeling includes the estimated pre-tax impact to our financial results arising from our catastrophe, property, engineering, energy, marine and aviation lines of business. Our PMLs include assumptions regarding the location, size and magnitude of an event, the frequency of events, the construction type and a property’s susceptibility to damage and the cost of rebuilding the property. Loss estimates for non-U.S. zones will be subject to foreign exchange rates, although we may mitigate this currency variability from a book value perspective.
As indicated in the table above, our modeled single occurrence 1-in-100-year return period PML for a Southeast U.S. hurricane, net of reinsurance, is approximately $0.3$0.4 billion. According to our modeling, there is a one percent chance that on an annual basis losses incurred from a Southeast hurricane event could be in excess of $0.3$0.4 billion. Conversely, there is a 99% chance that on an annual basis the loss from a Southeast hurricane will fall below $0.3$0.4 billion.
We have developed our PML estimates using multiple by combining judgment and experience with the outputs from the catastrophe model,commercially available vendor models, includingfrom AIR Worldwide ("AIR") and Risk Management Solutions ("RMS"), which we also use for pricing catastrophe risk. These models coverThis model covers the major peril regions where we face potential exposure. We combine the outputs of catastrophe models withAdditionally, we have included our estimate of non-modeled perils and other factors which we believe from our experience, provides us with a more complete view of natural peril catastrophe risk.
Our PML estimates are based on assumptions that are inherently subject to significant uncertainties and contingencies. These uncertainties and contingencies can affect actual losses and could cause actual losses to differ materially from those expressed above. We aim to reduce the potential for model error in a number of ways, the most important of which is by ensuring that management’s judgment supplements the model outputs. We also perform ongoing model validation both within ourat the line of business units and at a group level including through our catastrophe model validation unit.team. These validation procedures include sensitivity testing of models to understand their key variables and, where possible, back testingbacktesting the model outputs to actual results.
Estimated net losses from peak zone catastrophes may change from period to period as a result of several factors, which include but are not limited to, updates to vendor catastrophe models, changes into our owninternal modeling, changes in our underwriting portfolios, changes to our reinsurance purchasing strategy and changes in foreign exchange rates. Several of the aforementioned factors, including our ongoing actions to reduce underwriting volatility, drove the changes to our natural catastrophe PMLs during 2019.
Man-madeMan-Made Catastrophe Risk
In lineConsistent with our management of natural peril catastrophe exposures, we also take a similarly focused and analytical approach to ourthe management of man-made catastrophes. Man-made catastrophes, which include such risks as train collisions, airplane crashes or terrorism, are harder to model in terms of assumptions regarding intensity and frequency. For these risks we couple the vendor models (where available) with our bespoke modeling and underwriting judgment and expertise. This allows us to take advantage of business opportunities relatingrelated to man-made catastrophe exposures particularly where we can measure and limit the risk sufficiently as well as obtain risk-adequate pricing.
As an example of our approach, our assessment of terrorism risk is based on a mixture of qualitative and quantitative data (e.g. for estimating property damage, business interruption, mortality and morbidity subsequent to an attack of a predefined magnitude), which we use to control, limit and manage our aggregate terrorism exposure. We use commercially available vendor modeling and bespoke modeling tools to measure accumulations around potential terrorism accumulation zones on a deterministic and probabilistic basis. We supplement the results of our modeling with underwriting judgment.
Reserving Risk
The estimation of loss reserves is subject to uncertainty due to the fact thatas the settlement of claims that have arisenarise before the balance sheet date is dependent on future events and developments. UnforeseenThere are many factors that would cause loss trends resulting from court rulings,reserves to increase or decrease, which include, but are not limited to emerging claims and coverage issues, changes in the law, medical and long-term care costs,legislative, regulatory, social and economic factors such as inflation can have an impact onenvironment and unexpected changes in loss inflation. The estimation of loss reserves could also be adversely affected by the ultimate costfailure of our loss limitation strategy and/or the failure of models used to settle our claim liabilities.support key decisions.
We calculate the reserves for losses and loss expenses ("loss reserves") in accordance with actuarial best practice based on substantiated assumptions, methodsmethodologies and assessments. The assumptionsassumptions. In addition, we have well established processes in place for determining loss reserves, which we ensure are regularly reviewed and updated, and the application of our Group reserving policy and standards of practice ensures a reliable and consistent procedure.consistently applied. Our loss reserving process demands data quality and reliability and requires a quantitative and qualitative review of both our overall reserves and individual large claims. Within a structured control framework, claims information is communicated on a regular basis throughout our organization, including to senior management, to provide an increased awareness regarding theof losses that have taken placeoccurred throughout the insurance markets. The detailed and analytical reserving approach that follows is designed to absorb and understand the latest information on our reported and unreported claims, to recognize the resultant exposure as quickly as possible, and to makerecord appropriate and realistic provisionsloss reserves in our consolidated financial statements. We have well established processes for determining carried reserves, which we ensure are applied consistently over time.
Reserving for long-tail lines of business represents a significant component of reserving risk. When loss trends prove to be higher than those underlying our reserving assumptions, the risk is greater because of a stacking-up effect: we carryloss reserves torecorded in our consolidated financial statements cover claims arising from several years of underwriting activity and these reserves are likely to be adversely affected by unfavorable loss trends. We manage and mitigate reserving risk on long-tail business in a variety of ways. First, the long-tail business we write is part of a well-balanced and diversified global portfolio of business. In 2019,2020, long-tail net premiums written (namely liability and motor business) represented 22%23% of total net premiums written and long-tail net loss reserves represented 35% of total net loss reserves. We also purchase reinsurance on liability business to manage our net positions. Secondly,Second, we follow a disciplined underwriting process that utilizes available information, including industry trends.
Another significant component of reserving risk relates to the estimation of losses in the aftermath of a major catastrophe event. Refer to Item 7 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates – Reserves for Losses and Loss Expenses' for further details.
Claims Handling Risk
In accepting risk, we are committing to the payment of claims and therefore these risks must be understood and controlled. We have claims teams located throughoutembedded in our main business units.lines of business. Our claim teams include a diverse group of experienced professionals, including claims adjusters and attorneys. We also use approved external service providers, such as independent adjusters and appraisers, surveyors, accountants, investigators and specialist attorneys, as appropriate.
We maintain claims handling guidelines which include details on claims reporting controls and claims reporting control and escalation procedures in all our claims units.teams. Large claims matters are reviewed during weekly claims meetings. The minutes from each meeting are circulated to our underwriters, senior management and others involved in the reserving process. To maintain communication between underwriting and claims teams, claims personnel regularly report at underwriting meetings and frequently attend client meetings.
We foster a strong culture of review among our claims teams. This includes MIAs, whereby senior claims handlers audit a sample of claim files. The process is designed to ensure consistency between the claims unitsteams and to develop Group-widegroup-wide best practices.
When we receive notice of a claim, regardless of size, it is recorded withinin our claims and underwriting and claims systems. To assist with the reporting of significant claims,In addition, we have also developed a standard format and procedure to produce "flash reports" for significant events and potential losses, regardless of whether we have exposure. Our process for flash reporting allows a direct notification to be communicated to underwriters and senior management worldwide. Similarly, for natural peril catastrophes, we have developed a catastrophe database, along with catastrophe coding in certain systems, that allows for the gathering, blendinganalyzing and reporting of loss information as it develops from early modeled results to fully adjusted and paid losses.
Strategic Risk
Strategic risks affect or are created by an organization’s business strategy and strategic objectives. Our review of strategic risk evaluates not only internal and external challenges that might cause our chosen strategy to fail but also evaluates major risks that could affect our long-term performance and position. We believe it is imperative that we consider the business risks associated with, and mitigated by, each strategy. We also view strategic risk not only as the negative impact of risk but also the sub-optimization of gain. Fundamentally, we believe that we are set up for success if we analyze both value protection and value creation.
A strategy function was formed as part of our enterprise-wide transformation to ensure that the prioritization and coordination of enterprise-wide resources is done efficiently and effectively to drive targeted strategic outcomes. On no less than a quarterly basis, the Executive Committee meets and receives holistic information about execution against strategy and makes decisions to adjust and/or advance strategy. In addition, strategies employed throughout our business in support of the broader enterprise strategy are reviewed in the context of a broader governance structure by the Business Council and business leadership, and are ultimately approved by the Board of Directors.
Market Risk
Market risk is the risk that our financial instruments may be negatively impacted by movements in financial market prices or rates such as equity prices, interest rates, credit spreads and foreign exchange rates. Fluctuations in market prices or rates primarily affect our investment portfolio.
Through asset and liability management, we aim to ensure that market risks influence the economic value of our investments and our loss reserves and other liabilities in the same way, thus mitigating the effect of market fluctuations. For example, we reflect important features of our liabilities, such as maturity patterns and currency structures, on the assets side of the balance sheet by acquiring investments with similar characteristics.
We supplement our asset-liability management with various internal policies and limits. As part of our strategic asset allocation process, different asset strategies are simulated and stressed in order to evaluate the ‘optimal’ portfolio (given return objectives and risk constraints). Our investments team manages asset classes to control aggregation of risk and provide a consistent approach to constructing portfolios and the selection process of external asset managers. We have limits on the concentration of investments by single issuers and certain asset classes, and we limit the level of illiquid investments (refer to 'Liquidity Risk' below). Further, our investment guidelines do not permit the use of leverage in any of our fixed maturity portfolios.
We stress test our investment portfolios using historical and hypothetical scenarios to analyze the impact of unusual market conditions and to ensure potential investment losses remain within our risk appetite. At an annual aggregated level, we manage the total risk exposure to our investment portfolio so that the ‘total return’ investment loss in any one year is unlikely to exceed a defined percentage of our common equity at a defined return period.
We mitigate foreign currency risk by seeking to match our estimated insurance and reinsurance liabilities payable in foreign currencies with assets, including cash and investments that are denominated in the same currencies. Where necessary, we use derivative financial instruments for economic hedging purposes. For example, in certain circumstances, we use forward contracts and currency options to economically hedge portions of our un-matched foreign currency exposures.
Liquidity Risk
Liquidity risk is the risk that we may not have sufficient financial resources to meet our obligations when they are due, or would have to incur excessive costs to do so. As an insurer and reinsurer, our core business generates liquidity primarily
through premiums, investment income and the maturity/sale of investments. Our exposure to liquidity risk stems mainly from the need to cover potential extreme loss events and regulatory constraints that limit the flow of funds within the Group. To manage these risks, we have a range of liquidity policies and procedures in place:
•We maintain cash and cash equivalents and a high quality, liquid investment portfolio to meet expected outflows, as well as those that could result from a range of potential stress events. We place limits on the maximum percentage of cash and investments which may be in an illiquid form as well as on the minimum percentage of unrestricted cash and liquid investment grade fixed income securities.
•We maintain committed borrowing facilities, as well as access to diverse funding sources to cover contingencies. Funding sources include asset sales, external debt issuances and lines of credit.
Credit Risk
Credit risk represents the risk of incurring financial loss due to the diminished creditworthiness (eroding credit rating(reduced financial strength and, ultimately, possibly default) of our third-party counterparties. We distinguish betweenbetween: various forms of credit exposure; the risk of issuer default from instruments in which we invest, or trade, such as corporate bonds; counterparty exposure in a direct contractual relationship, such as reinsurance; the credit risk related to our premium receivables, including those from brokers and other intermediaries; and the risk we assume through our insurance contracts, such as our credit and political risk and trade credit and bondsurety lines of business.
Credit Risk Aggregation
We monitor and manage the aggregation of credit risk on a Group-widegroup-wide basis, allowing us to consider exposure management strategies for individual companies, countries, regions, sectors and any other relevant inter-dependencies. Our credit exposures are aggregated based on the origin of risk. Credit risk aggregation is managed through minimizing overlaps in underwriting, financing and investing activities. As part of our credit aggregation framework, we assign aggregate credit limits by country and for any individual counterparty.by single counterparty (or parent of affiliated counterparties). These limits are based and adjusted on a variety of factors including the prevailing economic environment and the nature of the underlying credit exposures.
Our credit aggregation measurement and reporting process is facilitated by our credit risk exposure database, which contains relevant information on counterparty details and credit risk exposures. The database is accessible by management throughout the Group, thus providing transparency to allow for the implementation of active exposure management strategies. We also license third-party tools to provide credit risk assessments. We monitor all our credit aggregations and, where appropriate, adjust our internal risk limits and/or have takentake specific actions to reduce our risk exposures.exposures
Credit Risk Relating to Investing ActivitiesCash and Investments
Within ourIn order to mitigate concentration and operational risks related to cash and cash equivalents, we limit the maximum amount of cash that can be deposited with a single counterparty and additionally limit acceptable counterparties based on current rating, outlook and other relevant factors.
Our fixed maturity investment portfolio, which represents approximately $12 billion or 49%47% of our total assets, we areis exposed to potential losses arising from the diminished creditworthiness of issuers of bonds as well as third-party counterparties such as custodians. Our investment portfolio is managed by external investment managers in accordance with its investment guidelines. We limit such credit risk through diversification, issuer exposure limits graded by ratings and, with respect to custodians, through contractual and other legal remedies. Excluding U.S. Treasurygovernment and Agencyagency securities, we limit our concentration of credit risk to any single corporate issuer to 2% or less of our investment grade fixed maturities portfolio for securities rated A- or above and 1% or less of our investment grade fixed maturities portfolio for securities rated below A-.
We also have credit risk relating to our cash and cash equivalents. In order to mitigate concentration and operational risks related to cash and cash equivalents, we limit the maximum amount of cash that can be deposited with a single counterparty and additionally limit acceptable counterparties based on current rating, outlook and other relevant factors.
Credit Risk Relating to Reinsurance Recoverable Assets
Within our reinsurance purchasing activities, weWe are exposed to the credit risk of a reinsurer failing to meet its obligations under our reinsurance contracts. To help mitigate this, allour purchases of our reinsurance purchasing is subject to financial security requirements specified by our RSC. The RSC maintains a list of approved reinsurers, reviewsperforms 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 limits 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 RSC requires reinsurers who do not meet specified requirements to provide collateral.
We monitor counterparty credit quality and exposures, with special monitoring of those cases that merit close attention.
Credit Risk Relating to Premium Receivables
Our largestThe diversity of our client base limits credit risk exposureassociated with premium receivables. 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 premium receivables is from brokersagainst corresponding payments for losses and loss expenses.
Brokers and other intermediaries; the risk arises where theyintermediaries collect premiums from customers to be paid to us or we pay claims to them for onward settlement to customers on our behalf. We have policies and standardsprocedures in place to manage and monitor credit risk from intermediaries with a focus on day-to-day monitoring of the largest positions.
These contractual rights contribute to the mitigation of credit risk, together with the monitoring of aged premium receivable balances. In light of these mitigating factors and considering that a significant portion of premium receivables are not currently due based on the terms of the underlying contracts, we do not utilize specific credit quality indicators to monitor our premium receivable balances.
Credit Risk Relating to our Underwriting Portfolio
In the insurance segment, we provide credit insurance primarily for lenders (financial institutions) seeking to mitigate the risk of non-payment from their borrowers. This product has complementedcomplements our more traditional political risk insurance business. For the credit insurance contracts, it is necessary for the buyer of the insurance, most often a bank, to hold an insured asset, most often an underlying loan, in order to claim compensation under the insurance contract. The vast majority of the credit insurance provided is for single-name illiquid risks, primarily in the form of senior secured bank loans that can be individually analyzed and underwritten. As part of thisthe underwriting process, an evaluation of creditworthiness and reputation of the obligor is critical and forms the cornerstone of the underwriting process.critical. We generally require that our clients to retain a share of each transaction that we insure. A key element to our underwriting analysis is the assessment of recovery in the event of default and, accordingly, the strength of the collateral and the enforceability of rights to the collateral are paramount.
We avoid insurance for structured finance products defined by pools of risks and insurance for synthetic products that would expose us to mark-to-market losses. We also seek to avoid terms in our credit insurance contracts which introduce liquidity risk, most notably in the form of a collateralization requirement upon a ratings downgrade.
We also provide protection against sovereign default or sovereign actions that result in impairment of cross-border investments for banks and corporations. Our contracts generally include conditions precedent to our liability relating to the enforceability of the insured transaction and restricting amendments to the transaction documentation, obligations on the insured to prevent and minimize losses, subrogation rights (including rights to have the insured asset transferred to us) and waiting periods. Under most of our policies, a loss payment is made in the event the debtor failed to pay our client when payment is due subject to a waiting period of up to 180 days.
In the reinsurance segment, we provide reinsurance of credit and surety bond insurers exposed to the risks of financial loss arising from non-payment of trade receivables covered by a policy (credit insurance) or non-performance (bonding)of obligations (surety). Our credit insurance exposures are concentrated primarily within developed economies, while our surety bond exposures are concentrated primarily withinin Latin AmericanAmerica and developed economies. We also provide coverage to the mortgage industry through insurance and reinsurance of mortgage insurance companies and U.S. government sponsoredgovernment-sponsored entity credit risk sharing transactions. We focus on credit risk transfer from Federal Home Loan Mortgage Corporation and Federal National Mortgage Association, in the single-family, fixed rate, conforming mortgage space. We provide this cover on a proportional and non-proportional basis globally through AXIS Re U.S., AXIS Specialty Bermuda and AXIS Managing Agency Ltd. Our exposure to mortgage risk is monitored and managed through robust underwriting within defined parameters for mortgage credit quality and concentration, continuous monitoring of the housing market, as well as limits on our PML resulting from a severe economic downturn in the housing market.
MarketOperational Risk
Market risk is the risk that our financial instruments may be negatively impacted by movements in financial market prices or rates such as equity prices, interest rates, credit spreads and foreign exchange rates. Fluctuations in market rates primarily affect our investment portfolio.
Through asset and liability management, we aim to ensure that market risks influence the economic value of our investments and that of our loss reserves and other liabilities in the same way, thus mitigating the effect of market fluctuations. For example, we reflect important features of our liabilities, such as maturity patterns and currency structures, on the assets side of the balance sheet by acquiring investments with similar characteristics.
We supplement our asset-liability management with various internal policies and limits. As part of our strategic asset allocation process, different asset strategies are simulated and stressed in order to evaluate the ‘optimal’ portfolio (given return objectives and risk constraints). In our investment department, we centralize the management of asset classes to control aggregation of risk and provide a consistent approach to constructing portfolios as well as the selection process of external asset managers. We have limits on the concentration of investments by single issuers and certain asset classes, and we limit the level of illiquid investments (refer to 'Liquidity Risk' below). Further, our investment guidelines do not permit the use of leverage in any of our fixed maturity portfolios.
We stress test our investment portfolios using historical and hypothetical scenarios to analyze the impact of unusual market conditions and to ensure potential investment losses remain within our risk appetite. At an annual aggregated level, we manage the total risk exposure to our investment portfolio so that the ‘total return’ investment loss in any one year is unlikely to exceed a defined percentage of our common equity at a defined return period.
We mitigate foreign currency risk by seeking to match our estimated insurance and reinsurance liabilities payable in foreign currencies with assets, including cash and investments that are also denominated in such currencies. Where necessary, we use derivative financial instruments for economic hedging purposes. For example, in certain circumstances, we use forward contracts and currency options, to economically hedge portions of our un-matched foreign currency exposures.
Operational Risk
Operational risk represents the risk of financial loss as a result of inadequate processes, system failures, human error or external events.events, including but not limited to direct or indirect financial loss, reputational damage, customer dissatisfaction and legal and regulatory penalties.
Group Risk is responsible for coordinating and overseeing a Group-widegroup-wide framework for operational risk management. As part of this, we maintain an operational loss-event database which helps us better monitor and analyze potential operational risk, identify any trends, and, where necessary, put in place improvement actions to avoid occurrence or recurrence of operational loss events.
We manage transaction type operational risks through the application of process controls throughout our business. In testing these controls, we supplement the work of our internal audit team with regular underwriting and claim MIAs (as discussed above).
We have specific processes and systems in place to focus on high priority operational matters, such as information security, managing business continuity and third-party vendor risk:
•Major failures and disasters which could cause a severe disruption to working environments, facilities and personnel, represent a significant operational risk to us. Our Business Continuity Management framework strives to protect critical business functions from these effects to enable us to carry out our core tasks in time and at the quality required. During 2019,2020, we continued to review our Business Continuity Planning procedures through cyclical planned tests.
•We have developed a number of Information Technology ("IT") platforms, applications and security controls to support our business activities worldwide. Dedicated security standards are in place for our IT systems to ensure the proper use, availability and protection of our information assets.
•Our use of third-party vendors exposes us to a number of increased operational risks, including the risk of security breaches, fraud, non-compliance with laws and regulations or internal guidelines and inadequate service. We manage material third-party vendor risk, by, among other things, performing a thorough risk assessment on potential large vendors, reviewing a vendor’s financial stability, ability to provide ongoing service and business continuity planning.
Liquidity Risk
Liquidity risk is the risk that we may not have sufficient financial resources to meet our obligations when they fall due or would have to incur excessive costs to do so. As an insurer and reinsurer, our core business generates liquidity primarily through premiums, investment income and the maturity/sale of investments. Our exposure to liquidity risk stems mainly from the need to cover potential extreme loss events and regulatory constraints that limit the flow of funds within the Group. To manage these risks, we have a range of liquidity policies and measures in place:
We maintain cash and cash equivalents and high quality, liquid investment portfolios to meet expected outflows, as well as those that could result from a range of potential stress events. We place internal limits on the maximum percentage of cash and investments which may be in an illiquid form as well as on the minimum percentage of our asset portfolio which may be invested in unrestricted cash and liquid investment grade fixed income securities.
We maintain committed borrowing facilities, as well as access to diverse funding sources to cover contingencies. Funding sources include asset sales, external debt issuances and lines of credit.
Capital ManagementUnited States
U.S. Insurance Holding Company Regulation of AXIS Capital’s Insurance Subsidiaries
As members of an insurance holding company system, each of AXIS Insurance Co., AXIS Re U.S., AXIS Specialty U.S. and AXIS Surplus, collectively AXIS Capital’s U.S. insurance subsidiaries (collectively, the "U.S. Insurance Subsidiaries") are subject to the insurance holding company system laws and regulations of the states in which they do business. These laws generally require each of the U.S. Insurance Subsidiaries to register with its domestic state insurance department and to furnish financial and other information which may materially affect the operations, management or financial condition within the holding company system. All transactions within a holding company system that involve an insurance company must be fair and equitable. Notice to the applicable insurance department is required prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and an entity in its holding company system, and certain transactions may not be consummated without the department’s prior approval.
State Insurance Regulation
AXIS Re U.S. is licensed to transact insurance and reinsurance throughout the U.S. and in Puerto Rico. AXIS Re U.S. is also authorized to transact insurance and reinsurance throughout Canada through its Canadian branch and has reinsurance permissions in Argentina, Brazil, China, Columbia, Ecuador, Guam, Guatemala, Honduras, Panama, India and Mexico. AXIS Insurance Co. is licensed to transact insurance and reinsurance throughout the U.S. AXIS Specialty U.S. is licensed to transact insurance and reinsurance throughout the U.S., except California, Iowa, Maine, New Mexico, New York and Wyoming. AXIS Surplus is eligible to write insurance on a surplus lines basis throughout the U.S., Puerto Rico and the U.S. Virgin Islands.
Our U.S. Insurance Subsidiaries also are subject to regulation and supervision by their respective states of domicile and by other jurisdictions in which they do business. The regulations generally are derived from statutes that delegate regulatory and supervisory powers to an insurance official. The regulatory framework varies from state to state, but generally relates to approval of policy forms and rates, the standards of solvency that must be met and maintained, including risk-based capital management strategy isstandards, material transactions between an insurer and its affiliates, the licensing of insurers, agents and brokers, restrictions on insurance policy terminations, the nature of and limitations on the amount of certain investments, limitations on the net amount of insurance of a single risk compared to maximize long-term shareholder valuethe insurer’s surplus, deposits of securities for the benefit of policyholders, methods of accounting, periodic examinations of the financial condition and market conduct of insurance companies, the form and content of reports of financial condition required to be filed, reserves for unearned premiums, losses, expenses and other obligations.
Our U.S. Insurance Subsidiaries are required to file detailed quarterly statutory financial statements with state insurance regulators in each of the states in which they conduct business. In addition, the U.S. Insurance Subsidiaries’ operations and accounts are subject to financial condition and market conduct examination at regular intervals by among other things, optimizing capital allocationstate regulators.
Regulators and minimizingrating agencies use statutory surplus as a measure to assess our cost of capital. We manage our capital in accordance with our Target Capital Range ("TCR") concept. The TCR defines the preferred level of capital neededU.S. Insurance Subsidiaries’ ability to absorb shock lossessupport business operations and still satisfy our minimum solvency targets in relationpay dividends. Our U.S. Insurance Subsidiaries are subject to key capital benchmarks including our "own view" of risk from our internal capital modelvarious state statutory and regulatory restrictions that limit the amount of dividends that may be paid from earned surplus without prior approval from regulatory authorities. These restrictions differ by state, but generally are based on calculations using statutory surplus, statutory net
income and rating agencyinvestment income. In addition, many state regulators use the National Association of Insurance Commissioners promulgated risk-based capital requirements:requirements as a means of identifying insurance companies which may be under-capitalized.
Internal risk capital - We useAlthough generally the insurance industry is not directly regulated by the federal government, federal legislation and initiatives can affect the industry and our internal capital modelbusiness. Certain sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank") pertain to assess the capital consumptionregulation and business of insurance. Specifically, the Federal Insurance Office ("FIO") has limited authority to collect information and report on the business of insurance to Congress. In addition, Dodd-Frank contains the Non-Admitted and Reinsurance Reform Act of 2010 ("NRRA"). NRRA attempts to coordinate the payment of surplus lines taxes, simplify the granting of alien insurers to become surplus lines authorized and coordinates the credit for certain reinsurance. The Company continues to monitor the implementation of Dodd-Frank.
Ternian Insurance Group LLC, a leading provider of voluntary, limited benefit, affordable health plans and other employee benefits coverage for hourly and part-time workers and their families, is an authorized insurance producer in all 50 states of the U.S. except Hawaii. As a resident insurance producer in Arizona, Ternian Insurance Group LLC is subject to regulation and supervision by the Arizona Department of Insurance and is also subject to the regulation and supervision of the other states in which Ternian transacts business.
AXIS Specialty Underwriters, Inc., a Florida licensed reinsurance intermediary, is subject to regulation and supervision by the Florida Department of Financial Services. AXIS Specialty Underwriters, Inc. operates as the Latin American and Caribbean regional coverholder for Syndicate 1686, providing facultative reinsurance coverage to the Latin American and Caribbean market.
U.S. Authorizations of our business, measuring and monitoring the potential aggregation of risk at extreme return periods.
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• | Regulatory capital requirements - In each country in which we operate, the local regulator specifies the minimum amount and type of capital that each of the regulated entities must hold in support of their liabilities and business plans. We target to hold, in addition to the minimum capital required to comply with the solvency requirements, an adequate buffer to ensure that each of our operating entities meets its local capital requirements. Refer to Item 8, Note 21 to the Consolidated Financial Statements, 'Statutory Financial Information' for further details.
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• | Rating agency capital requirements - Rating agencies apply their own models to evaluate the relationship between the required risk capital of a company and its available capital resources. The assessment of capital adequacy is usually an integral part of the rating agency process. Meeting rating agency capital requirements and maintaining strong credit ratings are strategic business objectives of the Company. Refer to Item 7 'Management’s Discussion and Analysis of Financial Condition and Results of Operations –Liquidity and Capital Resources' for further details.
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The TCR identifies the point at which management needs to consider raising capital, amending our business plan or executing capital management activities well before capital approaches the minimum requirements ("early warning indicator"). This allows us to take appropriate measures to ensure the continued strength and appropriateness of our capital and solvency positions, and also enables us to take advantage of opportunities as they arise. Such measures are performed as and when required and include traditional capital management tools (e.g. dividends, share buy-backs, issuance of shares or debt) or through changes to our risk exposure (e.g. recalibration of our investment portfolio or changes to our reinsurance purchasing strategy).Non-U.S. Insurance Subsidiaries
The TCR also considers an amountinsurance laws of capital beyond which capital could be considered "excess". Where we do not find sufficiently attractive opportunities and returns for our excess capital, we may return capital back to our shareholders through share repurchases and/each state of the U.S. regulate or dividends. In doing so, we seek to maintain an appropriate balance between higher returns for our shareholders andprohibit the security provided by a sound capital position.
REGULATION
General
The businesssale of insurance and reinsurance by insurers and reinsurers that are not admitted to do business within their jurisdictions, or conduct business pursuant to exemptions. AXIS Specialty Europe is regulatedeligible to write surplus lines business throughout the U.S. and in most countries, althoughPuerto Rico. AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to (i) write surplus lines business throughout the degreeU.S. and typein all U.S. territories, (ii) write insurance business, except life insurance business, in the states of regulation varies significantly from one jurisdiction to another. Illinois, Kentucky and in the U.S. Virgin Islands and (iii) write non-life reinsurance business throughout the U.S. and in all U.S. territories, except for accident and health reinsurance in New York.
In addition someto the regulatory requirements imposed by the jurisdictions in which they are currently evaluating changeslicensed, reinsurers’ business operations are affected by regulatory requirements in various states of the U.S. governing "credit for reinsurance" that are imposed on their ceding companies. In general, a ceding company obtaining reinsurance from a reinsurer that is licensed, accredited or approved by the jurisdiction or state in which the ceding company files statutory financial statements is permitted to their regulationreflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company’s liability for unearned premiums (which is that portion of premiums written which applies to the unexpired portion of the policy period), loss reserves and we are monitoring these potential developments. Toloss expense reserves ceded to the reinsurer. The great majority of states, however, permit a credit to statutory surplus resulting from reinsurance obtained from a non-licensed or non-accredited reinsurer to be recognized to the extent we are awarethat the reinsurer provides a letter of impending changescredit, trust fund or other acceptable security arrangement. A few states do not allow credit for reinsurance ceded to non-licensed reinsurers except in regulation, designated project teams prepare uscertain limited circumstances, and others impose additional requirements that make it difficult to comply onbecome accredited. In connection with the establishment of a timely basis with such anticipated changes. The following describes the current material regulations under which the Company operates.
Bermuda
Our Bermuda insurance operating subsidiary,Multi-Beneficiary Reinsurance Trust, AXIS Specialty Bermuda is a Class 4 general businessobtained accredited or trusteed reinsurer status in all U.S. jurisdictions except for New York.
Ireland
Our Ireland domiciled insurer and reinsurer are subject to the Insurance Act 1978Solvency II Directive (Directive 2009/138/EC), as amended. Solvency II represents a consolidation and modernization of Bermudaexisting European Commission Solvency I insurance and reinsurance regulation and supervision and includes a harmonized risk-based solvency and reporting regime for the insurance/reinsurance sector. Solvency II covers three main areas: (i) the valuation of assets and liabilities and related regulations,solvency capital requirements; (ii) governance requirements including key functions of compliance, internal audit, actuarial and risk management; and (iii) legal entity and European Union ("E.U.") group reporting and disclosure requirements including public disclosures. The capital requirement must be computed using the Solvency II standard formula unless the Central Bank of Ireland ("CBI") has previously authorized a company to use its own internal model. Certain of our European legal entities are subject to Solvency II.
AXIS Specialty Europe
AXIS Specialty Europe is a European public limited liability company incorporated as a non-life insurer under the laws of Ireland. It is a Societas Europaea (SE), or European society company, and has been registered in accordance with E.U. law. As a SE company, AXIS Specialty Europe can more easily merge with companies in European member states and also transfer its domicile to other member states of the E.U. AXIS Specialty Europe is authorized and regulated by the CBI pursuant to the Insurance Acts 1909 to 2000, as amended, repealed or replaced, the Central Bank Acts 1942 – 2014, as amended, repealed or replaced, and E.U. regulation relating to general insurance and statutory instruments made thereunder. AXIS Specialty Europe is authorized to conduct business in 16 non-life insurance classes throughout the E.U. and the European Economic Area ("EEA"), which includes each of the member countries of the E.U. with the addition of Iceland, Liechtenstein and Norway. AXIS Specialty Europe may also write reinsurance business within the classes of insurance business for which it is authorized.
AXIS Specialty Europe is subject to Solvency II. In accordance with Solvency II, AXIS Specialty Europe is permitted to provide insurance services to clients located in any EEA Member State ("Freedom of Services"), subject to compliance with any "general good requirements" as may be established by the applicable EEA Member State regulator. AXIS Specialty Europe has notified the CBI of its intention to provide insurance services on a Freedom of Services basis in all EEA countries.
Solvency II also permits AXIS Specialty Europe to carry on insurance business in any EEA Member State under the principle of "Freedom of Establishment" subject to the prior approval of the CBI. AXIS Specialty Europe operates under Freedom of Establishment in the U.K., Belgium and the Netherlands through its branches established in each of these jurisdictions.
AXIS Specialty Europe's U.K. branch transacts general insurance business in the U.K., trading as AXIS Specialty London. The U.K. withdrew from the E.U. on December 31, 2020 and is now considered a third country. In order to maintain business continuity, AXIS Specialty Europe submitted an application to the Prudential Regulatory Authority (the "Insurance Act""PRA") in 2018 for authorization of a third country branch. As this application is still pending, AXIS Specialty Europe entered into the PRA's Temporary Permissions Regime (the "TPR"), under which it is able to maintain business continuity. AXIS Specialty Europe will remain in the TPR, fully regulated by the PRA and the Financial Conduct Authority ("FCA"), until the earlier of the third year anniversary of its admission to the TPR and the date the PRA application has been fully assessed and approved.
Effective January 1, 2019, Compagnie Belge d’Assurances Aviation NV/SA merged into AXIS Specialty Europe by way of merger by absorption and dissolved without going into liquidation (the "Aviabel Merger"). TheIn connection with the Aviabel Merger, AXIS Specialty Europe established two new branches in Belgium and the Netherlands (see "Belgium" and the "Netherlands" below).
AXIS Specialty Europe has local regulatory permission to carry on insurance business in Jersey and has reinsurance permissions in India, China, Argentina, Mexico, Panama, Paraguay, Chile, Honduras, Ecuador, Colombia and Guatemala.
AXIS Re SE
AXIS Re SE is a European public limited liability company incorporated as a reinsurer under the laws of Ireland. AXIS Re SE is also a Societas Europaea (SE), or European society company, registered in accordance with E.U. law. AXIS Re SE is authorized by the CBI as a composite reinsurer (non-life and life) in accordance with the Insurance Acts 1909 to 2000, as amended, repealed or replaced, the Central Bank Acts 1942 – 2014, as amended, repealed or replaced, and E.U. regulation applicable to reinsurance and statutory instruments made thereunder. AXIS Re SE is authorized to transact reinsurance throughout the E.U. and the EEA and is subject to Solvency II.
AXIS Re SE conducts business through its branch in Zurich, Switzerland, trading as AXIS Re Europe (see "Switzerland" below).
AXIS Re SE Escritório de Representação No Brasil Ltda. was established in Brazil as a subsidiary of AXIS Re SE to facilitate the Brazilian Superintendence of Private Insurance ("SUSEP") regulatory requirements for approval of a representative office of AXIS Re SE and for the registration of AXIS Re SE with SUSEP as an Admitted Reinsurer.
AXIS Re SE's representative offices in France and Spain were closed during 2019.
AXIS Re SE has reinsurance permissions in Argentina, Bolivia, Brazil, China, Chile, Colombia, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, India, Mexico, Nicaragua, Panama, Paraguay, Peru and Venezuela.
AXIS Specialty Holdings Ireland Limited
AXIS Specialty Holdings Ireland Limited is the limited liability holding company for AXIS Specialty Europe and AXIS Re SE, each incorporated under the laws of Ireland, Contessa Limited, a U.K. licensed insurance intermediary, and AXIS Reinsurance (DIFC) Limited, a Dubai licensed insurance intermediary.
AXIS Specialty Bermuda may write reinsurance under Solvency II equivalence granted to Bermuda by the E.U.
AXIS Managing Agency Ltd. is eligible to write insurance (except permanent health) and reinsurance business in Ireland through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" below).
AXIS Specialty Global Holdings Limited
AXIS Specialty Global Holdings Limited is the limited liability holding company for AXIS Capital's U.S. Insurance subsidiaries.
U.K. and Lloyd's of London
In the U.K., under the Financial Services and Markets Act provides that2000 ("FSMA"), no person may carry on anya regulated activity unless authorized or exempt. Effecting or intermediating contracts of insurance or reinsurance business in or from within Bermuda unless registered as an insurerare regulated activities requiring authorization. Effecting contracts of insurance requires authorization by the Bermuda Monetary Authority (the "BMA") underPRA and is regulated by the Insurance Act. The InsuranceFCA. Intermediating contracts of insurance requires authorization by the FCA.
Under the Financial Services Act imposes upon Bermuda insurance companies solvency and liquidity standards and auditing and reporting requirements, and grants2012, the BMA powers to supervise, investigate, require information and demand the production of documents and interveneFCA is a conduct regulator for all U.K. firms carrying on regulated activity in the affairsU.K. while the PRA is the prudential regulator of insurance companies. Significant requirements pertainingU.K. banks, building societies, credit unions, insurers and major investment firms. As a prudential regulator, the PRA's general objective is to Class 4 insurers includepromote the appointmentsafety and soundness of an independent auditor, the appointment of a loss reserve specialist, the appointment of a principal representative in Bermuda, the filing of annual Statutory Financial Returns, the filing of annual GAAPfirms it regulates. The PRA rules require financial statements, the filing of an annualfirms to hold sufficient capital and solvency return,have adequate risk controls in place.
The FCA's statutory strategic objective is to ensure that relevant markets function well and have operational objectives to protect consumers, protect financial markets and promote competition. It makes rules covering how the firm must be managed and requirements relating to the firm’s systems and controls, how business must be conducted and the firm’s arrangements to manage financial crime risk. The PRA and the FCA require regular and ad hoc reporting and monitor compliance with minimumtheir respective rulebooks through a variety of means including the collection of data, industry reviews and enhanced capital requirements, compliance with certain restrictions on reductionssite visits. The directors and senior managers of capitalAXIS Managing Agency Ltd. must be "approved persons" under FSMA, making them directly and the payment of dividends and distributions, compliance with group solvency and supervision rules, if applicable, andpersonally accountable for ensuring compliance with the Insurance Coderequirements of Conduct. On July 30, 2018, the Insurance Amendment (No. 2)PRA and the FCA.
AXIS Managing Agency Ltd.
AXIS Managing Agency Ltd. is authorized and regulated by the PRA and regulated by the FCA to conduct insurance and reinsurance business and is a Lloyd's managing agent authorized by Lloyd's to manage our syndicates, Syndicate 1686 and Syndicate 2007. AXIS Managing Agency Ltd. is also the managing agent for SPA 6129, a third-party Lloyd's special purpose arrangement.
To consolidate our Lloyd’s business under Syndicate 1686, Syndicate 2007 ceased accepting new business and was placed into run-off on January 1, 2019. The final underwriting year of Syndicate 2007 and SPA 6129 will close by way of a reinsurance to close arrangement which took effect on January 1, 2021.
Lloyd’s is a society of corporate and individual members which underwrite insurance and reinsurance as members of syndicates. A syndicate is made up of one or more members that form a group to accept insurance and reinsurance risks. Each syndicate is managed by a managing agent. Managing agents write insurance business on behalf of the members of the syndicate, which members receive profits or bear losses in proportion to their respective shares in the syndicate for each underwriting year of account.
Lloyd’s is subject to U.K. law and is authorized under the FSMA. The Lloyd’s Act 2018 amended1982 defines the Insurancegovernance structure and rules under which the society operates. Under the Lloyd's Act to provide1982, the Council of Lloyd’s is responsible for the prior payment of policyholders' liabilities ahead of general unsecured creditors in the eventmanagement and supervision of the liquidationLloyd’s market and supports the Lloyd's market. Lloyd's manages and protects the Lloyd's network of international licenses. Lloyd's agrees to syndicates' business plans and evaluates performance against
those plans. Syndicates are required to underwrite only in accordance with their agreed business plans. If they fail to do so, Lloyd’s can take a range of actions including, as a last resort, prohibiting a syndicate from underwriting. Lloyd’s also monitors syndicates’ compliance with Lloyd’s minimum standards and responsible for setting both member and central capital levels.
Lloyd’s has a global network of licenses and authorizations, and underwriters at Lloyd's may write business in and from countries where Lloyd’s has authorized status or winding upexemptions available to non-admitted insurers or reinsurers. Lloyd’s licenses can only be used if the Syndicate Business Forecast, agreed annually with Lloyd’s, names those countries.
AXIS Managing Agency Ltd. operates an underwriting division at Lloyd’s Insurance Company (China) Limited, a wholly owned subsidiary of an insurer.the Corporation of Lloyd’s which allows it to underwrite reinsurance in China.
AXIS Corporate Capital UK Limited
Until December 31, 2018, AXIS Corporate Capital UK Limited was the sole corporate member of Syndicate 1686. Effective January 1, 2019, both AXIS Corporate Capital UK Limited and AXIS Corporate Capital UK II Limited are corporate members of Syndicate 1686, providing 70% and 30% capital support, respectively. Syndicate 1686 is managed by AXIS Managing Agency Ltd.
AXIS Corporate Capital UK II Limited
(formerly Novae Corporate Underwriting Limited)
Following the acquisition of Novae Group Limited, management of Syndicate 2007 was transferred to AXIS Managing Agency Ltd. AXIS Corporate Capital UK II Limited is the sole corporate member of Syndicate 2007.
AXIS Underwriting Limited
AXIS Underwriting Limited, formerly known as Novae Underwriting Limited, is authorized and regulated by the FCA as an insurance intermediary and underwrites insurance at Lloyd's on behalf of Syndicate 1686.
Contessa Limited
Effective December 2019, Contessa Limited ceased writing insurance on behalf of AXIS Specialty Europe. Contessa Limited will continue to manage the AXIS Specialty Europe book of business on a run-off basis.
In January 2021, Contessa Limited surrendered its license as an insurance intermediary with the FCA.
AXIS Specialty UK Holdings Limited
AXIS Specialty UK Holdings Limited is a limited liability holding company for AXIS Managing Agency Ltd., AXIS Corporate Capital UK Limited and Novae Group Limited, and is incorporated under the laws of England and Wales.
Regulatory Impact Due to Brexit
On June 23, 2016, the U.K. voted to exit the E.U. ("Brexit") and on December 31, 2020, the U.K. completed its withdrawal from the E.U. Although an agreement was reached between the E.U. and the U.K., this amendment appliesagreement does not cover financial services. The parties have committed to general businessenter into a Memorandum of Understanding covering financial services by March 2021. The following addresses the current impact to our insurers and provides among other things that, subject to certain statutorily preferred debts, the insurance debts of an insurer must be paid in priority to all other unsecured debtsreinsurers as a result of the insurer. U.K.'s withdrawal from the E.U.
Insurance debt is defined
AXIS Specialty Europe established its branch in the U.K. pursuant to the right to Freedom of Establishment under E.U. law. As it was anticipated that AXIS Specialty Europe would lose its authorization to conduct business in the U.K. as a debtresult of the U.K.'s exit from the E.U., an application for authorization of a third country branch was submitted to which an insurerthe PRA in 2018. As this application is or may become liable pursuantstill pending, AXIS Specialty Europe entered into the TPR to an insurance contract excluding debts owedobtain temporary authorization. Under the TPR, AXIS Specialty Europe has authority to an insurer under an insurance contract whereoperate as a third country branch in the insurerU.K. and is fully regulated by the person insured.PRA and FCA. As a result, AXS Specialty Europe's operations in the U.K. have been able to continue without interruption.
In preparation for Brexit, Lloyd’s established Lloyd's Insurance Company S.A in Brussels ("Lloyd’s Brussels") to retain access to the EEA markets and transferred all EEA risks to Lloyd’s Brussels.Lloyd's Brussels has been approved by the National Bank of Belgium ("NBB") and the Belgian conduct regulator, the Financial Services and Markets Authority ("Belgian FSMA") with authorization to write non-life insurance risks throughout the EEA. Effective with Brexit, all EEA risks are written by Lloyd’s Brussels.AXIS Managing Agency Ltd. has retained its access to the EEA markets through Lloyd's Brussels.
In January 1, 2016,2021, Lloyd’s Brussels updated Lloyd’s managing agents on its ongoing discussions with Lloyd’s, NBB and the BMA wasBelgian FSMA regarding Lloyd’s Brussels’ operating model and the activities performed on behalf of Lloyd’s Brussels by Lloyd’s managing agents. We continue to monitor these discussions and are prepared to address any required changes to our operating model in the U.K. or the EEA.
Reinsurance
AXIS Managing Agency Ltd. remains able to conduct non-life facultative, proportional and excess of loss reinsurance throughout the EEA via Lloyd’s Brussels. The E.U. has not yet granted full "equivalence"equivalence to the U.K. under Solvency II, (as more fully described belowhowever the review is ongoing and a decision is expected in the coming months.
AXIS Re SE currently transacts reinsurance business in the EEA pursuant to European law. In November 2020, the U.K. granted equivalence under "Ireland")Solvency II to EEA supervised reinsurers, including AXIS Re SE, allowing such reinsurers to continue operations without interruption.
Switzerland
AXIS Re SE's branch in Zurich, Switzerland trades as AXIS Re Europe and is registered in Zurich as AXIS Re SE, Dublin (Zurich branch). The CBI remains responsible for Bermuda’s commercialthe prudential supervision of the branch. The Swiss Financial Market Supervisory Authority does not impose additional regulation upon a Swiss branch of an EEA reinsurer.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write all classes of insurance sector, including Class 4 insurers.business, except life, sickness and legal expenses, and is authorized to write all classes of reinsurance business in Switzerland.
The BMA acts as group supervisor of AXIS Capital and has designated Singapore
AXIS Specialty Bermuda as the ‘designated insurer’ of the Group. In accordance with the group supervisionconducts insurance and insurance group solvency rules, AXIS Capital is required to prepare and submit annual audited group GAAP financial statements, an annual group Statutory Financial Return, an annual group Capital and Solvency Return and quarterly group unaudited GAAP financial statements, and to appoint both a group actuary and a group auditor. AXIS Capital also files an annual capital and solvency return and must ensure compliance with minimum and enhanced capital requirements.
AXIS Ventures Reinsurance Limited is registered as a Class 3A insurer subject to the Insurance Act and is a registered segregated accounts company under the Bermuda Segregated Accounts Companies Act 2000, as amended. As with AXIS Specialty Bermuda, AXIS Ventures Reinsurance Limited is regulated by the BMA and is subject to solvency and liquidity standards and auditing and reporting requirements, including compliance with the Insurance Code of Conduct.
AXIS Ventures and AXIS Reinsurance Managers are regulated by the BMA as insurance managers. Insurance managers are subject to the Insurance Act which provides that no person may carry onreinsurance business as an insurance manager unless registered for the purpose by the BMA under the Insurance Act. Insurance managers are required to comply with the Insurance Manager Code of Conduct.
AXIS Capital, AXIS Specialty Bermuda, AXIS Specialty Holdings Bermuda Limited, AXIS Specialty Investments Limited, AXIS Ventures, AXIS Ventures Reinsurance Limited, AXIS Specialty Investments II Limited and AXIS Reinsurance Managers must also comply with provisions of the Bermuda Companies Act 1981, as amended (the "Companies Act"), regulating the payment of dividends and distributions. A Bermuda company may not declare or pay a dividend or make a distribution out of contributed surplus if there are reasonable grounds for believing that: (a) the company is, or would after the payment be, unable to payfrom its liabilities as they become due; or (b) the realizable value of the company’s assets would
thereby be less than its liabilities. During 2019, Novae Bermuda Underwriting Limited merged with and into Novae Bermuda Holdings Limited, the surviving company. Each of Novae Bermuda Holdings Limited, AXIS Specialty Markets Limited and Glen Rock Holdings Ltd. were dissolved during 2019 and were subject to the foregoing provisions prior to dissolution.
Thebranch in Singapore, branch of AXIS Specialty Bermuda, AXIS Specialty Limited (Singapore Branch), established in 2008, is regulated bysubject to the Monetary Authoritysupervision of Singapore (the "MAS") pursuant to The Insurance Act of Singaporethe BMA and the MAS which imposes significant regulations relating to capital adequacy, risk management, governance and audit and actuarial requirements. AXIS Specialty Limited (Singapore Branch) is registered by the Accounting and Corporate Regulatory Authority ("ACRA")ACRA as a foreign company in Singapore and is also regulated by ACRA pursuant to the Singapore Companies Act. Prior
AXIS Managing Agency Ltd. is eligible to establishinguse Lloyd's licenses to write insurance from Singapore with the exception of certain compulsory classes and life business. Singapore business may also be written from outside Singapore in certain circumstances where it is placed with a Singapore intermediary licensed by the MAS to place business at Lloyd's or by dealing directly with the insured.
Canada
AXIS Re U.S. conducts insurance and reinsurance business from AXIS Reinsurance Company (Canadian Branch), its Singaporebranch in Canada, subject to the supervision of the New York State Department of Financial Services and the Office of the Superintendent of Financial Institutions Canada ("OSFI"), the federal regulatory authority that supervises federal Canadian and non-Canadian insurance companies operating in Canada pursuant to the Insurance Companies Act (Canada). The branch is authorized by OSFI to transact insurance and reinsurance. In addition, the branch is subject to the laws and regulations of each of the provinces and territories in which it is licensed.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses subject to the laws and regulations of each of the provinces and territories in which it is licensed and to write insurance in or from Canada, with the following exceptions: hail insurance in respect of crop in the province of Quebec; home warranty insurance in the province of British Columbia; life insurance; credit protection insurance; title insurance; surety; and mortgage default insurance. Syndicate 1686, through Lloyd's, is authorized to write reinsurance in or from Canada subject to certain restrictions relating to life reinsurance.
Belgium
AXIS Specialty Europe conducts insurance from its Belgium branch, AXIS Specialty Bermuda had maintained a representative office in Singapore since 2004.Europe SE (Belgium Branch), which is subject to CBI prudential supervision and limited regulation by the NBB.
AXIS Specialty BermudaEurope also has permission to write insurance and reinsurance permissionson a Freedom of Services basis in China and the Netherlands. AXIS Specialty Limited (Singapore Branch) has separate reinsurance permission in China.Belgium.
AXIS Re SE mayhas permission to write reinsurance on a Freedom of Services basis in Bermuda under Solvency II equivalence between Bermuda and the E.U.Belgium.
AXIS Managing Agency Ltd. mayis eligible to write generalinsurance (except permanent health) and reinsurance business in Belgium through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" above).
Netherlands
AXIS Specialty Europe conducts insurance from its Netherlands branch, AXIS Specialty Europe SE (Netherlands Branch), which is subject to CBI prudential supervision and limited regulation by the Dutch National Bank.
AXIS Specialty Europe has permission to write insurance and reinsurance on a Freedom of Services basis in the Netherlands.
AXIS Re SE has permission to write reinsurance on a Freedom of Services basis in the Netherlands.
AXIS Managing Agency Ltd. is eligible to write insurance (except permanent health) and reinsurance business in the Netherlands through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" above).
Dubai
AXIS Reinsurance (DIFC) Limited was granted a prudential Category 4 license by the Dubai Financial Services Authority in December 2017 and operated as an intermediary under binding authority granted by the Board of Directors of AXIS Re SE to underwrite accident and health reinsurance. In December 2020, AXIS Reinsurance (DIFC) Limited surrendered its license and is currently in liquidation proceedings.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write reinsurance in or from Dubai with certain exceptions.
Non-Admitted Insurance and Reinsurance
The Company also insures and reinsures risks in many countries, including the above countries, pursuant to regulatory permissions and exemptions available to non-admitted insurers and reinsurers.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write insurance and reinsurance business where Lloyd's has authorized status or pursuant to regulatory exemptions available to non-admitted insurers and reinsurers.
TRADEMARKS
We use our trademarks, including among others, our "AXIS" trademarks for the global marketing of our products and services, and we believe that we sufficiently safeguard our trademark portfolio to protect our rights.
HUMAN CAPITAL MANAGEMENT
As a company, AXIS Capital’s mission is not only to deliver outstanding financial results, but also to help our clients, brokers and partners navigate the challenges of a volatile world. We believe our employees distinguish us from our competitors and are critical to our success as an insurance and reinsurance company that leads with purpose. Our workforce’s strength is grounded in our One AXIS culture, which celebrates collaboration, diversity and integrity, as well as relentless execution, continuous learning, adapting and improving. We recognize that our strength lies in our people, and therefore, one of our core strategies is to invest in and support our employees, including the following areas of focus:
Health, Safety and Wellness
We are committed to the health, safety and wellness of our workforce. In response to the ongoing COVID-19 pandemic, most of our employees have worked remotely since March 2020, and we suspended all nonessential business travel. We provided employees with an office and technology stipend to assist with the transition to working from home and have developed educational tools and materials focused on the well-being of our employees, including remote working best practices, leadership of virtual teams and managing stress while working from home. We also offered flexible work schedules, added half-day well-being days and allowed flexibility with paid time off and sick leave policies for employees directly impacted by COVID-19. We are carefully reviewing and monitoring health information and shelter-in-place orders in the regions in which we operate, and we have reopened certain of our offices only on an optional and limited basis and in accordance with the rules and regulations of the applicable jurisdiction. Our Board of Directors is focused on our response to the COVID-19 pandemic, receiving regular updates on the health and safety of employees, protocols to address actual or suspected COVID-19 exposures or cases and the status of any return to work decisions.
Diversity, Equity and Inclusion
We see diversity, equity and inclusion as a strategic imperative that is core to our business and our culture. We believe that encouraging a wide range of experiences, backgrounds and perspectives and ensuring equal treatment for all makes AXIS a more rewarding place to work, enables us to attract talented teammates, enriches our perspectives and makes us stronger as a global organization. Below are strategies and initiatives enacted in 2020 to further the advancement of our diverse, equitable and inclusive culture:
•Diversity & Inclusion Council: We established a Diversity & Inclusion Council comprised of global employees representing a full spectrum of experiences and viewpoints. The Council was established to ensure that employees with diverse perspectives and backgrounds can share their thoughts, ideas and recommendations. The Council is supported by an ancillary group of D&I Advocates who actively engage and promote the work of the Council.
•Educational Initiatives: AXIS is committed to diversity, equity and inclusion educational initiatives and offers them through varying mediums. Initiatives included:
◦Mandatory unconscious bias training for all employees;
◦Monthly "knowledge tests" on various diversity, equity and inclusion topics for all employees;
◦Informational toolkits serving as quick reference guides; and
◦The establishment of an anti-racism resource center.
The year was highlighted by a global forum on racial justice and equality with an external moderator and panel of AXIS colleagues.
•Recruitment: We continued to broaden our recruiting strategies to identify, source and develop a diverse pipeline of candidates. Initiatives included:
◦Establishing and enhancing existing relationships with diverse universities and external professional organizations;
◦Participating in diverse apprenticeship programs in Bermuda, usingLondon and the U.S.;
◦Further building out our internship program with strong diverse representation;
◦Providing recruitment training and manager coaching with a focus on enhancing managers’ effectiveness at recruiting diverse candidates; and
◦Ensuring management succession plans have diverse representation.
•Advocacy: AXIS participated in the Lloyd's licensesDive In festival, a festival for diversity and inclusion in the insurance sector, by sponsoring and participating in local committees in Atlanta, Bermuda, London, New York and Zurich.
•Tracking:We established quarterly measurement of diverse hiring, turnover, promotions, succession planning and candidate slates. In support of this work, we measure gender pay gap semi-annually and conduct annual pay audits. We also continued to partner with a human capital analytics firm that advises companies with respect to diversity, equity and inclusion metrics to help us set, track and consistently improve our diversity, equity and inclusion.
•Disclosure: We believe transparency will play a critical role in driving action by shining light on the areas where we can increase underrepresented populations in our workforce. In 2020, AXIS participated in the Bloomberg Gender Equality Index (the "GEI"), an index of public companies committed to disclosing their efforts to achieve gender equality, to build
greater parity between genders within our organization. This participation, in turn, earned AXIS inclusion in the 2021 GEI.
Talent Development
At AXIS, investing in our people is a top priority. We provide our employees with a variety of professional development resources to help them achieve their career goals. Some of our 2020 initiatives in furtherance of this goal are described below:
•Career Mobility Within the Organization: In 2020, 20% of our open positions were filled by internal candidates.
•AXIS Academy: We provide our employees access to AXIS Academy, which serves as our learning and development hub and reflects our commitment to continuing education. AXIS Academy includes over 5,000 online training courses.
•Professional Development: We also offer financial assistance for external professional development opportunities and tuition reimbursement for certain part-time business-related degree programs.
•Early Careers Program: Our Early Careers Program aims to build a strong pipeline of early career talent through our internship and development programs.
•AXIS Careers: We created AXIS Careers to ensure our people feel empowered to "own their careers" – offering a comprehensive suite of professional development tools, resources and training modules to help navigate career experiences and upskilling across our global organization. This includes leadership development, mentoring, and job secondments, shadows and swaps.
Employee Engagement
We understand that employee engagement leads to a more satisfying and fulfilling workplace and motivates employees to do their best work. Our employee engagement initiatives include: (i) AXIS Applause (our global recognition program to recognize the contributions of other AXIS members), (ii) community building events for AXIS employees and their families and (iii) our employee-led charitable giving program which helps our employees give back to their communities.
During 2020, we conducted an enterprise-wide engagement survey, measuring engagement and inclusion. Managers and teams reflected on the survey results and developed enterprise-wide and local action plans to address areas identified for growth.
Compensation and Benefits
To attract and retain our industry’s top talent, we offer employees a total rewards program that is designed to incentivize exceptional performance and deliver equal pay for equal work. Our compensation packages align with our pay-for-performance philosophy and are assessed on an annual basis through year-end performance reviews. Our packages are also regularly benchmarked against similarly sized insurance, reinsurance and financial services companies in each of our talent markets. Compensation components include market competitive salaries and short-term annual incentive programs (i.e., bonus payments) and, for senior level employees, long-term incentives such as equity grants. Our comprehensive benefits packages include medical plans for employees and their families, flexible spending accounts, retirement savings plans with employer contributions and work-life benefits, including parental leave policies, flexible work arrangements for eligible employees and charitable matching programs.
Succession Planning
We have a robust talent and succession planning process. On an annual basis, management conducts a talent and succession plan for each member of our Executive Committee and their direct reports, focusing on high performing and high potential talent, diverse talent, and the succession plan for each position. On an annual basis, our Board of Directors receives a comprehensive succession plan for each member of our Executive Committee. In light of the COVID-19 pandemic, in 2020, the Compensation Committee also received a report on the emergency succession plan for the Executive Committee.
Employees
At December 31, 2020, we had 1,921 employees. During fiscal year 2020, the number of employees increased by approximately 17%, primarily due to increases in our Business Technology Solutions team in our newly opened Halifax, Nova Scotia office. During fiscal 2020, our voluntary turnover rate was approximately 8%.
Below is an approximate summary of our employees by region at December 31, 2020:
| | | | | | | | | | | |
| | | |
| | Employees | |
| | | |
| North America | 1,212 | |
| Europe, Middle East and Africa | 677 | |
| Asia Pacific | 32 | |
| Total employees | 1,921 | |
| | | |
At December 31, 2020, our global employees had approximately the following gender demographics:
| | | | | | | | | | | | | | |
| | | | |
| | Women | Men | |
| | | | |
| Total employees(1) | 43% | 55% | |
| | | | |
(1)2% of employees did not identify.
At December 31, 2020, our U.S. employees had approximately the following racial and ethnic demographics:
| | | | | | | | | | | |
| | | |
| | All U.S. Employees(2)(3) | |
| | | |
| Black / African American | 14% | |
| Asian | 10% | |
| Hispanic / Latinx | 4% | |
| White | 59% | |
| Multiracial, Native American and Pacific Islander | 2% | |
| | | |
(2)This information is presented for U.S. employees only. We continue to gather global demographic information to demonstrate our racial and ethnic diversity.
(3)11% of employees did not identify.
INFORMATION SECURITY
Information security is one of our highest priorities. Our information security ecosystem is designed to evolve with the changing security threat environment through ongoing assessment and measurement. We use commercial and proprietary security monitoring technologies and techniques to continuously monitor and respond to cyber threats. We also regularly engage independent third-party security auditors to test our systems and controls against relevant security standards and regulations.
Our employees and contractors are required to comply with our IT End User policy and certify their compliance annually. Information security awareness training is mandatory for all new hires and for existing employees and contractors on a regular basis.
Our Board of Directors, along with the Risk Committee and Audit Committee of the Board of Directors, oversee our information security program. In 2020, our Board of Directors received periodic updates throughout the year on cybersecurity matters, and these updates are part of the Board of Directors' standing agenda.
AVAILABLE INFORMATION
Our Internet website address is www.axiscapital.com. Information contained in our website is not part of this report.
We make available free of charge, through our internet website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Current copies of the charter for each of our Audit Committee, Corporate Governance and Nominating Committee, Compensation Committee, Finance Committee, Executive Committee and Risk Committee, as well as our Corporate Governance Guidelines and Code of Business Conduct, are available on our internet website at www.axiscapital.com.
RISK AND CAPITAL MANAGEMENT
Risk Management Framework – Overview
Mission and Objectives
The mission of Enterprise Risk Management ("ERM") at the Company is to promptly identify, assess, manage, monitor and report risks that affect the achievement of our strategic, operational and financial objectives. The key objectives of our risk management framework are to:
•Protect our capital base and earnings by monitoring our risks against our stated risk appetite and limits;
•Promote a sound risk management culture through disciplined and informed risk taking;
•Enhance value creation and contribute to an optimal risk-return profile by providing the basis for efficient capital deployment;
•Support our group-wide decision-making process by providing reliable and timely risk information; and
•Safeguard our reputation.
The risk management framework applies to all lines of business and corporate functions across our insurance and reinsurance segments.
Risk Governance
At the heart of our risk management framework is a governance process with responsibilities for identifying, assessing, managing, monitoring and reporting risks. We articulate roles and responsibilities for risk management throughout the organization, from the Board of Directors and the Chief Executive Officer to our business and corporate functions, thus embedding risk management throughout the Company (refer to "'U.K.Risk Governance and Lloyd'sRisk Management Organization' below).
To support our governance process, we rely on our documented policies and procedures. Our risk policies are a formal set of London"documents we use to specify our approach and risk mitigation/control philosophy for managing individual and aggregate risks. We also have procedures to approve exceptions and procedures for referring risk issues to senior management and the Board of Directors. Our qualitative and quantitative risk reporting framework provides transparency and early warning indicators to senior management with regard to our overall risk profile, adherence to risk appetite and limits and improvement actions at an operating entity and Group level.
Various governance and control bodies coordinate to help ensure that objectives are being achieved, risks are identified, and appropriately managed, and internal controls are in place and operating effectively.
Internal Capital Model
An important aspect of our risk management framework is our internal capital model. Utilizing this modeling framework provides us with a holistic view of the capital we put at risk in any year by allowing us to understand the relative interaction
among the known risks impacting us. This integrated approach recognizes that a single risk factor can affect different sub-portfolios and that different risk factors can have different mutual dependencies. We continuously review and update our model and its parameters as our risk landscape and external environment continue to evolve.
As well as being used to measure internal risk capital (refer to 'Capital Management' below), our internal capital model is used as a tool in managing our business, planning capital allocations, portfolio monitoring, reinsurance and retrocession (collectively referred to as "reinsurance") purchasing and investment asset allocations.
Our internal capital model is an integral part of the business planning process which provides an assessment as to whether our prospective business and investment strategies are in line with our defined risk appetite and objectives at the group and operating entity level. The model also provides a basis for optimizing our risk-return profile by providing consistent risk measurement across the Group. The model outputs are reviewed and supplemented with management’s judgment and business experience and expertise.
Risk Diversification
As a global insurer and reinsurer with a wide product offering across different businesses, diversification is a key component of our business model and risk framework. Diversification enhances our ability to manage our risks by limiting the impact of a single event and contributing to relatively stable long-term results and our general risk profile. The degree to which the diversification effect can be realized depends not only on the correlation between risks but also the level of relative concentration of those risks. Therefore, our aim is to maintain a balanced risk profile without any disproportionately large risks. Our internal capital model considers the level of correlation and diversification between individual risks and we measure concentration risk consistently across our business in terms of pre/post diversified internal risk capital requirements.
Risk Appetite and Limit Framework
Our integrated risk management framework considers material risks that arise from our operations. Large risks that might accumulate and have the potential to produce substantial losses are subject to our group-wide risk appetite and limit framework. Our risk appetite, as authorized by the Board of Directors, represents the amount of risk that we are willing to accept within the constraints imposed by our capital resources as well as the expectations of our stakeholders as to the type of risks we hold within our business. At an annual aggregated level, we also monitor and manage the potential financial loss from the accumulation of risk exposure in any one year.
Specific risk limits are defined and translated into a consistent framework across our identified risk categories and across our operating entities and are intended to limit the impact of individual risk types or accumulations of risk. Individual limits are established through an iterative process to ensure that the overall framework complies with our group-wide requirements on capital adequacy and risk accumulation.
We monitor risk through, for example, risk dashboards and limit consumption reports. These are intended to allow us to detect potential deviations from our internal risk limits at an early stage.
External Perspectives
Various external stakeholders, among them regulators, rating agencies, investors and accounting bodies, place emphasis on the importance of sound risk management in the insurance/reinsurance industry. We monitor developments in the external environment and evolve our risk management practices accordingly.
Risk Governance and Risk Management Organization
The key elements of our governance framework, as it relates specifically to risk management, are described below:
Board of Directors’ Level
The Risk Committee of the Board of Directors ("Risk Committee") assists the directors in overseeing the integrity and effectiveness of our ERM framework and ensuring that our risk assumption and risk mitigation activities are consistent with that framework. The Risk Committee reviews, approves and monitors our overall risk strategy, risk appetite and key risk limits and receives regular reports from the Group Risk Management function ("Group Risk") to ensure any significant risk issues are being addressed by management. The Risk Committee further reviews, with management and Internal Audit, the Group’s general policies and procedures and satisfies itself that effective systems of risk management and controls are established and maintained. Among its other responsibilities, the Risk Committee also reviews and approves our annual Own
Risk and Solvency Assessment ("ORSA") report. The Risk Committee assesses the independence and objectivity of our Group Risk function, approves its terms of reference and reviews its ongoing activities.
Following a recommendation by the Chief Executive Officer, the Risk Committee also conducts a review and provides a recommendation to the Board of Directors regarding the appointment and/or removal of the Chief Risk Officer. The Risk Committee meets with the Chief Risk Officer in separate executive sessions on a regular basis.
The Finance Committee of the Board of Directors oversees the Group’s investment of funds and adequacy of financing facilities. This includes approval of the Group’s strategic asset allocation plan. The Audit Committee of the Board of Directors, which is supported Internal Audit, is responsible for overseeing internal controls and compliance procedures, and also reviews with management and the Chairman of the Risk Committee, the Group’s policies regarding risk assessment and risk management.
Group Executive Level
The Executive Committee formulates our business objectives and risk strategy within the overall risk appetite set by the Board of Directors. It allocates capital resources and sets limits across the Group, with the objective of balancing return and risk. While the Executive Committee is responsible overall for risk management, it has delegated some authority to the executive level Risk Management Committee ("RMC") consisting of the Chief Executive Officer, Chief Financial Officer, Chief Strategy Officer, Head of Group Underwriting, Chief Executive Officers of each segment, Chief Risk Officer, Group Chief Actuary and General Counsel & Corporate Secretary.
The RMC is responsible for overseeing the integrity and effectiveness of the Group's ERM framework and ensuring that the Group's risk assumption and risk mitigation activities are consistent with that framework, including a review of the annual business plan relative to our risk limits. In addition to the RMC, there is an established framework of separate yet complementary management committees and subcommittees, focusing on particular aspects of ERM including the following:
Management Committees
•The Business Council oversees underwriting strategy and performance, establishes return targets and manages risk/exposure constraints across each line of business, consistent with the Company’s strategic goals.
•The Product Board for each major line of business aims to develop a coherent strategy for portfolio management, set underwriting guidelines and risk appetite and leverage expertise across the multiple geographies where we operate. The Product Boards also oversee exposure management frameworks and view of risk.
•The Investment & Finance Committee oversees the Group’s investment activities which includes monitoring market risks, the performance of our investment managers and the Group’s asset-liability management, liquidity positions and investment policies and guidelines. The Investment & Finance Committee also prepares the Group’s strategic asset allocation and presents it to the Finance Committee of the Board of Directors for approval.
•The Capital Management Committee oversees the integrity and effectiveness of the Company’s capital management policy, including the capital management policies of the Company’s legal entities and branches, and oversees the availability of capital within the Group.
•The Group Reserving Committee ensures appropriate oversight and challenge of the Group and Segment loss reserves.
RMC Sub-Committees
•The Natural Catastrophe Committee oversees the Group's natural catastrophe risk management framework, including the validation of modeling and accumulation practices.
•The Non-Natural Catastrophe Committee oversees the Group's non-natural catastrophe risk management framework, including the validation of modeling and accumulation practices.
•The Reinsurance Security Committee ("RSC") sets out the financial security requirements of our reinsurance counterparties and approves our counterparties, as needed.
•The Internal Model Committee oversees the Group's internal model framework, including the key model assumptions, methodology and validation framework.
•The Operational Risk Committee oversees the Group's operational risk framework for identifying, assessing, managing, monitoring and reporting of operational risk and facilitates the embedding of effective operational risk management practices throughout the Group.
•The Emerging Risks Working Group oversees the processes for identifying, assessing, managing, monitoring and reporting current and potential emerging risks.
•The Climate Change Working Group focuses specifically on climate-related risks and oversees the implementation of our climate risk management framework.
Group Risk Management Organization
As a general principle, management in each of our lines of business, segments and corporate functions is responsible in the first instance for the risks and returns of its decisions. Management is the 'owner' of risk management processes and is responsible for managing our business within defined risk limits.
The Chief Risk Officer reports to the Chief Financial Officer and the Chairman of the Risk Committee, leads our independent Group Risk function, and is responsible for oversight and implementation of the Group's ERM framework, as well as providing guidance and support for risk management practices. Group Risk is responsible for developing methods and processes for identifying, assessing, managing, monitoring and reporting risk. This forms the basis for informing the Risk Committee and RMC of the Group’s risk profile. Group Risk develops our risk management framework and oversees the adherence to this framework at the Group and operating entity level. Our Chief Risk Officer regularly reports risk matters to the Chief Financial Officer, Executive Committee, RMC and the Risk Committee.
Internal Audit, an independent, objective function, reports to the Audit Committee of the Board of Directors on the effectiveness of our risk management framework. This includes assurance that key business risks have been adequately identified and managed appropriately and that our system of internal control is operating effectively. Internal Audit also provides independent assurance around the validation of our internal capital model and coordinates risk-based audits, compliance reviews and other specific initiatives to evaluate and address risk within targeted areas of our business.
Our risk governance structure is further complemented by our legal team which seeks to mitigate legal and regulatory compliance risks with support from other teams. This includes ensuring that significant developments in law and regulation are observed and that we react appropriately to impending legislative and regulatory changes and applicable court rulings.
Risk Landscape
Our risk landscape comprises strategic, insurance, credit, market, operational and liquidity risks that arise as a result of doing business. We provide definitions of these risk categories as well as descriptions of management of these risks below. Across these risk categories, we identify and evaluate emerging threats and opportunities through a framework that includes the assessment of potential surprise factors that could affect exposures.
Our risk landscape is reviewed on a regular basis to ensure that it remains up-to-date based on the evolving risk profile of the Company. In addition, we undertake ongoing risk assessments across all enterprise risks, the output of which is captured in our risk register which is reviewed and reported through our governance structure.
Insurance Risk
Insurance risk is the inherent uncertainty as to the occurrence, amount and timing of insurance and reinsurance liabilities transferred to us through the underwriting process.
Since our inception in 2001, we have expanded our international presence, with underwriting offices in Bermuda, the U.S., Europe, Singapore and Canada. Our disciplined underwriting approach coupled with a peer review process has enabled us to manage this growth in a controlled and consistent manner.
A key component of the Group's underwriting risk governance is our peer review processes which allow for a collaborative review of risk and pricing and ensures that underwriting is within established guidelines and procedures. Underwriting guidelines are in place to provide a framework for consistent pricing and risk analysis and ensuring alignment to the Group's risk appetite. Limits are set on underwriting capacity, and cascade authority to individuals based on their specific roles and expertise.
We also have significant audit coverage across our lines of business, including Management Initiated Audits ("MIAs"). MIAs are audits of underwriting and claims files performed by teams independent of those who originated the transactions, the purpose of which is to test the robustness of our underwriting and claims processes and to recognize any early indicators of future trends in our operational risk environment.
Reinsurance Purchasing
Another key component of our mitigation of insurance risk is the purchase of reinsurance to protect our short and long tail lines of business on a treaty (covering a portfolio of risks) and facultative (single risk) basis.
For treaty reinsurance, we purchase proportional and non-proportional cover. Under proportional reinsurance, we cede an agreed percentage of the premiums and the losses and loss expenses on the policies we underwrite. We primarily use proportional reinsurance on our liability, professional lines and cyber portfolios, as well as on select property portfolios, where we protect against higher loss frequency rather than specific events. We also purchase proportional reinsurance on our assumed property catastrophe reinsurance portfolio, casualty, and credit and surety portfolios, which includes cessions to our Strategic Capital Partners. In addition, we use non-proportional reinsurance, whereby losses up to a certain amount (i.e. our retention) are borne by us. By using non-proportional reinsurance, we can limit our liability with a retention, which reflects our willingness and ability to bear risk, and is therefore in line with our risk appetite. We primarily purchase the following forms of non-proportional reinsurance:
•Excess of loss per risk – the reinsurer indemnifies us for loss amounts of all individual policies effected, defined in the treaty terms and conditions. Per risk treaties are an effective means of risk mitigation against large single losses (e.g. a large fire claim).
•Catastrophe excess of loss – provides aggregate loss cover for our insurance portfolio against the accumulation of losses incurred from a single event (e.g. windstorm).
We have a centralized risk funding department, which coordinates external treaty reinsurance purchasing across the Group and is overseen by our Reinsurance Purchasing Group ("RPG"). The RPG, which includes, among others, our Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, Head of Group Underwriting and representatives from the business leadership team, approves each treaty placement, and aims to ensure that appropriate diversification exists within our RSC approved counterparty panels.
Facultative reinsurance is case by case risk transfer. In certain circumstances, we use facultative reinsurance to complement treaty reinsurance by covering additional risks above and beyond what is already covered by treaties. Facultative reinsurance is monitored by the risk funding team.
Natural Peril Catastrophe Risk
Natural catastrophes such as hurricanes, windstorms, earthquakes, floods, tornados, hail and fire represent a challenge for risk management due to their accumulation potential and occurrence volatility. In managing natural catastrophe risk, our internal risk limit framework aims to limit the loss of capital due to a single event and the loss of capital that would occur from multiple (but perhaps smaller events) in any year. Within this framework, we have an established risk limit for single event, single zone probable maximum loss ("PML") within defined zones and at various return periods. For example, at the 1-in-250-year return period, we are not willing to expose more than 20% of common equity to a single event within a single zone.
The table below shows our mean PML to a single natural peril catastrophe event within certain defined single zones which correspond to peak industry catastrophe exposures at January 1, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| At January 1,
(in millions of U.S. dollars) | 2021 | | 2020 | |
| Single zone/single event | | Perils | 50 Year
Return
Period | | 100 Year
Return
Period | | 250 Year
Return
Period | | 50 Year
Return
Period | | 100 Year
Return
Period | | 250 Year
Return
Period | |
| | | | | | | | | | | | | | | |
| Southeast | | U.S. Hurricane | $ | 286 | | | $ | 408 | | | $ | 625 | | | $ | 262 | | | $ | 310 | | | $ | 428 | | |
| Northeast | | U.S. Hurricane | 42 | | | 115 | | | 262 | | | 53 | | | 145 | | | 236 | | |
| Mid-Atlantic | | U.S. Hurricane | 90 | | | 263 | | | 520 | | | 120 | | | 214 | | | 349 | | |
| Gulf of Mexico | | U.S. Hurricane | 175 | | | 263 | | | 431 | | | 202 | | | 249 | | | 283 | | |
| California | | Earthquake | 193 | | | 396 | | | 504 | | | 176 | | | 249 | | | 292 | | |
| Europe | | Windstorm | 136 | | | 182 | | | 240 | | | 195 | | | 238 | | | 316 | | |
| Japan | | Earthquake | 103 | | | 179 | | | 336 | | | 138 | | | 247 | | | 414 | | |
| Japan | | Windstorm | 113 | | | 186 | | | 220 | | | 114 | | | 195 | | | 256 | | |
| | | | | | | | | | | | | | | |
The return period refers to the frequency with which losses of a given amount or greater are expected to occur. A zone is a geographic area in which the insurance risks are considered to be correlated to a single catastrophic event. Estimated losses from a modeled event are grouped into a single zone, as shown above, based on where the majority of the total estimated industry loss is expected to occur. In managing zonal concentrations, we aim to ensure that the geography of single events is suitably captured, but distinct enough that they track specific types of events. For example, our definition of Southeast wind encompasses five states, including Florida, while our definition of Gulf Wind encompasses four states, including Texas.
Our PMLs take into account the fact that an event may trigger claims in a number of lines of business. For instance, our U.S. hurricane modeling includes the estimated pre-tax impact to our financial results arising from our catastrophe, property, engineering, energy, marine and aviation lines of business. Our PMLs include assumptions regarding the location, size and magnitude of an event, the frequency of events, the construction type and a property’s susceptibility to damage and the cost of rebuilding the property. Loss estimates for non-U.S. zones will be subject to foreign exchange rates, although we may mitigate this currency variability from a book value perspective.
As indicated in the table above, our modeled single occurrence 1-in-100-year return period PML for a Southeast U.S. hurricane, net of reinsurance, is approximately $0.4 billion. According to our modeling, there is a one percent chance that on an annual basis losses incurred from a Southeast hurricane event could be in excess of $0.4 billion. Conversely, there is a 99% chance that on an annual basis the loss from a Southeast hurricane will fall below $0.4 billion.
We have developed our PML estimates by combining judgment and experience with the outputs from the catastrophe model,commercially available from AIR Worldwide ("AIR"), which we also use for pricing catastrophe risk. This model covers the major peril regions where we face potential exposure. Additionally, we have included our estimate of non-modeled perils and other factors which we believe provides us with a more complete view of catastrophe risk.
Our PML estimates are based on assumptions that are inherently subject to significant uncertainties and contingencies. These uncertainties and contingencies can affect actual losses and could cause actual losses to differ materially from those expressed above. We aim to reduce the potential for model error in a number of ways, the most important of which is by ensuring that management’s judgment supplements the model outputs. We also perform ongoing model validation at the line of business and at a group level including through our catastrophe model validation team. These validation procedures include sensitivity testing of models to understand their key variables and, where possible, backtesting the model outputs to actual results.
Estimated net losses from peak zone catastrophes may change from period to period as a result of several factors, which include but are not limited to, updates to vendor catastrophe models, changes to our internal modeling, changes in our underwriting portfolios, changes to our reinsurance purchasing strategy and changes in foreign exchange rates.
Man-Made Catastrophe Risk
Consistent with our management of natural peril catastrophe exposures, we take a similarly focused and analytical approach to the management of man-made catastrophes. Man-made catastrophes, which include such risks as train collisions, airplane crashes or terrorism, are harder to model in terms of assumptions regarding intensity and frequency. For these risks we couple the vendor models (where available) with our bespoke modeling and underwriting judgment and expertise. This allows us to take advantage of business opportunities related to man-made catastrophe exposures particularly where we can measure and limit the risk sufficiently as well as obtain risk-adequate pricing.
As an example of our approach, our assessment of terrorism risk is based on a mixture of qualitative and quantitative data (e.g. for estimating property damage, business interruption, mortality and morbidity subsequent to an attack of a predefined magnitude), which we use to limit and manage our aggregate terrorism exposure. We use commercially available vendor modeling and bespoke modeling tools to measure accumulations around potential terrorism accumulation zones on a deterministic and probabilistic basis. We supplement the results of our modeling with underwriting judgment.
Reserving Risk
The estimation of loss reserves is subject to uncertainty as the settlement of claims that arise before the balance sheet date is dependent on future events and developments. There are many factors that would cause loss reserves to increase or decrease, which include, but are not limited to emerging claims and coverage issues, changes in the legislative, regulatory, social and economic environment and unexpected changes in loss inflation. The estimation of loss reserves could also be adversely affected by the failure of our loss limitation strategy and/or the failure of models used to support key decisions.
We calculate reserves for losses and loss expenses ("loss reserves") in accordance with actuarial best practice based on substantiated methodologies and assumptions. In addition, we have well established processes in place for determining loss reserves, which we ensure are consistently applied. Our loss reserving process demands data quality and reliability and requires a quantitative and qualitative review of overall reserves and individual large claims. Within a structured control framework, claims information is communicated on a regular basis throughout our organization, including to senior management, to provide an increased awareness of losses that have occurred throughout the insurance markets. The detailed and analytical reserving approach that follows is designed to absorb and understand the latest information on reported and unreported claims, to recognize the resultant exposure as quickly as possible, and to record appropriate loss reserves in our consolidated financial statements.
Reserving for long-tail lines of business represents a significant component of reserving risk. When loss trends prove to be higher than those underlying our reserving assumptions, the risk is greater because of a stacking-up effect: loss reserves recorded in our consolidated financial statements cover claims arising from several years of underwriting activity and these reserves are likely to be adversely affected by unfavorable loss trends. We manage and mitigate reserving risk on long-tail business in a variety of ways. First, the long-tail business we write is part of a well-balanced and diversified global portfolio of business. In 2020, long-tail net premiums written (namely liability and motor business) represented 23% of total net premiums written and long-tail net loss reserves represented 35% of total net loss reserves. We also purchase reinsurance on liability business to manage our net positions. Second, we follow a disciplined underwriting process that utilizes available information, including industry trends.
Another significant component of reserving risk relates to the estimation of losses in the aftermath of a major catastrophe event. Refer to Item 7 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates – Reserves for Losses and Loss Expenses' for further details.
Claims Handling Risk
In accepting risk, we are committing to the payment of claims and therefore these risks must be understood and controlled. We have claims teams embedded in our main lines of business. Our claim teams include a diverse group of experienced professionals, including claims adjusters and attorneys. We also use approved external service providers, such as independent adjusters and appraisers, surveyors, accountants, investigators and specialist attorneys, as appropriate.
We maintain claims handling guidelines which include details on claims reporting controls and claims reporting escalation procedures in all our claims teams. Large claims matters are reviewed during weekly claims meetings. The minutes from each meeting are circulated to our underwriters, senior management and others involved in the reserving process. To maintain communication between underwriting and claims teams, claims personnel regularly report at underwriting meetings and frequently attend client meetings.
We foster a strong culture of review among our claims teams. This includes MIAs, whereby senior claims handlers audit a sample of claim files. The process is designed to ensure consistency between the claims teams and to develop group-wide best practices.
When we receive notice of a claim, regardless of size, it is recorded in our claims and underwriting systems. In addition, we have developed a standard format and procedure to produce "flash reports" for significant events and potential losses, regardless of whether we have exposure. Our process for flash reporting allows a direct notification to be communicated to underwriters and senior management worldwide. Similarly, for natural peril catastrophes, we have developed a catastrophe database, along with catastrophe coding in certain systems, that allows for the gathering, analyzing and reporting of loss information as it develops from early modeled results to fully adjusted and paid losses.
Strategic Risk
Strategic risks affect or are created by an organization’s business strategy and strategic objectives. Our review of strategic risk evaluates not only internal and external challenges that might cause our chosen strategy to fail but also evaluates major risks that could affect our long-term performance and position. We believe it is imperative that we consider the business risks associated with, and mitigated by, each strategy. We also view strategic risk not only as the negative impact of risk but also the sub-optimization of gain. Fundamentally, we believe that we are set up for success if we analyze both value protection and value creation.
A strategy function was formed as part of our enterprise-wide transformation to ensure that the prioritization and coordination of enterprise-wide resources is done efficiently and effectively to drive targeted strategic outcomes. On no less than a quarterly basis, the Executive Committee meets and receives holistic information about execution against strategy and makes decisions to adjust and/or advance strategy. In addition, strategies employed throughout our business in support of the broader enterprise strategy are reviewed in the context of a broader governance structure by the Business Council and business leadership, and are ultimately approved by the Board of Directors.
Market Risk
Market risk is the risk that our financial instruments may be negatively impacted by movements in financial market prices or rates such as equity prices, interest rates, credit spreads and foreign exchange rates. Fluctuations in market prices or rates primarily affect our investment portfolio.
Through asset and liability management, we aim to ensure that market risks influence the economic value of our investments and our loss reserves and other liabilities in the same way, thus mitigating the effect of market fluctuations. For example, we reflect important features of our liabilities, such as maturity patterns and currency structures, on the assets side of the balance sheet by acquiring investments with similar characteristics.
We supplement our asset-liability management with various internal policies and limits. As part of our strategic asset allocation process, different asset strategies are simulated and stressed in order to evaluate the ‘optimal’ portfolio (given return objectives and risk constraints). Our investments team manages asset classes to control aggregation of risk and provide a consistent approach to constructing portfolios and the selection process of external asset managers. We have limits on the concentration of investments by single issuers and certain asset classes, and we limit the level of illiquid investments (refer to 'Liquidity Risk' below). Further, our investment guidelines do not permit the use of leverage in any of our fixed maturity portfolios.
We stress test our investment portfolios using historical and hypothetical scenarios to analyze the impact of unusual market conditions and to ensure potential investment losses remain within our risk appetite. At an annual aggregated level, we manage the total risk exposure to our investment portfolio so that the ‘total return’ investment loss in any one year is unlikely to exceed a defined percentage of our common equity at a defined return period.
We mitigate foreign currency risk by seeking to match our estimated insurance and reinsurance liabilities payable in foreign currencies with assets, including cash and investments that are denominated in the same currencies. Where necessary, we use derivative financial instruments for economic hedging purposes. For example, in certain circumstances, we use forward contracts and currency options to economically hedge portions of our un-matched foreign currency exposures.
Liquidity Risk
Liquidity risk is the risk that we may not have sufficient financial resources to meet our obligations when they are due, or would have to incur excessive costs to do so. As an insurer and reinsurer, our core business generates liquidity primarily
through premiums, investment income and the maturity/sale of investments. Our exposure to liquidity risk stems mainly from the need to cover potential extreme loss events and regulatory constraints that limit the flow of funds within the Group. To manage these risks, we have a range of liquidity policies and procedures in place:
•We maintain cash and cash equivalents and a high quality, liquid investment portfolio to meet expected outflows, as well as those that could result from a range of potential stress events. We place limits on the maximum percentage of cash and investments which may be in an illiquid form as well as on the minimum percentage of unrestricted cash and liquid investment grade fixed income securities.
•We maintain committed borrowing facilities, as well as access to diverse funding sources to cover contingencies. Funding sources include asset sales, external debt issuances and lines of credit.
Credit Risk
Credit risk represents the risk of incurring financial loss due to the diminished creditworthiness (reduced financial strength and, ultimately, possibly default) of our third-party counterparties. We distinguish between: various forms of credit exposure; the risk of issuer default from instruments in which we invest, such as corporate bonds; counterparty exposure in a direct contractual relationship, such as reinsurance; the credit risk related to our premium receivables, including those from brokers and other intermediaries; and the risk we assume through our insurance contracts, such as our credit and political risk and credit and surety lines of business.
Credit Risk Aggregation
We monitor and manage the aggregation of credit risk on a group-wide basis, allowing us to consider exposure management strategies for individual companies, countries, regions, sectors and any other relevant inter-dependencies. Our credit exposures are aggregated based on the origin of risk. Credit risk aggregation is managed through minimizing overlaps in underwriting, financing and investing activities. As part of our credit aggregation framework, we assign aggregate credit limits by country and by single counterparty (or parent of affiliated counterparties). These limits are based and adjusted on a variety of factors including the prevailing economic environment and the nature of the underlying credit exposures.
Our credit aggregation measurement and reporting process is facilitated by our credit risk exposure database, which contains relevant information on counterparty details and credit risk exposures. The database is accessible by management throughout the Group, thus providing transparency to allow for the implementation of active exposure management strategies. We also license third-party tools to provide credit risk assessments. We monitor all our credit aggregations and, where appropriate, adjust our internal risk limits and/or take specific actions to reduce our risk exposures
Credit Risk Relating to Cash and Investments
In order to mitigate concentration and operational risks related to cash and cash equivalents, we limit the maximum amount of cash that can be deposited with a single counterparty and additionally limit acceptable counterparties based on current rating, outlook and other relevant factors.
Our fixed maturity investment portfolio, which represents approximately $12 billion or 47% of our total assets, is exposed to potential losses arising from the diminished creditworthiness of issuers of bonds as well as third-party counterparties such as custodians. Our investment portfolio is managed by external investment managers in accordance with its investment guidelines. We limit such credit risk through diversification, issuer exposure limits graded by ratings and, with respect to custodians, contractual and other legal remedies. Excluding U.S. government and agency securities, we limit our concentration of credit risk to any single corporate issuer to 2% or less of our investment grade fixed maturities portfolio for securities rated A- or above and 1% or less of our investment grade fixed maturities portfolio for securities rated below A-.
Credit Risk Relating to Reinsurance Recoverable Assets
We are exposed to the credit risk of a reinsurer failing to meet its obligations under our reinsurance contracts. To help mitigate this, our purchases of reinsurance is subject to financial security requirements specified by our RSC. The RSC 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 limits 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 RSC requires reinsurers who do not meet specified requirements to provide collateral.
Credit Risk Relating to Premium Receivables
The diversity of our client base limits credit risk associated with premium receivables. 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 premium receivables against corresponding payments for losses and loss expenses.
Brokers and other intermediaries collect premiums from customers on our behalf. We have procedures in place to manage and monitor credit risk from intermediaries with a focus on day-to-day monitoring of the largest positions.
These contractual rights contribute to the mitigation of credit risk, together with the monitoring of aged premium receivable balances. In light of these mitigating factors and considering that a significant portion of premium receivables are not currently due based on the terms of the underlying contracts, we do not utilize specific credit quality indicators to monitor our premium receivable balances.
Credit Risk Relating to our Underwriting Portfolio
In the insurance segment, we provide credit insurance primarily for lenders (financial institutions) seeking to mitigate the risk of non-payment from their borrowers. This product complements our traditional political risk insurance business. For the credit insurance contracts, it is necessary for the buyer of the insurance, most often a bank, to hold an insured asset, most often an underlying loan, in order to claim compensation under the insurance contract. The vast majority of the credit insurance provided is for single-name illiquid risks, primarily in the form of senior secured bank loans that can be individually analyzed and underwritten. As part of the underwriting process, an evaluation of creditworthiness and reputation of the obligor is critical. We generally require our clients to retain a share of each transaction that we insure. A key element to our underwriting analysis is the assessment of recovery in the event of default and, accordingly, the strength of the collateral and the enforceability of rights to the collateral are paramount.
We avoid insurance for structured finance products defined by pools of risks and insurance for synthetic products that would expose us to mark-to-market losses. We also seek to avoid terms in our credit insurance contracts which introduce liquidity risk, most notably in the form of a collateralization requirement upon a ratings downgrade.
We also provide protection against sovereign default or sovereign actions that result in impairment of cross-border investments for banks and corporations. Our contracts generally include conditions precedent to our liability relating to the enforceability of the insured transaction and restricting amendments to the transaction documentation, obligations on the insured to prevent and minimize losses, subrogation rights (including rights to have the insured asset transferred to us) and waiting periods. Under most of our policies, a loss payment is made in the event the debtor failed to pay our client when payment is due subject to a waiting period of up to 180 days.
In the reinsurance segment, we provide reinsurance of credit and surety bond insurers exposed to the risks of financial loss arising from non-payment of trade receivables covered by a policy (credit insurance) or non-performance of obligations (surety). Our credit insurance exposures are concentrated primarily within developed economies, while our surety bond exposures are concentrated primarily in Latin America and developed economies. We also provide coverage to the mortgage industry through insurance and reinsurance of mortgage insurance companies and U.S. government-sponsored entity credit risk sharing transactions. We focus on credit risk transfer from Federal Home Loan Mortgage Corporation and Federal National Mortgage Association, in the single-family, fixed rate, conforming mortgage space. We provide this cover on a proportional and non-proportional basis globally through AXIS Re U.S., AXIS Specialty Bermuda and AXIS Managing Agency Ltd. Our exposure to mortgage risk is monitored and managed through robust underwriting within defined parameters for mortgage credit quality and concentration, continuous monitoring of the housing market, as well as limits on our PML resulting from a severe economic downturn in the housing market.
Operational Risk
Operational risk represents the risk of loss as a result of inadequate processes, system failures, human error or external events, including but not limited to direct or indirect financial loss, reputational damage, customer dissatisfaction and legal and regulatory penalties.
Group Risk is responsible for coordinating and overseeing a group-wide framework for operational risk management. As part of this, we maintain an operational loss-event database which helps us monitor and analyze potential operational risk, identify any trends, and, where necessary, put in place improvement actions to avoid occurrence or recurrence of operational loss events.
We manage transaction type operational risks through the application of process controls throughout our business. In testing these controls, we supplement the work of our internal audit team with regular underwriting and claim MIAs (as discussed above).
We have specific processes and systems in place to focus on high priority operational matters, such as information security, managing business continuity and third-party vendor risk:
•Major failures and disasters which could cause a severe disruption to working environments, facilities and personnel, represent a significant operational risk to us. Our Business Continuity Management framework strives to protect critical business functions from these effects to enable us to carry out our core tasks in time and at the quality required. During 2020, we continued to review our Business Continuity Planning procedures through cyclical planned tests.
•We have developed a number of Information Technology ("IT") platforms, applications and security controls to support our business activities worldwide. Dedicated security standards are in place for our IT systems to ensure the proper use, availability and protection of our information assets.
•Our use of third-party vendors exposes us to a number of increased operational risks, including the risk of security breaches, fraud, non-compliance with laws and regulations or internal guidelines and inadequate service. We manage material third-party vendor risk, by, among other things, performing a thorough risk assessment on potential large vendors, reviewing a vendor’s financial stability, ability to provide ongoing service and business continuity planning.
United States
U.S. Insurance Holding Company Regulation of AXIS Capital’s Insurance Subsidiaries
As members of an insurance holding company system, each of AXIS Insurance Co., AXIS Re U.S., AXIS Specialty U.S. and AXIS Surplus, collectively AXIS Capital’s U.S. insurance subsidiaries ("U.S.(collectively, the "U.S. Insurance Subsidiaries") are subject to the insurance holding company system laws and regulations of the states in which they do business. These laws generally require each of the U.S. Insurance Subsidiaries to register with its respective domestic state insurance department and to furnish financial and other information which may materially affect the operations, management or financial condition within the holding company system. All transactions within a holding company system that involve an insurance company must be fair and equitable. Notice to the applicable insurance departmentsdepartment is required prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and an entity in its holding company system, and certain transactions may not be consummated without the department’s prior approval.
State Insurance Regulation
AXIS Re U.S. is licensed to transact insurance and reinsurance throughout the U.S. and in Puerto Rico. AXIS Re U.S. is also authorized to transact insurance and reinsurance throughout Canada through its Canadian branch and has reinsurance permissions in Argentina, Brazil, China, Columbia, Ecuador, Guam, Guatemala, Honduras, Panama, India and Mexico. AXIS Insurance Co. is licensed to transact insurance and reinsurance throughout the U.S. AXIS Specialty U.S. is licensed to transact insurance and reinsurance throughout the U.S., except California, Iowa, Maine, New Mexico, New York and Wyoming. AXIS Surplus is eligible to write insurance on a surplus lines basis throughout the U.S., Puerto Rico and the U.S. Virgin Islands.
Our U.S. Insurance Subsidiaries also are subject to regulation and supervision by their respective states of domicile and by other jurisdictions in which they do business. The regulations generally are derived from statutes that delegate regulatory and supervisory powers to an insurance official. The regulatory framework varies from state to state, but generally relates to approval of policy forms and rates, the standards of solvency that must be met and maintained, including risk-based capital standards, material transactions between an insurer and its affiliates, the licensing of insurers, agents and brokers, restrictions on insurance policy terminations, the nature of and limitations on the amount of certain investments, limitations on the net amount of insurance of a single risk compared to the insurer’s surplus, deposits of securities for the benefit of policyholders, methods of accounting, periodic examinations of the financial condition and market conduct of insurance companies, the form and content of reports of financial condition required to be filed, reserves for unearned premiums, losses, expenses and other obligations.
Our U.S. Insurance Subsidiaries are required to file detailed quarterly statutory financial statements with state insurance regulators in each of the states in which they conduct business. In addition, the U.S. Insurance Subsidiaries’ operations and accounts are subject to financial condition and market conduct examination at regular intervals by state regulators.
Regulators and rating agencies use statutory surplus as a measure to assess our U.S. Insurance Subsidiaries’ ability to support business operations and pay dividends. Our U.S. Insurance Subsidiaries are subject to various state statutory and regulatory
restrictions that limit the amount of dividends that may be paid from earned surplus without prior approval from regulatory authorities. These restrictions differ by state, but generally are based on calculations using statutory surplus, statutory net
income and investment income. In addition, many state regulators use the National Association of Insurance Commissioners promulgated risk-based capital requirements as a means of identifying insurance companies which may be under-capitalized.
Although generally the insurance industry generally is not directly regulated by the federal government, federal legislation and initiatives can affect the industry and our business. Certain sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank") pertain to the regulation and business of insurance. Specifically, the Federal Insurance Office ("FIO") has limited authority and serves to collect information and report on the business of insurance to Congress. In addition, Dodd-Frank contains the Non-admittedNon-Admitted and Reinsurance Reform Act of 2010 ("NRRA"). NRRA attempts to coordinate the payment of surplus lines taxes, simplify the granting of alien insurers to become surplus lines authorized and coordinates the credit for certain reinsurance. Various sections of Dodd-Frank become effective over time and regulations have yet to be drafted for certain provisions. The Company does not anticipate that Dodd-Frank will have any material effect on its operations or financial condition this year, but will continuecontinues to monitor its implementation.the implementation of Dodd-Frank.
Ternian Insurance Group LLC, a leading provider of voluntary, limited benefit, affordable health plans and other employee benefits coverage for hourly and part-time workers and their families, is an authorized insurance producer in all 50 states of the U.S. except Hawaii. As a resident insurance producer in Arizona, Ternian Insurance Group LLC is subject to regulation and supervision by the Arizona Department of Insurance and is also subject to the regulation and supervision of the other states in which Ternian transacts business.
AXIS Specialty Underwriters, Inc., a Florida licensed reinsurance intermediary, is subject to regulation and supervision by the Florida Department of Financial Services. AXIS Specialty Underwriters, Inc. operates as the Latin American and Caribbean regional coverholder for Syndicate 1686, providing facultative reinsurance coverage to the Latin American and Caribbean market with a focus on energy and property business.market.
U.S. Authorizations of our Non-U.S. Insurance Subsidiaries
The insurance laws of each state of the U.S. regulate or prohibit the sale of insurance and reinsurance within their jurisdictions by insurers and reinsurers that are not admitted to do business within suchtheir jurisdictions, or conduct business pursuant to exemptions. AXIS Specialty Europe is eligible to write surplus lines business throughout the U.S. and in Puerto Rico. AXIS Managing Agency Ltd. is eligible to use Lloyd's of London licenses to (i) write surplus lines business throughout the U.S. and in all U.S. territories, (ii) to write insurance business, except life insurance business, in the states of Illinois, Kentucky and in the U.S. Virgin Islands and (iii) to write non-life reinsurance business throughout the U.S. and in all U.S. territories, except for accident and health reinsurance in New York.
In addition to the regulatory requirements imposed by the jurisdictions in which they are licensed, reinsurers’ business operations are affected by regulatory requirements in various states of the U.S. governing "credit for reinsurance" that are imposed on their ceding companies. In general, a ceding company obtaining reinsurance from a reinsurer that is licensed, accredited or approved by the jurisdiction or state in which the ceding company files statutory financial statements is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company’s liability for unearned premiums (which areis that portion of premiums written which applies to the unexpired portion of the policy period), loss reserves and loss expense reserves ceded to the reinsurer. The great majority of states, however, permit a credit to statutory surplus resulting from reinsurance obtained from a non-licensed or non-accredited reinsurer to be recognized to the extent that the reinsurer provides a letter of credit, trust fund or other acceptable security arrangement. A few states do not allow credit for reinsurance ceded to non-licensed reinsurers except in certain limited circumstances, and others impose additional requirements that make it difficult to become accredited. In connection with the establishment of a Multi-Beneficiary Reinsurance Trust, AXIS Specialty Bermuda obtained accredited or trusteed reinsurer status in all U.S. jurisdictions except for New York.
Ireland
Our Ireland domiciled insurer and reinsurer are subject to the Solvency II Directive (Directive 2009/138/EC), as amended. Solvency II represents a consolidation and modernization of existing European Commission Solvency I insurance and reinsurance regulation and supervision and includes a new harmonized risk basedrisk-based solvency and reporting regime for the insurance/reinsurance sector. Solvency II covers three main areas: (i) the valuation of assets and liabilities and related solvency capital requirements; (ii) governance requirements including key functions of compliance, internal audit, actuarial and risk management; and (iii) new legal entity and European Union ("E.U.") group reporting and disclosure requirements including public disclosures. The new capital requirement must be computed using the Solvency II standard formula unless the Central Bank of Ireland ("CBI") has previously authorized a company to use its own internal model. Certain of our European legal entities are subject to Solvency II.
AXIS Specialty Europe
AXIS Specialty Europe is a European public limited liability company incorporated as a non-life insurer under the laws of Ireland. It is a Societas Europaea (SE), or European society company, and has been registered in accordance with company law of the E.U. law. As a SE company, AXIS Specialty Europe can more easily merge with companies in European member states and also transfer its domicile to other member states of the E.U. AXIS Specialty Europe is authorized and regulated by the CBI pursuant to the Insurance Acts 1909 to 2000, as amended, repealed or replaced, the Central Bank Acts 1942 – 2014, as amended, repealed or replaced, and E.U. regulation relating to general insurance and statutory instruments made thereunder. AXIS Specialty Europe is authorized to conduct business in 16 non-life insurance classes throughout the E.U. and the European Economic Area ("EEA"), which includes each of the member countries of the E.U. with the addition of Iceland, Liechtenstein and Norway. AXIS Specialty Europe may also write reinsurance business within the classes of insurance business for which it is authorized.
AXIS Specialty Europe is subject to Solvency II. In accordance with Solvency II, AXIS Specialty Europe is permitted to provide insurance services to clients located in any EEA Member State ("Freedom of Services"), subject to compliance with any "general good requirements" as may be established by the applicable EEA Member State regulator. AXIS Specialty Europe has notified the CBI of its intention to provide insurance services on a Freedom of Services basis in all EEA countries.
Solvency II also permits AXIS Specialty Europe to carry on insurance business in any EEA Member State under the principle of "Freedom of Establishment" subject to the prior approval of the CBI. AXIS Specialty Europe operates under Freedom of Establishment in the U.K., Belgium and the Netherlands through its branches established in each of these jurisdictions.
AXIS Specialty Europe's U.K. branch transacts general insurance business in the U.K., trading as AXIS Specialty London. The CBI remains responsible for the prudential supervision of the branch; however, the branch is subject to limited regulation by the U.K. Financial Conduct Authority ("FCA") and the Prudential Regulation Authority ("PRA"). Due to the U.K.'s withdrawalwithdrew from the E.U. on JanuaryDecember 31, 2020 AXIS Specialty Europe expects to lose its Freedom of Establishment rights in the U.K. once any transitional arrangements have expired.and is now considered a third country. In order to maintain business continuity, upon the exit of the U.K. from the E.U., AXIS Specialty Europe has submitted an application to the PRAPrudential Regulatory Authority (the "PRA") in 2018 for authorization of a third country branchbranch. As this application is still pending, AXIS Specialty Europe entered into the PRA's Temporary Permissions Regime (the "TPR"), under which it is able to maintain business continuity. AXIS Specialty Europe will remain in the U.K., which, if approved, would beTPR, fully regulated by the PRA and the FCA.Financial Conduct Authority ("FCA"), until the earlier of the third year anniversary of its admission to the TPR and the date the PRA application has been fully assessed and approved.
Effective January 1, 2019, the shares of Compagnie Belge d’Assurances Aviation NV/SA ("Aviabel") were transferred to AXIS Specialty Europe from AXIS Specialty Holdings Ireland Limited and Aviabel was merged into AXIS Specialty Europe by way of merger by absorption and dissolved without going into liquidation (the "Aviabel Merger").
In connection with the Aviabel Merger, AXIS Specialty Europe established two new branches in Belgium and the Netherlands (see "Belgium" and the "Netherlands" below).
AXIS Specialty Europe has local regulatory permission to carry on insurance business in Jersey and has reinsurance permissions in India, China, Argentina, Mexico, Panama, Paraguay, Chile, Honduras, Ecuador, Colombia and Guatemala.
AXIS Re SE
AXIS Re SE is a European public limited liability company incorporated as a reinsurer under the laws of Ireland. AXIS Re SE is also a Societas Europaea (SE), or European society company, registered in accordance with the corporate law of the E.U. law. AXIS Re SE is authorized by the CBI as a composite reinsurer (non-life and life) in accordance with the Insurance Acts 1909 to 2000, as amended, repealed or replaced, the Central Bank Acts 1942 -– 2014, as amended, repealed or replaced, and E.U. regulation applicable to reinsurance and statutory instruments made thereunder. AXIS Re SE is authorized to transact reinsurance throughout the E.U. and the EEA and is subject to Solvency II.
AXIS Re SE conducts business through its branch in Zurich, Switzerland, trading as AXIS Re Europe (see "Switzerland" below).
AXIS Re SE Escritório de Representação No Brasil Ltda. was established in Brazil as a subsidiary of AXIS Re SE to facilitate the Brazilian Superintendence of Private Insurance ("SUSEP") regulatory requirements for approval of a representative office of AXIS Re SE and for the registration of AXIS Re SE with SUSEP as an Admitted Reinsurer.
AXIS Re SE's representative offices in France and Spain were closed during 2019.
AXIS Re SE has reinsurance permissions in Argentina, Bolivia, Brazil, China, Chile, Colombia, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, India, Mexico, Nicaragua, Panama, Paraguay, Peru and Venezuela.
AXIS Specialty Holdings Ireland Limited
AXIS Specialty Holdings Ireland Limited is the limited liability holding company for AXIS Specialty Europe and AXIS Re SE, each incorporated under the laws of Ireland, Contessa Limited, a U.K. licensed insurance intermediary, and AXIS Reinsurance (DIFC) Limited, a Dubai licensed insurance intermediary, and Aviabel Re S.A., a captive reinsurance company which was registered and licensed in Luxembourg until December 2019 (refer to "Luxembourg" below).
Effective January 1, 2019, AXIS Specialty Holdings Ireland Limited transferred the shares of Aviabel to AXIS Specialty Europe, described above under "AXIS Specialty Europe" as the Aviabel Merger.
AXIS Specialty Bermuda may write reinsurance under Solvency II equivalence betweengranted to Bermuda andby the E.U.
AXIS Managing Agency Ltd. is eligible to use Lloyd's of London licenses to write insurance except(except permanent health,health) and reinsurance business on a Freedom of Services basis in Ireland.Ireland through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" below).
AXIS Specialty Global Holdings Limited
AXIS Specialty Global Holdings Limited is the limited liability holding company for AXIS Capital's U.S. Insurance subsidiaries.
U.K. and Lloyd's of London
In the U.K., under the Financial Services and Markets Act 2000 ("FSMA"), no person may carry on a regulated activity unless authorized or exempt. Effecting or intermediating contracts of insurance or reinsurance are regulated activities requiring authorization. Effecting contracts of insurance requires authorization by the PRA and is regulated by the FCA. Intermediating contracts of insurance requires authorization by the FCA.
Under the Financial Services Act 2012, the FCA is a conduct regulator for all U.K. firms carrying on a regulated activity in the U.K. while the PRA is the prudential regulator of U.K. banks, building societies, credit unions, insurers and major investment firms. As a prudential regulator, the PRA has aPRA's general objective is to promote the safety and soundness of the firms it regulates. The PRA rules require financial firms to hold sufficient capital and have adequate risk controls in place.
The FCA has aFCA's statutory strategic objective is to ensure that relevant markets function well and have operational objectives to:to protect consumers;consumers, protect financial markets;markets and promote competition. It makes rules covering how the firm must be managed and requirements relating to the firm’s systems and controls;controls, how business must be conducted;conducted and the firm’s arrangements to manage financial crime risk. The PRA and the FCA require regular and ad hoc reporting and monitor compliance with their respective rulebooks through a variety of means including the collection of data, industry reviews and site visits. The directors and senior managers of AXIS Managing Agency Ltd. must be "approved persons" under FSMA, making them directly and personally accountable for ensuring compliance with the requirements of the PRA and the FCA.
AXIS Managing Agency Ltd.
AXIS Managing Agency Ltd. is authorized and regulated by the PRA and regulated by the FCA to conduct insurance and reinsurance business and is a Lloyd's managing agent authorized by Lloyd's to manage our syndicates, Syndicate 1686 and Syndicate 2007. AXIS Managing Agency Ltd. is also the managing agent for SPA 6129, a third partythird-party Lloyd's special purpose arrangement.
To consolidate our Lloyd’s business under Syndicate 1686, Syndicate 2007 ceased accepting new business and was placed into run-off on January 1, 2019. The final underwriting year of Syndicate 2007 and SPA 6129 will close by way of a reinsurance to close arrangement which took effect on January 1, 2021.
Lloyd’s is a society of members both corporate and individual members which underwrite insurance and reinsurance (each for its own account) as members of syndicates. A syndicate is made up of one or more members that join together asform a group to accept insurance and reinsurance risks. Each syndicate is managed by a managing agent. Managing agents write insurance business on behalf of the member(s)members of the syndicate, which member(s)members receive profits or bear losses in proportion to their sharerespective shares in the syndicate for each underwriting year of account.
The Society of Lloyd’s is subject to U.K. law and is authorized under the FSMA. The Lloyd’s Act 1982 defines the governance structure and rules under which the society operates. Under the Lloyd's Act 1982, the Council of Lloyd’s is responsible for the management and supervision of the Lloyd’s market. The Council of Lloyd's overseasmarket and supports the Lloyd's market. Lloyd's manages and protects the Lloyd's network of international licenses. Lloyd's agrees to syndicates' business plans and evaluates performance against
those plans. Syndicates are required to underwrite only in accordance with their agreed business plans. If they fail to do so, Lloyd’s can take a range of actions including, as a last resort, stoppingprohibiting a syndicate from underwriting. Lloyd’s also monitors syndicates’ compliance with Lloyd’s minimum standards. In addition, Lloyd's isstandards and responsible for setting both member and central capital levels.
Lloyd’s has a global network of licenses and authorizations, and underwriters at Lloyd's may write business in and from countries where Lloyd’s has authorized status or exemptions available to non-admitted insurers or reinsurers. Lloyd’s licenses can only be used if the Syndicate Business Forecast, agreed annually with Lloyd’s, names those countries.
AXIS Managing Agency Ltd. operates an underwriting division at Lloyd’s Insurance Company (China) Limited, a wholly owned subsidiary of the Corporation of Lloyd’s which allows it to underwrite reinsurance in China.
AXIS Corporate Capital UK Limited
Until December 31, 2018, AXIS Corporate Capital UK Limited was the sole corporate member of Syndicate 1686. Effective January 1, 2019, both AXIS Corporate Capital UK Limited and AXIS Corporate Capital UK II Limited are the corporate members of Syndicate 1686, providing 70% and 30% capital support, respectively. Syndicate 1686 is managed by AXIS Managing Agency Ltd.
AXIS Corporate Capital UK II Limited
(formerly Novae Corporate Underwriting Limited)
Following the acquisition of Novae Group Limited, management of Syndicate 2007 was transferred to AXIS Managing Agency Ltd. AXIS Corporate Capital UK II Limited is the sole corporate member of Syndicate 2007.
AXIS Underwriting Limited
AXIS Underwriting Limited, formerly known as Novae Underwriting Limited, is authorized and regulated by the FCA as an insurance intermediary and underwrites insurance at Lloyd's on behalf of Syndicate 1686 at Lloyd’s.1686.
Contessa Limited
Contessa Limited is authorized and regulated by the FCA as an insurance intermediary with offices in London and Belfast and underwrites insurance on behalf of AXIS Specialty Europe in the U.K and in Ireland.
Effective in December 2019, Contessa Limited ceased writing new businessinsurance on behalf of AXIS Specialty Europe. Contessa Limited will continue to manage the AXIS Specialty Europe book of business on a run-off basis.
AXIS Specialty UK Holdings Limited
AXIS Specialty UK Holdings Limited is a limited liability holding company for AXIS Managing Agency Ltd., AXIS Corporate Capital UK Limited and Novae Group Limited, and is incorporated under the laws of England and Wales.
Regulatory Impact dueDue to Brexit
On June 23, 2016, the U.K. voted to exit the E.U. ("Brexit") and on JanuaryDecember 31, 2020, the U.K. completed its withdrawal from the E.U. Although an agreement was reached between the E.U. and the U.K., this agreement does not cover financial services. The parties have committed to enter into a Memorandum of Understanding covering financial services by March 2021. The following addresses the anticipatedcurrent impact to our insurers and reinsurers as a result of the the U.K.'s withdrawal from the E.U.
Insurance
AXIS Specialty Europe established its branch in the U.K. pursuant to the right to Freedom of Establishment under EUE.U. law. It is expectedAs it was anticipated that AXIS Specialty Europe willwould lose its authorization to conduct business in the U.K. under these rights. In orderas a result of the U.K.'s exit from the E.U., an application for authorization of a third country branch was submitted to ensure continuity of services,the PRA in 2018. As this application is still pending, AXIS Specialty Europe entered into the TPR to obtain temporary authorization. Under the TPR, AXIS Specialty Europe has applied for authorization from the PRAauthority to license its existing U.K. branchoperate as a third-countrythird country branch in the U.K.
AXIS and is fully regulated by the PRA and FCA. As a result, AXS Specialty Europe will remain authorized to service customers within and outside of the EEA to the extent permitted by local law. AXIS Specialty Europe’s customers basedEurope's operations in the EEA will be serviced from AXIS Specialty Europe's head office in Dublin, Ireland or through either of AXIS Specialty Europe’s EEA branches in Belgium or the Netherlands.
AXIS Managing Agency Ltd. transacts direct insurance business in the EEA on a Freedom of Services basis from the U.K. It is expected that AXIS Managing Agency Ltd. will lose its authorization to conduct direct insurance business in the EEA on a Freedom of Services basis. However, AXIS Managing Agency Ltd. will remainhave been able to access the EEA markets viacontinue without interruption.
In preparation for Brexit, Lloyd’s established Lloyd's Insurance Company S.A in Brussels ("Lloyd’s Brussels") to ensure continuity of services inretain access to the EEA. EEA markets and transferred all EEA risks to Lloyd’s Brussels.Lloyd's Brussels has been approved by the National Bank of Belgium ("NBB") and the Belgian conduct regulator, the Financial Services and Markets Authority ("Belgian FSMA") with authorization to write non-life insurance risks throughout the EEA. Effective with Brexit, all EEA viarisks are written by Lloyd’s Brussels.AXIS Managing Agency Ltd. has retained its access to the EEA markets through Lloyd's existing distribution channels.Brussels.
In January 2021, Lloyd’s Brussels updated Lloyd’s managing agents on its ongoing discussions with Lloyd’s, NBB and the Belgian FSMA regarding Lloyd’s Brussels’ operating model and the activities performed on behalf of Lloyd’s Brussels by Lloyd’s managing agents. We continue to monitor these discussions and are prepared to address any required changes to our operating model in the U.K. or the EEA.
Reinsurance
AXIS Managing Agency Ltd. currently transacts worldwide reinsurance at Lloyd’s including in the EEA. It is expected that full equivalence under Solvency II will be granted by the European Commission to the U.K. as a result of the European Union (Withdrawal) Bill and the transposition of Solvency II into U.K law. In the unlikely event that full equivalence under Solvency II is not granted, AXIS Managing Agency Ltd. will remainremains able to conduct non-life facultative, proportional and proportional excess of loss reinsurance throughout the EEA via Lloyd'sLloyd’s Brussels. The E.U. has not yet granted equivalence to the U.K. under Solvency II, however the review is ongoing and a decision is expected in the coming months.
AXIS Re SE currently transacts reinsurance business in the EEA andpursuant to European law. In November 2020, the U.K. Pursuant to the European Union (Withdrawal) Bill and the transposition of Solvency II into U.K law, we anticipate that the PRA will grant fullgranted equivalence under Solvency II to EEA supervised reinsurers, including AXIS Re SE, allowing AXIS Re SEsuch reinsurers to continue its operations without disruption. In the unlikely event that full equivalence under Solvency II is not granted to the U.K., AXIS Capital will continue its reinsurance operations through its entities authorized to conduct reinsurance in the EEA and in the U.K.interruption.
Switzerland
AXIS Re SE's branch in Zurich, Switzerland trades as AXIS Re Europe and is registered in Zurich as AXIS Re SE, Dublin (Zurich branch). The CBI remains responsible for the prudential supervision of the branch. The Swiss Financial Market Supervisory Authority does not impose additional regulation upon a Swiss branch of an EEA reinsurer.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write all classes of insurance business, except life, sickness and legal expenses, and is authorized to write all classes of reinsurance business in Switzerland.
Singapore
AXIS Specialty Bermuda conducts insurance and reinsurance business from its branch in Singapore, AXIS Specialty Limited (Singapore Branch), subject to the supervision of the BMA and the MAS which imposes significant regulations relating to capital adequacy, risk management, governance and audit and actuarial requirements. AXIS Specialty Limited (Singapore Branch) is registered by ACRA as a foreign company in Singapore and regulated by ACRA pursuant to the Singapore Companies Act.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write insurance from Singapore with the exception of certain compulsory classes and life business. SingaporeanSingapore business may also be written from outside of Singapore in certain circumstances where it is placed with a Singapore intermediary licensed by the MAS to place business at Lloyd's or by dealing directly with the insured.
Canada
AXIS Re U.S. conducts insurance and reinsurance business from AXIS Reinsurance Company (Canadian Branch), its branch in Canada, subject to the supervision of the New York State Department of Financial Services and the Office of the Superintendent of Financial Institutions Canada ("OSFI"), the federal regulatory authority that supervises federal Canadian and non-Canadian insurance companies operating in Canada pursuant to the Insurance Companies Act (Canada). The branch is authorized by OSFI to transact insurance and reinsurance. In addition, the branch is subject to the laws and regulations of each of the provinces and territories in which it is licensed.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses subject to the laws and regulations of each of the provinces and territories in which it is licensed and to write insurance in or from Canada, with the following exceptions: hail insurance in respect of crop in the province of Quebec; home warranty insurance in the province of British Columbia; life insurance; credit protection insurance; title insurance; surety; and mortgage default insurance. Syndicate 1686, through Lloyd's, is authorized to write reinsurance in or from Canada subject to certain restrictions relating to life reinsurance.
Belgium
Through December 31, 2018, Aviabel was authorized to conduct general property and casualty insurance and maintained its registered office in Brussels, Belgium. Aviabel was regulated by the National Bank of Belgium pursuant to the Belgian Act of 2016 and was subject to Solvency II. Aviabel also exercised certain insurance activities through its branch registered in the Netherlands and had a captive subsidiary in Luxembourg, Aviabel RE S.A.
Through 2018, Aviabel was permitted to provide insurance across the EEA on a cross-border basis and had reinsurance permissions in Argentina, Chile, Colombia, Ecuador, Guatemala, Honduras, Mexico, Panama, Paraguay, Peru, Venezuela, India, China and South Korea.
As a result of the Aviabel Merger on January 1, 2019, described above under "AXIS Specialty Europe", the insurance and reinsurance portfolio of Aviabel was transferred to AXIS Specialty Europe, a process overseen and coordinated by the National Bank of Belgium in cooperation with other European regulators.
Effective January 1, 2019, AXIS Specialty Europe conducts insurance from its Belgium branch, AXIS Specialty Europe SE (Belgium Branch), which is subject to CBI prudential supervision and limited regulation by the National Bank of Belgium.NBB.
AXIS Specialty Europe also has permission to write insurance and reinsurance on a Freedom of Services basis in Belgium.
AXIS Re SE has permission to write reinsurance on a Freedom of Services basis in Belgium.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write insurance (except permanent health) and reinsurance business on a Freedom of Establishment basis in Belgium.
Luxembourg
Aviabel Re S.A., a captive reinsurance company in Luxembourg, was liquidated and as a result surrendered its reinsurance licenseBelgium through Lloyd's Brussels (see "Regulatory Impact Due to the Commissariat aux Assurances in December 2019.
AXIS Specialty Europe has permission to write insurance and reinsurance on a Freedom of Services basis in Luxembourg.
AXIS Re SE has permission to write reinsurance on a Freedom of Services basis in Luxembourg.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write insurance (except permanent health) and reinsurance business on a Freedom of Establishment basis in Luxembourg.Brexit" above).
Netherlands
Effective January 1, 2019, AXIS Specialty Europe conducts insurance from its Netherlands branch, AXIS Specialty Europe SE (Netherlands Branch), which is subject to CBI prudential supervision and limited regulation by the Dutch National Bank.
AXIS Specialty Europe has permission to write insurance and reinsurance on a Freedom of Services basis in the Netherlands.
AXIS Re SE has permission to write reinsurance on a Freedom of Services basis in the Netherlands.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write insurance (except permanent health) and reinsurance business on a Freedom of Establishment basis in the Netherlands.Netherlands through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" above).
Dubai
AXIS Specialty Holdings Ireland Limited recently established AXIS Reinsurance (DIFC) Limited which was granted a prudential Category 4 license fromby the Dubai Financial Services Authority onin December 25, 2017 to provide insurance intermediation and insurance management services. AXIS Reinsurance (DIFC) Limited has been established within the Dubai International Financial Centre and is required to comply with Regulatory Law DIFC Law No. 1 2004 and any amendments.
AXIS Reinsurance (DIFC) Limited will operateoperated as an intermediary under binding authority granted by the Board of Directors of AXIS Re SE to underwrite accident and health reinsurance. In December 2020, AXIS Reinsurance (DIFC) Limited surrendered its license and is currently in liquidation proceedings.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write reinsurance in or from Dubai with certain exceptions.
Non-Admitted InsuranceStrategic Risk
Strategic risks affect or are created by an organization’s business strategy and Reinsurancestrategic objectives. Our review of strategic risk evaluates not only internal and external challenges that might cause our chosen strategy to fail but also evaluates major risks that could affect our long-term performance and position.
•We may be adversely affected by competition and consolidation in the insurance and reinsurance industry. Increased competition could result in fewer submissions, lower premium rates, less favorable policy terms and conditions and greater costs of customer acquisition and retention.
•We have been and may continue to be adversely affected by a deterioration in global economic conditions. Economic uncertainty and market turmoil has affected and may in the future affect, among other aspects of our business, the demand for and claims made under our products, the ability of customers, counterparties and others to establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital resources and our investment performance and portfolio. A persistent low interest rate environment may reduce our profitability as investment income falls.
•We may be adversely affected by the exit of the U.K. from the E.U.
•We may be adversely affected by loss of business provided by a major broker.
•We may be adversely affected by a downgrade in our financial strength or credit rating. If we experience a credit rating downgrade, withdrawal or negative watch/outlook in the future, we could incur higher borrowing costs and may have more limited means to access capital. It could also result in a substantial loss of business for us.
Market Risk
Market risk is the risk that our financial instruments may be negatively impacted by movements in financial market prices or rates.
•Our investment and derivative instrument portfolios may be adversely impacted by capital markets risk related to changes in equity prices, interest rates, credit spreads and other factors.
•Our operating results may be adversely affected by currency fluctuations.
Liquidity Risk
Liquidity risk is the risk that we may not have sufficient financial resources to meet our obligations when they are due, or would have to incur excessive costs to do so.
•Our underwriting activities may expose us to liquidity risk. This stems mainly from the need to cover potential extreme loss events and regulatory constraints that limit the flow of funds within the Group.
Credit Risk
Credit risk represents the risk of incurring financial loss due to the diminished creditworthiness (reduced financial strength and, ultimately, possibly default) of our third-party counterparties.
•We may be adversely impacted if we are unable to collect amounts due to us from our counterparties – most materially reinsurers, but also including brokers, agents and customers.
Operational Risk
Operational risk represents the risk of loss as a result of inadequate processes, system failures, human error or external events, including but not limited to direct or indirect financial loss, reputational damage, customer dissatisfaction and legal and regulatory penalties.
•We may be adversely impacted by failure of the processes, people or systems that we rely on to maintain our operations and manage the operational risks inherent to our business, including those outsourced to third parties.
Regulatory Risk
Regulatory risk represents the risk arising from our failure to comply with legal, statutory or regulatory obligations.
•Our insurance and reinsurance subsidiaries conduct business globally and are subject to varying degrees of regulation in multiple jurisdictions. We may be adversely affected if we fail to comply fully with, or obtain exemption, from relevant regulations.
Risks Related to the Ownership of our Securities
•In addition to the risks to our business listed above, there are certain other risks related to the ownership of our securities for example relating to our holding company structure or provisions in our organizational documents and bye-laws.
Risks Related to Taxation
•We may be adversely impacted by changes in tax rules, or changes in the interpretation of existing tax rules in the multiple jurisdictions in which we operate.
Readers should carefully consider the risks noted above together with the risks detailed in Item 1A, 'Risk Factors' and all of the other information included in this report.
Website and Social Media Disclosure
We use our website (www.axiscapital.com) and our corporate Twitter (@AXIS_Capital) and LinkedIn (AXIS Capital) accounts as channels of distribution of Company information. The Company also insuresinformation we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and reinsures riskspublic conference calls and webcasts. In addition, e-mail alerts and other information about AXIS Capital may be received when enrolled in many countries, includingour "E-mail Alerts" program, which can be found in the above countries, pursuantInvestor Information section of our website (www.axiscapital.com). The contents of our website and social media channels are not part of this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
In this Form 10-K, references to regulatory permissions"AXIS Capital" refer to AXIS Capital Holdings Limited and exemptions availablereferences to non-admitted insurers"we", "us", "our", "AXIS", the "Group" or the "Company" refer to AXIS Capital Holdings Limited and reinsurers.
its direct and indirect subsidiaries and branches, including: AXIS Specialty Holdings Bermuda Limited, AXIS Specialty Limited ("AXIS Specialty Bermuda"), AXIS Specialty Limited (Singapore Branch), AXIS Specialty Investments Limited, AXIS Specialty Investments II Limited, AXIS Specialty UK Holdings Limited, AXIS Managing Agency Ltd., AXIS Corporate Capital UK Limited (corporate member which provides 70% capital support to AXIS Syndicate 1686 ("Syndicate 1686")), Novae Group Limited, AXIS UK Services Limited, AXIS Underwriting Limited, AXIS Corporate Capital UK II Limited (sole corporate member of Novae Syndicate 2007 ("Syndicate 2007") and corporate member which provides 30% capital support to Syndicate 1686), AXIS Ventures Limited ("AXIS Ventures"), AXIS Reinsurance Managers Limited ("AXIS Reinsurance Managers"), AXIS Specialty Holdings Ireland Limited, AXIS Specialty Europe SE ("AXIS Specialty Europe"), AXIS Specialty Europe SE (U.K. Branch), AXIS Specialty Europe SE (Belgium Branch), AXIS Specialty Europe SE (Netherlands Branch), AXIS Reinsurance (DIFC) Limited, AXIS Re SE, AXIS Re SE, Dublin (Zurich Branch) ("AXIS Re Europe"), AXIS Re SE Escritório de Representação No Brasil Ltda., Contessa Limited, AXIS Specialty Global Holdings Limited, AXIS Specialty U.S. Holdings, Inc., AXIS Reinsurance Company ("AXIS Re U.S."), AXIS Reinsurance Company (Canadian Branch), AXIS Specialty U.S. Services, Inc., AXIS Specialty U.S. Services, Inc. (U.K. Branch), AXIS Specialty Canada Services, ULC, AXIS Group Services, Inc., AXIS Specialty Underwriters, Inc., AXIS Insurance Company ("AXIS Insurance Co."), AXIS Surplus Insurance Company ("AXIS Surplus"), AXIS Specialty Insurance Company ("AXIS Specialty U.S."), Ternian Insurance Group LLC, AXIS Specialty Finance LLC and AXIS Specialty Finance PLC, unless the context suggests otherwise.
Unless otherwise noted, tabular dollars are in thousands. Amounts may not reconcile due to rounding differences.
General
AXIS provides a broad range of specialty lines insurance and treaty reinsurance to our clients on a worldwide basis, through operating subsidiaries and branch networks based in Bermuda, the United States ("U.S."), Europe, Singapore and Canada. Our underwriting operations are organized around our global underwriting platforms, AXIS Insurance and AXIS Re.
The markets in which we operate have historically been cyclical. During periods of excess underwriting capacity, defined by the availability of capital, competition can result in lower pricing and less favorable policy terms and conditions for insurers and reinsurers. During periods of reduced underwriting capacity, pricing, and policy terms and conditions are generally more favorable for insurers and reinsurers. Historically, underwriting capacity has been impacted by several factors, including industry losses, catastrophes, changes in legal and regulatory guidelines, investment results and the ratings and financial strength of competitors. In 2020, we leveraged firming market conditions to increase our relevance in a select number of attractive specialty lines and treaty reinsurance markets and we continued to re-balance our portfolio towards less volatile lines of business.
At December 31, 2020, we had common shareholders’ equity of $4.7 billion, total capital of $6.6 billion and total assets of $25.9 billion.
Our Business Strategy
We are a hybrid specialty lines insurance and treaty reinsurance company that is eligiblea leader in many of the markets where we choose to use Lloyd's licensescompete. We provide our clients and distribution partners with a broad range of risk transfer products and services, and meaningful capacity, backed by excellent financial strength. We manage our portfolio holistically, aiming to writeconstruct the optimum portfolio of risks, consistent with our risk appetite and the development of our franchise. We nurture an ethical, entrepreneurial and disciplined culture that promotes outstanding client service, intelligent risk taking and the achievement of superior risk-adjusted returns for our shareholders. We believe that the achievement of our objectives will position us as a global leader in specialty risks.
We aim to execute on our business strategy through the following multi-pronged approach:
We offer a diversified range of products and services across market segments and geographies: Our position as a well-balanced hybrid specialty lines insurance and treaty reinsurance company gives us insight into the opportunities and challenges in a variety of markets. We are headquartered in Bermuda and have locations across the U.S., Canada and Europe including Dublin, London, Zurich and Brussels. We are actively pursuing opportunities throughout Latin America, mainly through our Miami office, which enables us to deliver a full range of facultative and treaty reinsurance solutions in Latin America. Our Singapore office serves as our regional hub in Asia and provides specialty insurance and reinsurance businesssolutions in the Asia Pacific region.
We underwrite a balanced portfolio of risks, including complex and volatile lines,moderating overall volatility with risk limits, diversification and risk management: Risk management is a strategic priority embedded in our organizational structure and we are continuously monitoring, reviewing and refining our enterprise risk management practices. We combine judgment and experience with data-driven analysis, enhancing our overall risk selection process.
We modulate our risk appetite and deployment of capital across the underwriting cycle, commensurate with available market opportunities and returns: In response to market dynamics, we recognize opportunities as they develop and react quickly as new trends emerge. Our risk analytics provide important and continuous feedback, further assisting with the ongoing assessment of our risk appetite and strategic capital deployment. We have been successful in extending our product lines, finding new distribution channels and entering new geographies. When we do not find sufficiently attractive uses for our capital, we return excess capital to our shareholders through share repurchases or dividends.
We develop and maintain deep, trusting and mutually beneficial relationships with clients and distribution partners, offering high levels of service and effective solutions for risk management needs: Our management team has extensive industry experience, deep product knowledge and long-standing market relationships. We primarily transact in specialty markets, where Lloyd's has authorized status or pursuantrisks are complex. We invest in data and technology capabilities and tools to regulatory exemptions availableempower our underwriters and enhance the service that we provide to non-admitted insurersour customers. Our intellectual capital and reinsurers.proven client-service capability attract clients and distribution partners looking for solutions.
We maintain excellent financial strength, characterized by financial discipline and transparency: Our total capital of $6.6 billion at December 31, 2020, as well as our high-quality and liquid investment portfolio and our operating subsidiary ratings of "A+" ("Strong") by Standard & Poor's and "A" ("Excellent") by the A.M. Best Company, Inc. ("A.M. Best") are key indicators of our financial strength.
Employees
At February 21, 2020, we had approximately 1,667 employees. We attract, develop, retain and motivate teams of experts: We aim to attract and retain the top talent in the industry and to motivate our employees to make decisions that are in the best interest of both our clients and shareholders. We nurture an ethical, risk-aware, achievement-oriented culture that promotes professionalism, responsibility, integrity, discipline and entrepreneurship.
Trademarks
We use our trademarks, including among others, our "AXIS" trademarks for the global marketing of our products and services, and As a result, we believe that we sufficiently safeguard our trademark portfoliostaff is well-positioned to protectmake the best underwriting and strategic decisions for AXIS.
In 2020, our rights.key metrics for performance measurement included operating return on average common equity ("operating ROACE") which is reconciled to the most comparable GAAP financial measure, return on average common equity ("ROACE"), in Item 7 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures Reconciliation' on an annual basis and relative total shareholder return ("TSR") over the long-term. We believe that the successful execution against long-term strategic plans should drive an increase in TSR over the long-term, and that TSR directly correlates to other relevant key performance metrics, including book value per diluted common share adjusted for dividends. Our goal is to achieve top-quintile industry operating ROACE and growth in book value per diluted common share adjusted for dividends, with volatility consistent with the industry average across underwriting cycles.
Available
Segment Information
Our Internet website address is http://www.axiscapital.com. Information contained inunderwriting operations are organized around our website isglobal underwriting platforms, AXIS Insurance and AXIS Re. We have determined that we have two reportable segments, insurance and reinsurance. We do not partallocate assets by segment, with the exception of this report.goodwill and intangible assets.
We make available freeRefer to Item 7 'Management’s Discussion and Analysis of charge, throughFinancial Condition and Results of Operations' for additional information relating to our internet website,reportable segments and Item 8, Note 3 to the Consolidated Financial Statements 'Segment Information' for additional information relating to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K,reportable segments and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d)a description of the Exchange Act as soon as reasonably practicable after such material is electronically filed with, or furnished to,geographic distribution of gross premiums written based on the SEC. Current copieslocation of the charterour subsidiaries.
The table below presents gross premiums written in each of our reportable segments for each of our Audit Committee, Corporate Governance and Nominating Committee, Compensation Committee, Finance Committee, Executive Committee and Risk Committee, as well as our Corporate Governance Guidelines and Codethe most recent three years.
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| Year ended December 31, | 2020 | | 2019 | | 2018 | |
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| Insurance | $ | 4,018,399 | | | $ | 3,675,931 | | | $ | 3,797,592 | | |
| Reinsurance | 2,808,539 | | | 3,222,927 | | | 3,112,473 | | |
| Total | $ | 6,826,938 | | | $ | 6,898,858 | | | $ | 6,910,065 | | |
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Insurance Segment
Lines of Business Conduct, are available on our internet website at http://www.axiscapital.com.and Distribution
Insurance Risk
Insurance risk is the inherent uncertainty as to the occurrence, amount and timing ofOur insurance and reinsurance liabilities transferred to us through the underwriting process.
The insurance/reinsurance business is historically cyclical, and we expect to experience periods with excess underwriting capacity and unfavorable premium rates.
The insurance/reinsurance business historically has been a cyclical industry characterized by periods of intense price competition due to excess underwriting capacity as well as periods when shortages of capacity permitted favorable premium levels. An increase in premium rates is often offset by an increasing supply ofsegment offers specialty insurance and reinsurance capacity, via capital provided by new entrants, new capital market instruments and structures and/or the commitment of additional capital by existing insurers and reinsurers, which may cause prices to decrease. Any of these factors could leadproducts to a significant reduction in premium rates, less favorable policy terms and fewer submissions for our underwriting services. In addition to these considerations, changes invariety of niche markets on a worldwide basis. The following are the frequency and severity of losses suffered by insureds and insurers may affect the cycles of the insurance/reinsurance business significantly.
Our results of operations, financial condition, or liquidity could be materially adversely affected by the occurrence of natural and man-made disasters, as well as outbreaks of pandemic or contagious diseases.
We have substantial exposure to unexpected losses resulting from natural disasters, man-made catastrophes and other catastrophe events. Catastrophes can be caused by various events, including hurricanes, typhoons, earthquakes, tsunamis, hailstorms, floods, severe winter weather, fires, drought, and other natural disasters and outbreaks of pandemic or contagious diseases. Catastrophes can also be man-made, such as terrorist attacks and other intentionally destructive acts, including those involving nuclear, biological, chemical or radiological events, cyber-attacks, explosions and infrastructure failures. The incidence and severity of catastrophes are inherently unpredictable and losses from catastrophes could be substantial.
Increases in the values and concentrations of insured property, particularly along coastal regions, as well as increases in the cost of construction materials required to rebuild affected properties, may increase the impact of catastrophe events in the future. Changes in global climate conditions may further increase the frequency and severity of catastrophe activity and losses in the future. Similarly, changes in global political and economic conditions may increase both the frequency and severity of man-made catastrophe events in the future. Examples of the impact of catastrophe events include the recognition of the net losses and loss expenses of:
$336 million, in the aggregate, primarily related to Japanese Typhoons Hagibis, Faxai and Tapah, Hurricane Dorian, and the Australia Wildfires in 2019;
$430 million, in the aggregate, primarily related to Hurricanes Michael and Florence, California Wildfires, and Typhoon Jebi in 2018; and
$835 million, in the aggregate, primarily related to U.S. weather-related events, Hurricanes Harvey, Irma and Maria, Mexico earthquakes and the California wildfires in 2017.
These events materially reduced our net income in the years noted above. Although we manage our exposure to such events through the use of underwriting controls and the purchase of third-party reinsurance, catastrophe events are inherently unpredictable and the actual nature of such events when they occur could be more frequent or severe than contemplated in our pricing and risk management expectations. As a result, the occurrence of one or more catastrophe events could have a material adverse effect on our results of operations, financial condition, or liquidity.
Cyber events are man-made perils and as such the threat landscape is dynamic and evolving. There is a risk that increases in the frequency and severity of losses to our clients from cyber events could adversely affect our results of operations or financial condition. The losses incurred from this risk are also dependent on our clients’ cybersecurity practices and defenses and the interaction of our policy wordings with the evolving threat landscape. In addition, our exposure to cyber events potentially includes exposure through ‘non-affirmative’ coverages, meaning risks and potential losses associated with policies where cyber risk is not explicitly included or excluded in the policy wording. As this is a relatively new peril, even in cases
where losses from cyber events are explicitly excluded, there can be no assurance that a court or arbitration panel will interpret policy language in line with the intention of the exclusion.
Global climate change may have a material adverse effect on our results of operations, financial condition, or liquidity.
We are potentially exposed to different aspects of climate risk, specifically, physical, liability and transition risks, as a result of climate change.
Physical risks describe weather-related events and longer-term shifts in climate, and emanate primarily from underwriting of property insurance and reinsurance. Climate change may expose us to an increased frequency and/or severity of these weather-related losses, and there is a risk that our pricing of these perils or our management of the associated aggregations does not or will not appropriately allow for changes in climate. Over the longer term, climate change may have an impact on the economic viability of certain lines of business if suitable adjustments in price and coverage cannot be achieved.
We may also be exposed to liability risks. Liability risks relate to losses or damages suffered by our insureds from physical or transition risks, such as losses stemming from climate-related litigation in liability lines. These risks could arise from management and boards not fully considering or responding to the impacts of climate change, or not appropriately disclosing current and future risks.
There is additionally a risk that certain elements of our business cease to be viable as a result of climate change ‘transition’ risks, which relate to losses driven by changes in technology, governments and regulators putting into place measures to encourage and support this transition, and society as a whole adapting to a lower-carbon economy. Recognizing the importance of this transition, effective 2020 AXIS Capital will cease underwriting risks for (and investing in the securities of) companies whose primary activity relates to thermal coal mining or power generation, or tar sands extraction. There remains a risk that our financial condition or operating performance may be impacted by changes in our insurance segment:
•Property: provides physical loss or damage, business model arisinginterruption and machinery breakdown cover for virtually all types of property, including commercial buildings, residential premises, construction projects and onshore renewable energy installations. This line of business includes primary and excess risks, some of which are catastrophe-exposed.
•Marine: provides cover for traditional marine classes, including offshore energy, renewable offshore energy, cargo, liability, recreational marine, fine art, specie, and hull war. Offshore energy coverage includes physical damage, business interruption, operator's extra expense and liability coverage for all aspects of offshore upstream energy, from climate change transition,exploration and byconstruction through the performanceoperation and distribution phases.
•Terrorism: provides cover for physical damage and business interruption of strategies we put in place to manage this transition.
Furthermore, we may be exposed to losses in the value of our investments arising from the physical and transition impacts of climate change, including 'stranded assets', on the companies and securities in which we invest.
We could face unanticipated losses from war, terrorism, political unrest, and geopolitical uncertainty and these or other unanticipated losses could have a material adverse effect on our results of operations, financial condition, or liquidity.
We have substantial exposure to unexpected losses resulting from war, actsan insured following an act of terrorism political unrest and geopolitical instability in many regions of the world. In certain instances, we specifically insureincludes kidnap and reinsure risks resulting from acts of terrorism. Even in cases where we attempt to exclude losses from terrorismransom, and certain other similar risks from some coverages written by us, there can be no assurance that a court or arbitration panel will interpret policy language or otherwise issue a ruling favorable to us. Accordingly, we can offer no assurance that our reserves for losses and loss expenses ("loss reserves") will be adequate to cover losses should they materialize.crisis management insurance.
We have limited terrorism coverage in our own reinsurance program for our exposure to catastrophe losses related to acts of terrorism. On December 20, 2019, the President of the United States signed the Terrorism Risk Insurance Program Reauthorization Act of 2019 ("TRIP"), extending the program through December 31, 2027. Although TRIP•Aviation: provides benefits in the event of certain acts of terrorism, those benefits are subject to a deductible and to other limitations. Under TRIP, once losses attributable to certain acts of terrorism exceed 20% of direct commercial propertyhull and liability, insurance premiumsand specific war cover primarily for the preceding calendar year, the federal government will reimburse insurerspassenger airlines but also for 80% of losses in excess of this deductible. Notably, TRIP does not provide coverage for reinsurance losses. Given the unpredictable frequencycargo operations, general aviation operations, airports, aviation authorities, security firms and severity of terrorism losses, as well as the limited terrorism coverage in our own reinsurance program, future losses from acts of terrorism could materially and adversely affect our results of operations, financial condition, or liquidity in future periods.product manufacturers.
Our•Credit and Political Risk: provides credit and political risk insurance products for banks, commodity traders, corporations and multilateral and export credit agencies. Cover is provided for a range of risks including sovereign default, credit default, political violence, currency inconvertibility and non-transfer, expropriation, aircraft non-repossession and contract frustration due to political events.
•Professional Lines: provides directors’ and officers’ liability, errors and omissions liability, employment practices liability, fiduciary liability, crime, professional indemnity, cyber and privacy insurance, medical malpractice and other financial insurance related covers for commercial enterprises, financial institutions, not-for-profit organizations and other professional service providers. This business is predominantly written on a claims-made basis.
•Liability: primarily targets primary and low to mid-level excess and umbrella commercial liability risks in the U.S. wholesale markets in addition to primary and excess of loss employers, public, and products liability business predominately in the U.K. Target industry sectors include construction, manufacturing, transportation and trucking, and other services.
•Accident and Health: includes accidental death, travel insurance and specialty health products for employer and affinity groups.
•Discontinued Lines - Novae: includes those lines of business that Novae exited or placed into run-off in the fourth quarter of 2016 and in the first quarter of 2017. These discontinued insurance lines include financial institutions, professional indemnity, international liability, and international direct and facultative property.
We produce business primarily through wholesale and retail brokers worldwide. Some of our insurance products are also distributed through managing general agents ("MGAs") and managing general underwriters ("MGUs"). In the U.S., we have the ability to write business on an admitted basis using forms and rates filed with state insurance regulators and on a non-admitted or surplus lines basis which provides flexibility in forms and rates, as these are not filed with state regulators. Our ability to write business on a non-admitted basis in the U.S. provides us with the pricing flexibility needed to write non-standard coverages. Substantially all of our insurance business is subject to aggregate limits, in addition to event limits.
Gross premiums written by broker, shown individually where premiums by broker were 10% or more of the total in any of the last three years, were as follows:
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| Years ended December 31, | 2020 | | 2019 | | 2018 | |
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| Marsh & McLennan Companies Inc. | $ | 496,913 | | | 12 | % | | $ | 434,108 | | | 12 | % | | $ | 380,238 | | | 10 | % | |
| Aon plc | 485,113 | | | 12 | % | | 393,645 | | | 11 | % | | 405,281 | | | 11 | % | |
| Other brokers | 2,310,687 | | | 58 | % | | 2,015,822 | | | 54 | % | | 2,067,447 | | | 54 | % | |
| Managing general agencies and underwriters | 725,686 | | | 18 | % | | 832,356 | | | 23 | % | | 944,626 | | | 25 | % | |
| Total | $ | 4,018,399 | | | 100 | % | | $ | 3,675,931 | | | 100 | % | | $ | 3,797,592 | | | 100 | % | |
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No insured accounted for more than 10% of the gross premiums written in the insurance segment.
Competitive Environment
In our insurance segment, where competition is focused on price, service, and availability in the form of capacity, appetite and distribution, among other considerations, we compete globally and locally with U.S. and non-U.S carriers. We believe we can achieve positive differentiation through underwriting expertise in our chosen lines of business and market segments, providing customized solutions for our strategic partners, and top caliber claim service levels to our customers. In addition, our investment in building an agile business model is expected to further position us to capitalize on opportunities and more quickly bring innovative products and services to market while advancing our efforts to strengthen our portfolio and drive profitable growth.
Reinsurance Segment
Lines of Business and Distribution
Our reinsurance segment provides treaty reinsurance to insurance companies on a worldwide basis, written on an excess of loss and a proportional basis. For excess of loss business, we typically indemnify the reinsured for a portion of losses, individually and in the aggregate, in excess of a specified individual or aggregate loss deductible. For proportional business, we assume an agreed percentage of the underlying premiums and accept liability for the same percentage of losses and loss expenses. Our business is primarily produced through reinsurance brokers worldwide. The following are the lines of business in our reinsurance segment:
•Catastrophe: provides protection for most catastrophic losses that are covered in the underlying insurance policies written by our cedants. The underlying policies principally cover property-related exposures but other exposures including workers compensation and personal accident are also covered. The principal perils covered by policies in this portfolio include hurricane and windstorm, earthquake, flood, tornado, hail and fire. In some instances, terrorism may be a covered peril or the only peril. This business is written on a proportional and excess of loss basis.
•Property: provides protection for property damage and related losses resulting from natural and man-made perils that are covered in the underlying personal and commercial lines insurance policies written by our cedants. The predominant exposure is property damage but other risks, including business interruption and other non-property losses, may also be covered when arising from a covered peril. The most significant perils covered by policies in this portfolio include windstorm, tornado and earthquake, but other perils such as freezes, riots, flood, industrial explosions, fire, hail and a number of other loss events are also included. This business is written on a proportional and excess of loss basis.
•Professional Lines: providesprotection for directors’ and officers’ liability, employment practices liability, medical malpractice, professional indemnity, environmental liability, cyber, and miscellaneous errors and omissions insurance risks. The underlying business is predominantly written on a claims-made basis. This business is written on a proportional and excess of loss basis.
•Credit and Surety: provides reinsurance of trade credit insurance products and includes proportional and excess of loss structures. The underlying insurance indemnifies sellers of goods and services in the event of a payment default by the buyer of those goods and services. Surety reinsurance provides protection for losses arising from a broad array of surety bonds issued by insurers to satisfy regulatory demands or contract obligations in a variety of jurisdictions around the world. Mortgage reinsurance is also provided to mortgage guaranty insurers and U.S. government-sponsored entities for losses related to credit risk transfer into the private sector.
•Motor: provides protection to insurers for motor liability and property damage losses arising out of any one occurrence. A loss occurrence can involve one or many claimants where the ceding insurer aggregates the claims from the occurrence. Traditional proportional and non-proportional reinsurance as well as structured solutions are offered.
•Liability: provides protection to insurers of admitted casualty business, excess and surplus lines casualty business and specialty casualty programs. The primary focus of the underlying business is general liability, workers' compensation, auto liability and excess casualty.
•Agriculture: provides protection for risks associated with the production of food and fiber on a global basis for primary insurance companies writing multi-peril crop insurance, crop hail and named peril covers, as well as custom risk transfer mechanisms for agricultural dependent industries with exposures to crop yield and/or price deviations. This business is written on a proportional and aggregate stop loss reinsurance basis.
•Engineering: provides protection for all types of construction risks and risks associated with erection, testing and commissioning of machinery and plants during the construction stage. This line of business protects insureds with interests in foreign jurisdictions in the event that governmental action prevents them from exercising their contractual rights, and may also protect their assets against physical damage perils. The insurance provided may includeincludes cover for losses arising from expropriation, forced abandonment, license cancellation, trade embargo, contract frustration, non-payment, war on land or political violence (including terrorism, revolution, insurrectionoperational failures of machinery, plant and civil unrest).
Our creditequipment and political riskelectronic equipment as well as business interruption. We decided to exit this line of business in 2020.
•Marine and Aviation: includes specialty marine classes such as cargo, hull, pleasure craft, marine liability, inland marine and offshore energy. The principal perils covered by policies in this portfolio include physical loss, damage and/or liability arising from natural perils of the seas or land, man-made events including fire and explosion, stranding/sinking/salvage, pollution, shipowners and maritime employers liability. This business is written on a non-proportional and proportional basis. Aviation provides cover for airline, aerospace and general aviation exposures. This business is written on a proportional and non-proportional basis.
•Accident and Health: includes personal accident, specialty health, accidental death, travel, life and disability reinsurance products which are offered on a proportional and catastrophic or per life excess of loss basis.
•Discontinued Lines - Novae: includes those lines of business that Novae exited or placed into run-off in the fourth quarter of 2016 and in the first quarter of 2017. These discontinued reinsurance lines include motor reinsurance, general liability reinsurance and international facultative property.
Gross premiums written by broker, shown individually where premiums by broker were 10% or more of the total in any of the last three years, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Years ended December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | | | | | | | |
| Marsh & McLennan Companies Inc. | $ | 818,821 | | | 29 | % | | $ | 838,617 | | | 26 | % | | $ | 779,375 | | | 25 | % | |
| Aon plc | 694,712 | | | 25 | % | | 887,602 | | | 28 | % | | 765,779 | | | 25 | % | |
| Willis Tower Watson PLC | 435,498 | | | 16 | % | | 403,402 | | | 13 | % | | 361,983 | | | 12 | % | |
| Other brokers | 582,368 | | | 20 | % | | 795,352 | | | 24 | % | | 864,601 | | | 28 | % | |
| Direct | 105,777 | | | 4 | % | | 135,614 | | | 4 | % | | 178,568 | | | 6 | % | |
| Managing general agencies and underwriters | 171,363 | | | 6 | % | | 162,339 | | | 5 | % | | 162,167 | | | 5 | % | |
| Total | $ | 2,808,539 | | | 100 | % | | $ | 3,222,927 | | | 100 | % | | $ | 3,112,473 | | | 100 | % | |
| | | | | | | | | | | | | |
No cedant accounted for more than 10% of the gross premiums written in the reinsurance segment.
Competitive Environment
In our reinsurance segment, competition tends to be focused on availability, service, financial strength and price. We compete with major U.S. and non-U.S. reinsurers and reinsurance departments of numerous multi-line insurance organizations. In addition to traditional market participants, we also provides non-payment coveragecompete with new market entrants supported by alternative capital sources offering risk transfer solutions on specific loana collateralized or other non-traditional basis. Our clients may also acquire reinsurance protection through capital market products such as catastrophe bonds and insurance loss warranties. We believe that we achieve a competitive advantage through our diversified global product offerings, responsiveness to customer needs and ability to provide sophisticated and innovative products. We offer excellent claims management, strong financial strength ratings and an ability to leverage our balance sheet and relationships with strategic capital partners to provide meaningful capacity.
Cash and Investments
We seek to balance the investment portfolios’ objectives of increasing book value with the generation of relatively stable investment income, while providing sufficient liquidity to meet our claims and other obligations. Liquidity needs arising from potential claims are of primary importance and are considered in asset class participation and the asset allocation process. A significant portion of our investment portfolio is dedicated to investment grade fixed maturities that will generate cash flows that match expected claim payouts.
To diversify risk and optimize the growth in book value, we may invest in other asset classes such as equity securities, high yield securities and alternative investments (e.g. private equity funds) which provide higher potential total rates of return. These individual investment classes involve varying degrees of risk, including the potential for more volatile returns and reduced liquidity. However, as part of a balanced portfolio, they also provide diversification from interest rate and credit risk.
With regard to our investment portfolio, we primarily utilize third-party investment managers for security selection and trade execution functions, subject to guidelines and objectives for each asset class. This enables us to actively manage our investment portfolio with access to top performers specializing in various products and markets. We insure sovereign non-paymentselect the managers based on various criteria including investment style, performance history and corporate non-paymentgovernance. In addition, we monitor approved investment asset classes for each subsidiary through analysis of our operating environment, including expected volatility of cash flows, overall capital position, regulatory and rating agency considerations. The Finance Committee of our Board of Directors approves overall group asset allocation targets and investment policy to ensure that they are consistent with our overall goals, strategies and objectives. We also have an Investment and Finance Committee, comprised of members of our senior management team, which oversees the implementation of our investment strategy.
Refer to Item 7 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cash and Investments' and Item 8, Note 5 to the Consolidated Financial Statements 'Investments' for additional information regarding our investment portfolio.
Refer to 'Risk and Capital Management' for additional information regarding the management of investment risk.
REGULATION
General
The business of insurance and reinsurance is regulated in most countries, although the degree and type of regulation varies significantly from one jurisdiction to another. In addition, some jurisdictions are currently evaluating changes to their regulation and we are monitoring these potential developments. To the extent we are aware of impending changes in regulation, designated project teams prepare us to comply on a timely basis with such anticipated changes. The following describes the current material regulations under which the Company operates.
Bermuda
Our Bermuda insurance operating subsidiary, AXIS Specialty Bermuda, is a Class 4 general business insurer subject to the Insurance Act 1978 of Bermuda and related regulations, as amended (the "Insurance Act"). The Insurance Act provides that no person may carry on any insurance or reinsurance business in or from within Bermuda unless registered as an insurer by the Bermuda Monetary Authority (the "BMA") under the Insurance Act. The Insurance Act imposes upon Bermuda insurance companies solvency and liquidity standards and auditing and reporting requirements, and grants the BMA powers to supervise, investigate, require information and demand the production of documents and intervene in the affairs of insurance companies. Significant requirements pertaining to Class 4 insurers include the appointment of an independent auditor, the appointment of a loss reserve specialist, the appointment of a principal representative in Bermuda, the filing of annual Statutory Financial Returns, the filing of annual GAAP financial statements, the filing of an annual capital and solvency return, compliance with minimum and enhanced capital requirements, compliance with certain restrictions on reductions of capital and the payment of dividends and distributions, compliance with group solvency and supervision rules, if applicable, and compliance with the Insurance Code of Conduct. On July 30, 2018, the Insurance Amendment (No. 2) Act 2018 amended the Insurance Act to provide for the prior payment of policyholders' liabilities ahead of general unsecured creditors in the event of the liquidation or winding up of an insurer. Effective January 1, 2019, this amendment applies to general business insurers and provides that, subject to certain statutorily preferred debts, the insurance debts of an insurer must be paid in priority to all other unsecured debts of the insurer. Insurance debt is defined as a debt to which an insurer is or may become liable pursuant to an insurance contract, excluding debts owed to an insurer under an insurance contract where the insurer is the person insured.
Effective January 1, 2016, the BMA was granted full "equivalence" under Solvency II (refer to"Ireland" below) for Bermuda’s commercial insurance sector, including Class 4 insurers.
The BMA acts as group supervisor of AXIS Capital and has designated AXIS Specialty Bermuda as the ‘designated insurer’ of the Group. In accordance with the group supervision and insurance group solvency rules, AXIS Capital is required to prepare and submit annual audited group GAAP financial statements, an annual group Statutory Financial Return, an annual group Capital and Solvency Return and quarterly group unaudited GAAP financial statements, and to appoint both a group actuary and a group auditor. AXIS Capital also files an annual capital and solvency return and must ensure compliance with minimum and enhanced capital requirements.
Effective September 23, 2020, AXIS Ventures Reinsurance Limited deregistered as a Class 3A insurer with the BMA and AXIS Ventures deregistered as an insurance manager with the BMA. AXIS Ventures Reinsurance Limited is currently pending dissolution.
AXIS Reinsurance Managers is regulated by the BMA as an insurance manager. Insurance managers are subject to the Insurance Act which provides that no person may carry on business as an insurance manager unless registered with the BMA under the Insurance Act. Insurance managers are required to comply with the Insurance Manager Code of Conduct.
AXIS Capital, AXIS Specialty Bermuda, AXIS Specialty Holdings Bermuda Limited, AXIS Specialty Investments Limited, AXIS Ventures, AXIS Specialty Investments II Limited and AXIS Reinsurance Managers must comply with provisions of the Bermuda Companies Act 1981, as amended (the "Companies Act"), regulating the payment of dividends and distributions. A Bermuda company may not declare or pay a dividend or make a distribution out of contributed surplus if there are reasonable grounds for believing that: (a) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the company’s assets would thereby be less than its liabilities.
The Singapore branch of AXIS Specialty Bermuda, AXIS Specialty Limited (Singapore Branch), established in 2008, is regulated by the Monetary Authority of Singapore (the "MAS") pursuant to The Insurance Act of Singapore, which imposes significant regulations relating to capital adequacy, risk management, governance, audit and actuarial requirements. AXIS Specialty Limited (Singapore Branch) is registered by the Accounting and Corporate Regulatory Authority ("ACRA") as a foreign company in Singapore and is also regulated by ACRA pursuant to the Singapore Companies Act. Prior to establishing its Singapore branch, AXIS Specialty Bermuda had maintained a representative office in Singapore since 2004.
AXIS Specialty Bermuda has reinsurance permissions in China and the Netherlands. AXIS Specialty Limited (Singapore Branch) has separate reinsurance permissions in China.
AXIS Re SE may write reinsurance in Bermuda under Solvency II equivalence between Bermuda and the E.U.
AXIS Managing Agency Ltd. may write general insurance and reinsurance in Bermuda using Lloyd's of London ("Lloyd's") licenses (refer to "U.K. and Lloyd's of London" below).
United States
U.S. Insurance Holding Company Regulation of AXIS Capital’s Insurance Subsidiaries
As members of an insurance holding company system, each of AXIS Insurance Co., AXIS Re U.S., AXIS Specialty U.S. and AXIS Surplus, collectively AXIS Capital’s U.S. insurance subsidiaries (collectively, the "U.S. Insurance Subsidiaries") are subject to the insurance holding company system laws and regulations of the states in which they do business. These laws generally require each of the U.S. Insurance Subsidiaries to register with its domestic state insurance department and to furnish financial and other information which may materially affect the operations, management or financial condition within the holding company system. All transactions within a holding company system that involve an insurance company must be fair and equitable. Notice to the applicable insurance department is required prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and an entity in its holding company system, and certain transactions may not be consummated without the department’s prior approval.
State Insurance Regulation
AXIS Re U.S. is licensed to transact insurance and reinsurance throughout the U.S. and in Puerto Rico. AXIS Re U.S. is also authorized to transact insurance and reinsurance throughout Canada through its Canadian branch and has reinsurance permissions in Argentina, Brazil, China, Columbia, Ecuador, Guam, Guatemala, Honduras, Panama, India and Mexico. AXIS Insurance Co. is licensed to transact insurance and reinsurance throughout the U.S. AXIS Specialty U.S. is licensed to transact insurance and reinsurance throughout the U.S., except California, Iowa, Maine, New Mexico, New York and Wyoming. AXIS Surplus is eligible to write insurance on a surplus lines basis throughout the U.S., Puerto Rico and the U.S. Virgin Islands.
Our U.S. Insurance Subsidiaries also are subject to regulation and supervision by their respective states of domicile and by other jurisdictions in which they do business. The regulations generally are derived from statutes that delegate regulatory and supervisory powers to an insurance official. The regulatory framework varies from state to state, but generally relates to approval of policy forms and rates, the standards of solvency that must be met and maintained, including risk-based capital standards, material transactions between an insurer and its affiliates, the licensing of insurers, agents and brokers, restrictions on insurance policy terminations, the nature of and limitations on the amount of certain investments, limitations on the net amount of insurance of a single risk compared to the insurer’s surplus, deposits of securities for the benefit of policyholders, methods of accounting, periodic examinations of the financial condition and market conduct of insurance companies, the form and content of reports of financial condition required to be filed, reserves for unearned premiums, losses, expenses and other obligations.
Our U.S. Insurance Subsidiaries are required to file detailed quarterly statutory financial statements with state insurance regulators in each of the states in which they conduct business. In addition, the U.S. Insurance Subsidiaries’ operations and accounts are subject to financial condition and market conduct examination at regular intervals by state regulators.
Regulators and rating agencies use statutory surplus as a measure to assess our U.S. Insurance Subsidiaries’ ability to support business operations and pay dividends. Our U.S. Insurance Subsidiaries are subject to various state statutory and regulatory restrictions that limit the amount of dividends that may be paid from earned surplus without prior approval from regulatory authorities. These restrictions differ by state, but generally are based on calculations using statutory surplus, statutory net
income and investment income. In addition, many state regulators use the National Association of Insurance Commissioners promulgated risk-based capital requirements as a means of identifying insurance companies which may be under-capitalized.
Although generally the insurance industry is not directly regulated by the federal government, federal legislation and initiatives can affect the industry and our business. Certain sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank") pertain to the regulation and business of insurance. Specifically, the Federal Insurance Office ("FIO") has limited authority to collect information and report on the business of insurance to Congress. In addition, Dodd-Frank contains the Non-Admitted and Reinsurance Reform Act of 2010 ("NRRA"). NRRA attempts to coordinate the payment of surplus lines taxes, simplify the granting of alien insurers to become surplus lines authorized and coordinates the credit for certain reinsurance. The Company continues to monitor the implementation of Dodd-Frank.
Ternian Insurance Group LLC, a leading provider of voluntary, limited benefit, affordable health plans and other employee benefits coverage for hourly and part-time workers and their families, is an authorized insurance producer in all 50 states of the U.S. except Hawaii. As a resident insurance producer in Arizona, Ternian Insurance Group LLC is subject to regulation and supervision by the Arizona Department of Insurance and is also subject to the regulation and supervision of the other states in which Ternian transacts business.
AXIS Specialty Underwriters, Inc., a Florida licensed reinsurance intermediary, is subject to regulation and supervision by the Florida Department of Financial Services. AXIS Specialty Underwriters, Inc. operates as the Latin American and Caribbean regional coverholder for Syndicate 1686, providing facultative reinsurance coverage to the Latin American and Caribbean market.
U.S. Authorizations of our Non-U.S. Insurance Subsidiaries
The insurance laws of each state of the U.S. regulate or prohibit the sale of insurance and reinsurance by insurers and reinsurers that are not admitted to do business within their jurisdictions, or conduct business pursuant to exemptions. AXIS Specialty Europe is eligible to write surplus lines business throughout the U.S. and in Puerto Rico. AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to (i) write surplus lines business throughout the U.S. and in all U.S. territories, (ii) write insurance business, except life insurance business, in the states of Illinois, Kentucky and in the U.S. Virgin Islands and (iii) write non-life reinsurance business throughout the U.S. and in all U.S. territories, except for accident and health reinsurance in New York.
In addition to the regulatory requirements imposed by the jurisdictions in which they are licensed, reinsurers’ business operations are affected by regulatory requirements in various states of the U.S. governing "credit for reinsurance" that are imposed on their ceding companies. In general, a ceding company obtaining reinsurance from a reinsurer that is licensed, accredited or approved by the jurisdiction or state in which the ceding company files statutory financial statements is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company’s liability for unearned premiums (which is that portion of premiums written which applies to the unexpired portion of the policy period), loss reserves and loss expense reserves ceded to the reinsurer. The great majority of states, however, permit a credit to statutory surplus resulting from reinsurance obtained from a non-licensed or non-accredited reinsurer to be recognized to the extent that the reinsurer provides a letter of credit, trust fund or other acceptable security arrangement. A few states do not allow credit for reinsurance ceded to non-licensed reinsurers except in certain limited circumstances, and others impose additional requirements that make it difficult to become accredited. In connection with the establishment of a Multi-Beneficiary Reinsurance Trust, AXIS Specialty Bermuda obtained accredited or trusteed reinsurer status in all U.S. jurisdictions except for New York.
Ireland
Our Ireland domiciled insurer and reinsurer are subject to the Solvency II Directive (Directive 2009/138/EC), as amended. Solvency II represents a consolidation and modernization of existing European Commission Solvency I insurance and reinsurance regulation and supervision and includes a harmonized risk-based solvency and reporting regime for the insurance/reinsurance sector. Solvency II covers three main areas: (i) the valuation of assets and liabilities and related solvency capital requirements; (ii) governance requirements including key functions of compliance, internal audit, actuarial and risk management; and (iii) legal entity and European Union ("E.U.") group reporting and disclosure requirements including public disclosures. The capital requirement must be computed using the Solvency II standard formula unless the Central Bank of Ireland ("CBI") has previously authorized a company to use its own internal model. Certain of our European legal entities are subject to Solvency II.
AXIS Specialty Europe
AXIS Specialty Europe is a European public limited liability company incorporated as a non-life insurer under the laws of Ireland. It is a Societas Europaea (SE), or European society company, and has been registered in accordance with E.U. law. As a SE company, AXIS Specialty Europe can more easily merge with companies in European member states and also transfer its domicile to other member states of the E.U. AXIS Specialty Europe is authorized and regulated by the CBI pursuant to the Insurance Acts 1909 to 2000, as amended, repealed or replaced, the Central Bank Acts 1942 – 2014, as amended, repealed or replaced, and E.U. regulation relating to general insurance and statutory instruments made thereunder. AXIS Specialty Europe is authorized to conduct business in 16 non-life insurance classes throughout the E.U. and the European Economic Area ("EEA"), which includes each of the member countries of the E.U. with the addition of Iceland, Liechtenstein and Norway. AXIS Specialty Europe may also write reinsurance business within the classes of insurance business for which it is authorized.
AXIS Specialty Europe is subject to Solvency II. In accordance with Solvency II, AXIS Specialty Europe is permitted to provide insurance services to clients located in any EEA Member State ("Freedom of Services"), subject to compliance with any "general good requirements" as may be established by the applicable EEA Member State regulator. AXIS Specialty Europe has notified the CBI of its intention to provide insurance services on a Freedom of Services basis in all EEA countries.
Solvency II also permits AXIS Specialty Europe to carry on insurance business in any EEA Member State under the principle of "Freedom of Establishment" subject to the prior approval of the CBI. AXIS Specialty Europe operates under Freedom of Establishment in the U.K., Belgium and the Netherlands through its branches established in each of these jurisdictions.
AXIS Specialty Europe's U.K. branch transacts general insurance business in the U.K., trading as AXIS Specialty London. The U.K. withdrew from the E.U. on December 31, 2020 and is now considered a third country. In order to maintain business continuity, AXIS Specialty Europe submitted an application to the Prudential Regulatory Authority (the "PRA") in 2018 for authorization of a third country branch. As this application is still pending, AXIS Specialty Europe entered into the PRA's Temporary Permissions Regime (the "TPR"), under which it is able to maintain business continuity. AXIS Specialty Europe will remain in the TPR, fully regulated by the PRA and the Financial Conduct Authority ("FCA"), until the earlier of the third year anniversary of its admission to the TPR and the date the PRA application has been fully assessed and approved.
Effective January 1, 2019, Compagnie Belge d’Assurances Aviation NV/SA merged into AXIS Specialty Europe by way of merger by absorption and dissolved without going into liquidation (the "Aviabel Merger"). In connection with the Aviabel Merger, AXIS Specialty Europe established two new branches in Belgium and the Netherlands (see "Belgium" and the "Netherlands" below).
AXIS Specialty Europe has local regulatory permission to carry on insurance business in Jersey and has reinsurance permissions in India, China, Argentina, Mexico, Panama, Paraguay, Chile, Honduras, Ecuador, Colombia and Guatemala.
AXIS Re SE
AXIS Re SE is a European public limited liability company incorporated as a reinsurer under the laws of Ireland. AXIS Re SE is also a Societas Europaea (SE), or European society company, registered in accordance with E.U. law. AXIS Re SE is authorized by the CBI as a composite reinsurer (non-life and life) in accordance with the Insurance Acts 1909 to 2000, as amended, repealed or replaced, the Central Bank Acts 1942 – 2014, as amended, repealed or replaced, and E.U. regulation applicable to reinsurance and statutory instruments made thereunder. AXIS Re SE is authorized to transact reinsurance throughout the E.U. and the EEA and is subject to Solvency II.
AXIS Re SE conducts business through its branch in Zurich, Switzerland, trading as AXIS Re Europe (see "Switzerland" below).
AXIS Re SE Escritório de Representação No Brasil Ltda. was established in Brazil as a subsidiary of AXIS Re SE to facilitate the Brazilian Superintendence of Private Insurance ("SUSEP") regulatory requirements for approval of a representative office of AXIS Re SE and for the registration of AXIS Re SE with SUSEP as an Admitted Reinsurer.
AXIS Re SE's representative offices in France and Spain were closed during 2019.
AXIS Re SE has reinsurance permissions in Argentina, Bolivia, Brazil, China, Chile, Colombia, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, India, Mexico, Nicaragua, Panama, Paraguay, Peru and Venezuela.
AXIS Specialty Holdings Ireland Limited
AXIS Specialty Holdings Ireland Limited is the limited liability holding company for AXIS Specialty Europe and AXIS Re SE, each incorporated under the laws of Ireland, Contessa Limited, a U.K. licensed insurance intermediary, and AXIS Reinsurance (DIFC) Limited, a Dubai licensed insurance intermediary.
AXIS Specialty Bermuda may write reinsurance under Solvency II equivalence granted to Bermuda by the E.U.
AXIS Managing Agency Ltd. is eligible to write insurance (except permanent health) and reinsurance business in Ireland through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" below).
AXIS Specialty Global Holdings Limited
AXIS Specialty Global Holdings Limited is the limited liability holding company for AXIS Capital's U.S. Insurance subsidiaries.
U.K. and Lloyd's of London
In the U.K., under the Financial Services and Markets Act 2000 ("FSMA"), no person may carry on a regulated activity unless authorized or exempt. Effecting or intermediating contracts of insurance or reinsurance are regulated activities requiring authorization. Effecting contracts of insurance requires authorization by the PRA and is regulated by the FCA. Intermediating contracts of insurance requires authorization by the FCA.
Under the Financial Services Act 2012, the FCA is a conduct regulator for all U.K. firms carrying on regulated activity in the U.K. while the PRA is the prudential regulator of U.K. banks, building societies, credit unions, insurers and major investment firms. As a prudential regulator, the PRA's general objective is to promote the safety and soundness of the firms it regulates. The PRA rules require financial firms to hold sufficient capital and have adequate risk controls in place.
The FCA's statutory strategic objective is to ensure that relevant markets function well and have operational objectives to protect consumers, protect financial markets and promote competition. It makes rules covering how the firm must be managed and requirements relating to the firm’s systems and controls, how business must be conducted and the firm’s arrangements to manage financial crime risk. The PRA and the FCA require regular and ad hoc reporting and monitor compliance with their respective rulebooks through a variety of means including the collection of data, industry reviews and site visits. The directors and senior managers of AXIS Managing Agency Ltd. must be "approved persons" under FSMA, making them directly and personally accountable for ensuring compliance with the requirements of the PRA and the FCA.
AXIS Managing Agency Ltd.
AXIS Managing Agency Ltd. is authorized and regulated by the PRA and regulated by the FCA to conduct insurance and reinsurance business and is a Lloyd's managing agent authorized by Lloyd's to manage our syndicates, Syndicate 1686 and Syndicate 2007. AXIS Managing Agency Ltd. is also the managing agent for SPA 6129, a third-party Lloyd's special purpose arrangement.
To consolidate our Lloyd’s business under Syndicate 1686, Syndicate 2007 ceased accepting new business and was placed into run-off on January 1, 2019. The final underwriting year of Syndicate 2007 and SPA 6129 will close by way of a reinsurance to close arrangement which took effect on January 1, 2021.
Lloyd’s is a society of corporate and individual members which underwrite insurance and reinsurance as members of syndicates. A syndicate is made up of one or more members that form a group to accept insurance and reinsurance risks. Each syndicate is managed by a managing agent. Managing agents write insurance business on behalf of the members of the syndicate, which members receive profits or bear losses in proportion to their respective shares in the syndicate for each underwriting year of account.
Lloyd’s is subject to U.K. law and is authorized under the FSMA. The Lloyd’s Act 1982 defines the governance structure and rules under which the society operates. Under the Lloyd's Act 1982, the Council of Lloyd’s is responsible for the management and supervision of the Lloyd’s market and supports the Lloyd's market. Lloyd's manages and protects the Lloyd's network of international licenses. Lloyd's agrees to syndicates' business plans and evaluates performance against
those plans. Syndicates are required to underwrite only in accordance with their agreed business plans. If they fail to do so, Lloyd’s can take a range of actions including, as a last resort, prohibiting a syndicate from underwriting. Lloyd’s also monitors syndicates’ compliance with Lloyd’s minimum standards and responsible for setting both member and central capital levels.
Lloyd’s has a global network of licenses and authorizations, and underwriters at Lloyd's may write business in and from countries where Lloyd’s has authorized status or exemptions available to non-admitted insurers or reinsurers. Lloyd’s licenses can only be used if the Syndicate Business Forecast, agreed annually with Lloyd’s, names those countries.
AXIS Managing Agency Ltd. operates an underwriting division at Lloyd’s Insurance Company (China) Limited, a wholly owned subsidiary of the Corporation of Lloyd’s which allows it to underwrite reinsurance in China.
AXIS Corporate Capital UK Limited
Until December 31, 2018, AXIS Corporate Capital UK Limited was the sole corporate member of Syndicate 1686. Effective January 1, 2019, both AXIS Corporate Capital UK Limited and AXIS Corporate Capital UK II Limited are corporate members of Syndicate 1686, providing 70% and 30% capital support, respectively. Syndicate 1686 is managed by AXIS Managing Agency Ltd.
AXIS Corporate Capital UK II Limited
(formerly Novae Corporate Underwriting Limited)
Following the acquisition of Novae Group Limited, management of Syndicate 2007 was transferred to AXIS Managing Agency Ltd. AXIS Corporate Capital UK II Limited is the sole corporate member of Syndicate 2007.
AXIS Underwriting Limited
AXIS Underwriting Limited, formerly known as Novae Underwriting Limited, is authorized and regulated by the FCA as an insurance intermediary and underwrites insurance at Lloyd's on behalf of Syndicate 1686.
Contessa Limited
Effective December 2019, Contessa Limited ceased writing insurance on behalf of AXIS Specialty Europe. Contessa Limited will continue to manage the AXIS Specialty Europe book of business on a run-off basis.
In January 2021, Contessa Limited surrendered its license as an insurance intermediary with the FCA.
AXIS Specialty UK Holdings Limited
AXIS Specialty UK Holdings Limited is a limited liability holding company for AXIS Managing Agency Ltd., AXIS Corporate Capital UK Limited and Novae Group Limited, and is incorporated under the laws of England and Wales.
Regulatory Impact Due to Brexit
On June 23, 2016, the U.K. voted to exit the E.U. ("Brexit") and on December 31, 2020, the U.K. completed its withdrawal from the E.U. Although an agreement was reached between the E.U. and the U.K., this agreement does not cover financial services. The parties have committed to enter into a Memorandum of Understanding covering financial services by March 2021. The following addresses the current impact to our insurers and reinsurers as a result of commercialthe U.K.'s withdrawal from the E.U.
Insurance
AXIS Specialty Europe established its branch in the U.K. pursuant to the right to Freedom of Establishment under E.U. law. As it was anticipated that AXIS Specialty Europe would lose its authorization to conduct business in the U.K. as well as political risk events. The vast majoritya result of the corporate non-payment credit insurance providedU.K.'s exit from the E.U., an application for authorization of a third country branch was submitted to the PRA in 2018. As this application is for single-named illiquid risks, primarilystill pending, AXIS Specialty Europe entered into the TPR to obtain temporary authorization. Under the TPR, AXIS Specialty Europe has authority to operate as a third country branch in the form of senior bank loans that can be individually analyzedU.K. and underwritten. We avoid insurance for structured finance products
definedis fully regulated by pools of risksthe PRA and insurance for synthetic products that would expose us to mark-to-market losses. We also avoid terms in our credit insurance contracts which introduce liquidity risk, most notably,FCA. As a result, AXS Specialty Europe's operations in the formU.K. have been able to continue without interruption.
In preparation for Brexit, Lloyd’s established Lloyd's Insurance Company S.A in Brussels ("Lloyd’s Brussels") to retain access to the EEA markets and transferred all EEA risks to Lloyd’s Brussels.Lloyd's Brussels has been approved by the National Bank of Belgium ("NBB") and the Belgian conduct regulator, the Financial Services and Markets Authority ("Belgian FSMA") with authorization to write non-life insurance risks throughout the EEA. Effective with Brexit, all EEA risks are written by Lloyd’s Brussels.AXIS Managing Agency Ltd. has retained its access to the EEA markets through Lloyd's Brussels.
In January 2021, Lloyd’s Brussels updated Lloyd’s managing agents on its ongoing discussions with Lloyd’s, NBB and the Belgian FSMA regarding Lloyd’s Brussels’ operating model and the activities performed on behalf of Lloyd’s Brussels by Lloyd’s managing agents. We continue to monitor these discussions and are prepared to address any required changes to our operating model in the U.K. or the EEA.
Reinsurance
AXIS Managing Agency Ltd. remains able to conduct non-life facultative, proportional and excess of loss reinsurance throughout the EEA via Lloyd’s Brussels. The E.U. has not yet granted equivalence to the U.K. under Solvency II, however the review is ongoing and a collateralization requirementdecision is expected in the coming months.
AXIS Re SE currently transacts reinsurance business in the EEA pursuant to European law. In November 2020, the U.K. granted equivalence under Solvency II to EEA supervised reinsurers, including AXIS Re SE, allowing such reinsurers to continue operations without interruption.
Switzerland
AXIS Re SE's branch in Zurich, Switzerland trades as AXIS Re Europe and is registered in Zurich as AXIS Re SE, Dublin (Zurich branch). The CBI remains responsible for the prudential supervision of the branch. The Swiss Financial Market Supervisory Authority does not impose additional regulation upon a ratings downgrade. We also manage our exposure, by among other things, setting credit limits by country, region, industry and individual counterparty, and regularly reviewing our aggregate exposures. However, dueSwiss branch of an EEA reinsurer.
AXIS Managing Agency Ltd. is eligible to globalization, political instability in one region can spreaduse Lloyd's licenses to other regions. Geopolitical uncertainty regarding a varietywrite all classes of domestic and international matters, such as the U.S. political and regulatory environment, the potential for default by one or more European sovereign debt issuers and Brexit (as defined below) could have a material adverse effect on our results of operations, financial condition, or liquidity.
The effects of emerging claim and coverage issues on ourinsurance business, are uncertain.
As industry practicesexcept life, sickness and legal judicial, social, political, technologicalexpenses, and other environmental conditions change, unexpected issues relatedis authorized to claims and coverage may emerge. These issues may adversely affect ourwrite all classes of reinsurance business by either extending coverage beyond our underwriting intent or by increasing the frequency and/or severity of claims. For example, the last global financial crisis resulted in a higher level of claim activity on professional linesSwitzerland.
Singapore
AXIS Specialty Bermuda conducts insurance and reinsurance business from its branch in Singapore, AXIS Specialty Limited (Singapore Branch), subject to the supervision of the BMA and the MAS which imposes significant regulations relating to capital adequacy, risk management, governance and audit and actuarial requirements. AXIS Specialty Limited (Singapore Branch) is registered by ACRA as a foreign company in Singapore and regulated by ACRA pursuant to the Singapore Companies Act.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write insurance from Singapore with the exception of certain compulsory classes and life business. In some instances, the effects of these changes may not become apparent until sometime after we have issued the impacted insurance or reinsurance contracts. In addition, actual losses may vary materially from the current estimate of losses based on a number of factors (refer to "If actual claims exceed our loss reserves, our financial results could be adversely affected" below). As a result, the full extent of liability under an insurance or reinsurance contract may not be known for many years after the contract is issued and a loss occurs.
If actual claims exceed loss reserves, our financial results could be adversely affected.
While we believe that loss reserves at December 31, 2019 are adequate, new information, events or circumstances, unknown at the original valuation date, may lead to future developments in ultimate losses being significantly greater or less than the loss reserves currently provided. The actual final cost of settling claims outstanding at December 31, 2019, as well as claims expected to arise from the unexpired period of risk is uncertain. There are many other factors that would cause loss reserves to increase or decrease, which include, but are not limited to changes in claim severity, changes in the expected level of reported claims, judicial action changing the scope and/or liability of coverage, changes in the legislative, regulatory, social and economic environment, and unexpected changes in loss inflation.
Our operating history, which includes periods of rapid growth, means that loss reserve estimates, particularly on the longer tailed classes ofSingapore business may place more reliance on industry benchmarks than mightalso be the case for companies with longer operating histories; as a result, the potential for volatilitywritten from outside Singapore in estimated loss reserves may be more pronounced than for more established companies. When establishing our single point best estimate of loss reserves at December 31, 2019, management considered actuarial estimates and applied informed judgment regarding qualitative factors that may not be fully captured in actuarial estimates. Such factors included, but were not limited to, the timing of the emergence of claims, volume and complexity of claims, social and judicial trends, potential severity of individual claims, and the extent of internal historical loss data versus industry information.
Changes to previous estimates of prior year loss reserves can adversely impact the reported calendar year underwriting results if loss reserves prove to be insufficient or can favorably impact reported results if loss reserves prove to be higher than actual claim payments. If net incomecertain circumstances where it is insufficient to absorb a required increase in loss reserves, we would incur an operating loss and could incur a reduction in capital.
We may be adversely impacted by inflation.
Our operations, like those of other insurers and reinsurers, are susceptible to the effects of inflation because premiums are established before the ultimate amounts of losses and loss expenses are known. Although we consider the potential effects of inflation when setting premium rates, premiums may not fully offset the effects of inflation and thereby essentially result in underpricing the risks we insure and reinsure. Loss reserves include assumptions about future payments for settlement of claims and claims-handling expenses, such as the value of replacing property, associated labor costs for the property business we write and litigation costs. To the extent inflation causes costs to increase above loss reserves established for claims, we will be required to increase loss reservesplaced with a corresponding reduction in net income inSingapore intermediary licensed by the period in whichMAS to place business at Lloyd's or by dealing directly with the deficiency is identified, which may have a material adverse effect on our results of operations or financial condition. Unanticipated higher inflation could also lead to higher interest rates, which would negatively impact the value of our fixed income securities and potentially other investments.insured.
Canada
The failure of our loss limitation strategy could have a material adverse effect on our results of operations, financial condition, or liquidity.
We seek to mitigate loss exposure through multiple methods. For example, we write a number of reinsurance contracts on an excess of loss basis. Excess of loss reinsurance indemnifies the insured against losses in excess of a specified amount. We generally limit the line size for each client and line of business on our insurance business and purchase reinsurance for many of our lines of business. In the case of proportional reinsurance treaties, we seek per occurrence limitations or losses and loss expenses ratio caps to limit the impact of losses from any one event. In proportional reinsurance, the reinsurer shares a proportional part of the premiums and losses of the reinsured. We also seek to limit our loss exposure through geographic diversification. Geographic zone limitations involve significant underwriting judgments, including the determination of the area of the zones and the inclusion of a particular policy within a particular zone’s limits. In addition, various provisions of our insurance policies and reinsurance contracts, such as limitations or exclusions from coverage or choice of forum negotiated to limit our risks may not be enforceable in the manner we intend. We cannot be sure that these loss limitation methods will effectively prevent a material loss exposure which could have a material adverse effect on our results of operations, financial condition, or liquidity.
If we choose to purchase reinsurance, we may be unable to do so.
We purchase reinsurance for ourAXIS Re U.S. conducts insurance and reinsurance operationsbusiness from AXIS Reinsurance Company (Canadian Branch), its branch in orderCanada, subject to mitigate the volatilitysupervision of losses on our financial results. From timethe New York State Department of Financial Services and the Office of the Superintendent of Financial Institutions Canada ("OSFI"), the federal regulatory authority that supervises federal Canadian and non-Canadian insurance companies operating in Canada pursuant to time, market conditions have limited,the Insurance Companies Act (Canada). The branch is authorized by OSFI to transact insurance and reinsurance. In addition, the branch is subject to the laws and regulations of each of the provinces and territories in some cases have prevented, insurerswhich it is licensed.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses subject to the laws and reinsurersregulations of each of the provinces and territories in which it is licensed and to write insurance in or from obtainingCanada, with the types and amountsfollowing exceptions: hail insurance in respect of reinsurance that they consider adequate for their business needs. There is no guarantee that our desired amounts of reinsurance or retrocessional reinsurance will be availablecrop in the marketplaceprovince of Quebec; home warranty insurance in the future. In additionprovince of British Columbia; life insurance; credit protection insurance; title insurance; surety; and mortgage default insurance. Syndicate 1686, through Lloyd's, is authorized to capacity risk, the remaining capacity may not be on terms we deem appropriatewrite reinsurance in or acceptable or with companies with whom we want to do business.
We utilize models to assist our decision making in key areas such as underwriting, reserving, reinsurance purchasing and the evaluation of our catastrophe risk but actual results could differ materially from model output.
We employ various modeling techniques (for example, scenarios, predictive, stochastic and/or forecasting) to analyze and estimate exposures, loss trends and other risks associated with our assets and liabilities. We utilize modeled outputs and related analyses to assist us in decision-making, for example, related to underwriting and pricing, reserving, reinsurance purchasing and the evaluation of our catastrophe risk through estimates of probable maximum losses, or "PMLs". The modeled outputs and related analyses, both from proprietary and third-party models, areCanada subject to various assumptions, professional judgment, uncertaintiescertain restrictions relating to life reinsurance.
Belgium
AXIS Specialty Europe conducts insurance from its Belgium branch, AXIS Specialty Europe SE (Belgium Branch), which is subject to CBI prudential supervision and limited regulation by the inherent limitationsNBB.
AXIS Specialty Europe also has permission to write insurance and reinsurance on a Freedom of any statistical analysis, includingServices basis in Belgium.
AXIS Re SE has permission to write reinsurance on a Freedom of Services basis in Belgium.
AXIS Managing Agency Ltd. is eligible to write insurance (except permanent health) and reinsurance business in Belgium through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" above).
Netherlands
AXIS Specialty Europe conducts insurance from its Netherlands branch, AXIS Specialty Europe SE (Netherlands Branch), which is subject to CBI prudential supervision and limited regulation by the useDutch National Bank.
AXIS Specialty Europe has permission to write insurance and qualityreinsurance on a Freedom of historical internal and industry data. Consequently, actual losses from loss events, whether from individual components (for example, wind, flood, earthquake, etc.) orServices basis in the aggregate, may differ materially from modeled results. If, based upon these models or other factors, we misprice our products or underestimate the frequency and/or severityNetherlands.
AXIS Re SE has permission to write reinsurance on a Freedom of loss events, our results of operations, financial condition, or liquidity may be adversely affected.
With respect to the evaluation of our catastrophe risk, our modeling utilizes a mix of historical data, scientific theory and mathematical methods. Output from multiple commercially available vendor models serves as a key input in our PML estimation process. We believe that there is considerable uncertaintyServices basis in the dataNetherlands.
AXIS Managing Agency Ltd. is eligible to write insurance (except permanent health) and parameter inputs for these vendor models. In that regard, there is no universal standardreinsurance business in the preparation of insured data for use in the models and the running of modeling software. In our view, the accuracy of the models depends heavily on the availability of detailed insured loss data from actual recent large catastrophes.Netherlands through Lloyd's Brussels (see "Regulatory Impact Due to the limited number of events, there is significant potential for substantial differences between the modeled loss estimate and actual company experience forBrexit" above).
Dubai
AXIS Reinsurance (DIFC) Limited was granted a single large catastrophe event. This potential difference could be even greater for perils with limited or no modeled annual frequency. We perform our own vendor model validation (including sensitivity analysis and backtesting, where possible) and supplement model output with historical loss information and analysis and management judgment. In addition, we derive our own estimates for non-modeled perils. Despite this, our PML estimates are subject to a high degree of uncertainty and actual losses from catastrophe events may differ materially.
We could be materially adversely affected if managing general agents, general agents, coverholders, other producers and third-party administrators in our program business exceed their underwriting and/or claims settlement authorities or otherwise breach obligations owed to us.
In program business conductedprudential Category 4 license by the insurance segment, following our underwriting, financial, claimsDubai Financial Services Authority in December 2017 and information technology due diligence reviews, we authorize managing general agents, general agents, coverholdersoperated as an intermediary under binding authority granted by the Board of Directors of AXIS Re SE to underwrite accident and other producershealth reinsurance. In December 2020, AXIS Reinsurance (DIFC) Limited surrendered its license and is currently in liquidation proceedings.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write business on our behalf within underwriting authorities prescribed by us. Once a program/coverholder commences, we
must rely on the underwriting controls of these entities to write business within the underwriting authorities provided by us. Although we monitor our programs/coverholders on an ongoing basis, our monitoring efforts may not be adequatereinsurance in or these entities may exceed their underwriting or claims settlement authorities or otherwise breach obligations owed to us. To the extent that these entities exceed their authorities or otherwise breach obligations owed to us in the future, our results of operations or financial condition could be materially adversely affected.from Dubai with certain exceptions.
Strategic Risk
Strategic risks are risks that affect or are created by an organization’s business strategy and strategic objectives. Our review of strategic risk is a broad one that evaluates not only internal and external challenges that might cause our chosen strategy to fail but also evaluates major risks that could affect our long-term positionperformance and performance.position.
Competition
•We may be adversely affected by competition and consolidation in the insurance/reinsurance industry could reduce our growth and profitability.
The insurance/reinsurance industry is highly competitive. We compete on an international and regional basis with major U.S., Bermuda, European and other international insurers and reinsurers and underwriting syndicates, including Lloyd's, some of which have greater financial, marketing and management resources than we do. We also compete with new companies that continue to be formed to enter the insurance/reinsurance markets. In addition, capital market participants have created alternative products that are intended to compete with insurance and reinsurance products. New and alternative capital inflows in the insurance/reinsurance industry and the retention by insured and cedants of more business have caused an excess supply of insurance and reinsurance capital. There has been a large amount of merger and acquisition activity in the insurance/reinsurance sector in recent years, which may continue; we may experience increased competition as a result of that consolidation with consolidated entities having enhanced market power.industry. Increased competition could result in fewer submissions, lower premium rates, less favorable policy terms and conditions and greater costs of customer acquisition and retention. In addition, if industry pricing does not meet our hurdle rate, we
•We have been and may reduce our future underwriting activities. These factors could havecontinue to be adversely affected by a material adverse effect on our growth and profitability.
Globaldeterioration in global economic conditions could materially and adversely affect our business, results of operations or financial condition.
Worldwide financial markets can be volatile. In 2008 and 2009, for example, there was volatility and disruption including, among other things, dislocation in the mortgage and asset-backed securities markets, deleveraging and decreased liquidity generally, widening of credit spreads, bankruptcies and government intervention in a number of large financial institutions. These events resulted in extraordinary responses by governments worldwide, including the enactment of the Emergencyconditions. Economic Stabilization Act of 2008 and the U.S. Recovery and Reinvestment Act in 2009 and Dodd Frank. Uncertaintyuncertainty and market turmoil has affected and may in the future affect, among other aspects of our business, the demand for and claims made under our products, the ability of customers, counterparties and others to establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital resources and our investment performance and portfolio. A persistent low interest rate environment may reduce our profitability as investment income falls.
•We also provide coverage to the mortgage industry through insurance and reinsurance of mortgage insurance companies and U.S. government sponsored entity credit risk sharing transactions, and deteriorating economic conditions could cause mortgage insurance losses to increase and adversely affect our results of operations or financial condition.
In addition, steps taken by governments to stabilize financial markets and improve economic conditions may be ineffective and actual or anticipated efforts to continue to unwind some of such steps could disrupt financial markets and/or could adversely impact the value of our investment portfolio. While inflation has recently been moderate and that trend may continue, it is possible that expansionary monetary policies, recent changes to the U.S. tax law, improving economic conditions, higher commodity prices and tighter labor markets could lead to an inflationary environment.
Given the ongoing global economic uncertainties, evolving market conditions may continue to affect our results of operations, financial condition, and capital resources. In the event that there is additional deterioration or volatility in financial markets or general economic conditions, our results of operations, financial condition, capital resources, and competitive landscape could be materially and adversely affected.
Acquisitions that we made or may make could turn out to be unsuccessful.
As part of our strategy, we have pursued and may continue to pursue growth through acquisitions. For example, as part of our strategy to develop a market leading international specialty insurance business, we acquired Novae Group plc, a specialty insurer and reinsurer that operated through Lloyd's of London in 2017. The negotiation of potential acquisitions as well as the integration of an acquired business or new personnel could result in a substantial diversion of management resources. Successful integration will depend on, among other things, our ability to effectively integrate acquired businesses or new personnel into our existing risk management and financial and operational reporting systems, our ability to effectively manage any regulatory issues created by our entry into new markets and geographic locations, our ability to retain key personnel and other operational and economic factors. There can be no assurance that the integration of acquired businesses or new personnel will be successful, that we will realize anticipated synergies, cost savings and operational efficiencies, or that the business acquired will prove to be profitable or sustainable. The failure to integrate acquired businesses successfully or to manage the challenges presented by the integration process may adversely impact our financial results. Acquisitions could involve numerous additional risks such as potential losses from unanticipated litigation or levels of claims and inability to generate sufficient revenue to offset acquisition costs.
Our ability to grow through acquisitions will depend, in part, on our success in addressing these risks. Any failure by us to effectively implement our acquisitions strategy could have a material adverse effect on our business, results of operations, or financial condition.
We could be adversely affected by the loss of one or more key executives or by an inability to attract and retain qualified personnel or by the inability of an executive to obtain a Bermuda work permit.
Our success depends on our ability to retain the services of our existing key executives and to attract and retain additional qualified personnel in the future. The loss of the services of any of our key executives or the inability to hire and retain other highly qualified personnel in the future could adversely affect our ability to conduct our business. Changes in local employment legislation, taxation and the approach of regulatory bodies to compensation practice within our operating jurisdictions may impact our ability to recruit and retain qualified personnel or the cost to us of doing so. There can be no assurance that we will be successful in identifying, hiring or retaining successors on terms acceptable to us.
With a few exceptions generally under Bermuda law only Bermudians, spouses of Bermudians or Permanent Resident Certificate holders (collectively "Residents") may engage in any gainful occupation in Bermuda without an appropriate governmental work permit. Work permits may be granted or extended by the Bermuda government only upon showing that, after proper public advertisement (in most cases), no Residents who meet the minimum standard requirements for the advertised position have applied for the position. Work permits are generally granted for one, three or five year durations. In January 2013, the Bermuda government abolished term limits, meaning expatriate workers can (subject to the above) continue to be employed in Bermuda indefinitely by reapplying for work permits. This removed the immigration policy put in place in 2001, which limited the total duration expatriate workers could remain in Bermuda. All executive officers who work in our Bermuda office who require work permits have obtained them.
The exit of the U.K. from the E.U. could adversely affect us.
On June 23, 2016, the U.K. voted in favor of Brexit. In March 2017, the U.K. government gave official notice of its intention to leave the E.U., commencing the period of up to two years during which the U.K. and the E.U. would negotiate the terms of the U.K.’s withdrawal from the E.U. On October 17, 2019, the U.K. and the E.U. approved a revised withdrawal agreement pertaining to Brexit, which was ratified by the U.K. Parliament and the Council of the European Union on January 31, 2020. This agreement provides for a transition period that will last until at least December 31, 2020, which period•We may be extended through December 31, 2022; however, the U.K. and the E.U. must make a decision as to whether to so extendadversely affected by July 1, 2020. During this transition period, the U.K. will remain within the European Single Market, and the services provided to clients and brokers should remain unaffected by these circumstances. Nevertheless, we have significant operations in the U.K. and other E.U. member states. Depending on the final terms of Brexit, we may be required to reorganize our operations and/or to capitalize U.K. branch activities in a manner that could be less efficient and more expensive.
Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business, results of operations, or financial condition.
Since we depend on a few brokers for a large portion of our revenues, loss of business provided by any one of them coulda major broker.
•We may be adversely affect us.
We market our insurance and reinsurance products worldwide primarily through insurance and reinsurance brokers and deriveaffected by a significant portion of our business from a limited number of brokers. Marsh & McLennan Companies, Inc., including its subsidiary Guy Carpenter & Company, Inc., Aon plc and Willis Towers Watson PLC, provided 47% of gross premiums written in 2019. Our relationships with these brokers are based on the quality of our underwriting and claims services, as well as our financial strength ratings. Any deterioration in these factors could result in the brokers advising our clients to place their business with other insurers and reinsurers. In addition, these brokers also have, or may in the future acquire, ownership interests in insurance and reinsurance companies that may compete with us; these brokers may then favor their own insurers and reinsurers over other companies. Loss of all or a substantial portion of the business provided by one or more of these brokers could have a material adverse effect on our business.
A downgrade in our financial strength or credit ratings by one or more rating agencies could materially and negatively impact our business, results of operations, financial condition, or liquidity.
Our ability to underwrite business is dependent upon the quality of our claims paying and financial strength ratings as evaluated by independent rating agencies. A downgrade, withdrawal or negative watch/outlook by any of these institutions could cause our competitive position in the insurance/reinsurance industry to suffer and make it more difficult for us to market our products.rating. If we experience a credit rating downgrade, withdrawal or negative watch/outlook in the future, we could incur higher borrowing costs and may have more limited means to access capital. A downgrade, withdrawal or negative watch/outlookIt could also result in a substantial loss of business for us, as ceding companies and brokers that place such business may move to other insurers and reinsurers with higher ratings. We would also be required to post collateral under the terms of certain of our policies of reinsurance.us.
We may require additional capital in the future, which may not be available or may only be available on unfavorable terms.
Our future capital requirements depend on many factors, including rating agency and regulatory requirements, the performance of our investment portfolio, our ability to write new business successfully, the frequency and severity of catastrophe events and our ability to establish premium rates and loss reserves at levels sufficient to cover losses. We may need to raise additional funds through financings. If we are unable to do so, it may curtail our ability to conduct our business. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. Equity financings could be dilutive to our existing shareholders and could result in the issuance of securities that have rights, preferences and privileges that are senior to those of our other securities. If we cannot obtain adequate capital on favorable terms or at all, our business, operating results and financial condition could be adversely affected.
Our inability to obtain the necessary credit could affect our ability to offer reinsurance in certain markets.
Neither AXIS Specialty Bermuda nor AXIS Re SE is licensed or admitted as an insurer or reinsurer in any jurisdiction other than Bermuda, Ireland, Singapore and Brazil. Because the U.S. and some other jurisdictions do not permit insurance companies to take credit on their statutory financial statements for reinsurance obtained from unlicensed or non-admitted insurers unless appropriate security mechanisms are in place, our reinsurance clients in these jurisdictions typically require AXIS Specialty Bermuda and AXIS Re SE to provide letters of credit or other collateral. Our credit facilities are used to post letters of credit. However, if our credit facilities are not sufficient or if we are unable to renew our credit facilities or arrange for other types of security on commercially affordable terms, AXIS Specialty Bermuda and AXIS Re SE could be limited in their ability to write business for some of our clients.
Market Risk and Liquidity Risk
Market risk is the risk that our financial instruments may be negatively impacted by movements in financial market prices or rates such asrates.
•Our investment and derivative instrument portfolios may be adversely impacted by capital markets risk related to changes in equity prices, interest rates, credit spreads and foreign exchange rates. other factors.
•Our operating results may be adversely affected by currency fluctuations.
Liquidity Risk
Liquidity risk is the risk that we may not have sufficient financial resources to meet our obligations when they fallare due, or would have to incur excessive costs to do so.
Our investment and derivative instrument portfolios are exposed to significant capital markets risk related to changes in interest rates, credit spreads and equity prices, as well as other risks, which may adversely affect our results of operations or financial condition.
The performance of our cash and investments portfolio has a significant impact on our financial results. A failure to successfully execute our investment strategy could have a significant impact on our results of operations or financial condition.
Our investment portfolio is subject to a variety of market risks, including risks relating to general economic conditions, interest rate fluctuations, equity price risk, foreign currency movements, pre-payment or reinvestment risk, liquidity risk and credit risk. Although we manage market risks through, among other things, stressing diversification and conservation of principal and liquidity in our investment guidelines, it is possible that, in periods of economic weakness or periods of turmoil in capital markets, we may experience significant losses in our portfolio.
Our fixed maturities, which represent 87% of our total investments and 78% of total cash and investments at December 31, 2019, may be adversely impacted by changes in interest rates. Increases in interest rates could cause the fair value of our investment portfolio to decrease, resulting in a lower book value (refer to Item 7A •'Quantitative and Qualitative Disclosure About Market Risk' for further details) and capital resources. In addition, a lower interest rate environment can result in reductions in our investment yield as new funds and proceeds from sales and maturities of fixed income securities are reinvested at lower rates. This reduces our overall future profitability. Interest rates are highly sensitive to many factors, including governmental and central bank monetary policies, inflation, domestic and international economic and political conditions and other factors beyond our control.
Our portfolios of "other investments" and equity securities expose us to market price variability, driven by a number of factors outside our control including, but not limited to global equity market performance. Given our reliance on external investment managers, we are also exposed to operational risks, which may include, but are not limited to a failure to follow our investment guidelines, technological and staffing deficiencies and inadequate disaster recovery plans.
Our derivative instrument counterparties may default on amounts owed to us due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud or other reasons. Even if we are entitled to collateral in circumstances of default, such collateral may be illiquid or proceeds from such collateral when liquidated may not be sufficient to recover the full amount of the obligation.
Changes in the method for determining LIBOR and the potential replacement of LIBOR may affect our cost of capital and net investment income.
On July 27, 2017, the FCA announced its intention to cease sustaining LIBOR after 2021. The FCA has statutory powers to require panel banks to contribute to LIBOR where necessary. The FCA has decided not to ask, or to require, that panel banks continue to submit contributions to LIBOR beyond the end of 2021. The FCA has indicated that it expects that the current panel banks will voluntarily sustain LIBOR until the end of 2021. The FCA’s intention is that after 2021, it will no longer ask, or require, banks to submit contributions to LIBOR. It is possible that the IBA and the panel banks could continue to produce LIBOR on the current basis after 2021, if they are willing and able to do so, but we believe it is unlikely that LIBOR will survive in its current form, or at all.
Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the trading market for LIBOR-based securities, including those held in our investment portfolio. Changes or reforms to the determination or supervision of LIBOR or successor reference rate may result in a sudden or prolonged increase or decrease in reported LIBOR or to a successor, which could have an adverse impact on the market for floating rate securities and the value of our investment portfolio and insurance products which directly or indirectly reference LIBOR or its successor.
At December 31, 2019, our investment portfolio included $1.8 billion of floating rate investments for which the interest rate was tied to LIBOR. The instruments and agreements governing our investments generally provide for appropriate fall-back language if the current index is no longer available, however there is no assurance that the alternative index will provide comparable returns. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on net investment income cannot yet be determined and any changes to benchmark interest rates could decrease net investment income, which could impact our results of operations, liquidity, or the market value of our investments.
Our operating results may be adversely affected by currency fluctuations.
Our reporting currency is the U.S. dollar. However, a portion of gross premiums are written and ceded in currencies other than the U.S. dollar and a portion of gross and ceded loss reserves are in non-U.S. currencies. In addition, a portion of our investment portfolio is denominated in currencies other than the U.S dollar. From time to time, we may experience losses resulting from fluctuations in the values of these non-U.S. currencies, which could adversely affect our operating results. Although we manage our foreign currency exposure through matching of our major foreign-denominated assets and liabilities, as well as through use of currency derivatives, there is no guarantee that we will successfully mitigate our exposure to foreign exchange losses. Sovereign debt concerns in Europe and related financial restructuring efforts, which may cause the value of the euro to deteriorate, and Brexit, which caused significant volatility in currency exchange rates, especially between the U.S. dollar and the British pound, may magnify these risks.
Our underwriting activities may expose us to liquidity risks.
Our exposure to liquidity riskrisk. This stems mainly from the need to cover potential extreme loss events and regulatory constraints that limit the flow of funds within the Group. We maintain cash and cash equivalents and high quality, liquid investment portfolios to meet expected outflows, as well as those that could result from a range of potential stress events. We place internal limits on the maximum percentage of cash and investments which may be in an illiquid form as well as on the minimum percentage of our asset portfolio which may be invested in unrestricted cash and liquid investment grade fixed income securities.
Additionally, we maintain committed borrowing facilities, as well as access to diverse funding sources to cover contingencies. Funding sources include asset sales, external debt issuances and lines of credit. We conduct stress tests to ensure the sufficiency of these funding sources in extreme scenarios; however, there remains a risk that in certain circumstances, our results of operations or financial condition may be adversely impacted by our inability to access appropriate liquidity, or the cost of doing so.
Credit Risk
Credit risk represents the risk of incurring financial loss due to the diminished creditworthiness (eroding credit rating(reduced financial strength and, ultimately, possibly default) of our third-party counterparties.
If
•We may be adversely impacted if we successfully purchase reinsurance, we may beare unable to collect amounts due to us.us from our counterparties – most materially reinsurers, but also including brokers, agents and customers.
A reinsurer’s insolvency, or inability or refusal to make payments under the terms of its reinsurance agreement with us, could have a material adverse effect on our business because we remain liable to the insured. We face counterparty risk whenever we purchase reinsurance or retrocessional reinsurance. Consequently, the insolvency, inability or unwillingness of any of our present or future reinsurers to make timely payments to us under the terms of our reinsurance or retrocessional agreements could have an adverse effect on our results of operations, financial condition, or liquidity.
Our reliance on brokers subjects us to credit risk.
In accordance with industry practice, we pay amounts owed on claims under our insurance and reinsurance contracts to brokers, and these brokers pay these amounts over to the clients that have purchased insurance and reinsurance from us. Although the law is unsettled and depends upon the facts and circumstances of the particular case, in some jurisdictions, if a broker fails to make such a payment, we might remain liable to the insured or ceding insurer for the deficiency.
Conversely, in certain jurisdictions, when the insured or ceding insurer pays premiums for these policies to brokers for payment over to us, these premiums might be considered to have been paid to us and the insured or ceding insurer will no longer be liable to us for those amounts, whether or not we have actually received the premiums from the broker. Consequently, we assume a degree of credit risk associated with brokers with whom we transact business. These risks are heightened during periods characterized by financial market instability and/or an economic downturn or recession.
Certain of our policyholders and intermediaries may not pay premiums owed to us due to insolvency or other reasons.
Insolvency, liquidity problems, distressed financial condition or the general effects of economic recession may increase the risk that policyholders or intermediaries, such as insurance brokers, may not pay a part of or the full amount of premiums owed to us, despite an obligation to do so. The terms of our contracts may not permit us to cancel our insurance even though we have not received payment. If non-payment becomes widespread, whether as a result of insolvency, lack of liquidity, adverse economic conditions, operational failure or otherwise, it could have a material adverse impact on our revenues and results of operations.
Operational Risk
Operational risk represents the risk of financial loss as a result of inadequate processes, system failures, human error or external events.events, including but not limited to direct or indirect financial loss, reputational damage, customer dissatisfaction and legal and regulatory penalties.
If we experience difficulties with technology and/or data security, our ability to conduct our business might be negatively impacted.
While technology can streamline many business processes and ultimately reduce the cost of operations, technology initiatives present certain risks. Our business is dependent upon our employees’ and outsourcers’ ability to perform, in an efficient and uninterrupted fashion, necessary business functions such as processing policies and paying claims. A shutdown or inability to access one or more of our facilities, a power outage, or a failure of one or more of our information technology, telecommunications or other systems could significantly impair our ability to perform such functions on a timely basis. If sustained or repeated, such a business interruption, system failure or service denial could result in a deterioration of our ability to write and process business, provide customer service, pay claims in a timely manner or perform other necessary business functions. Unauthorized access, computer viruses, deceptive communications (phishing), malware, hackers and other external hazards including catastrophe events could expose our data systems to security breaches. These risks could expose us to data loss and damages.
Like other global companies, we may be regularly the target of attempted cyber and other security threats and must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of threats to our data and systems. Over time, and particularly recently, the sophistication of these threats continues to increase. While administrative and technical controls, along with other preventive actions, reduce the risk of cyber incidents and protect our information technology, they may be insufficient to thwart cyber attacks and/or prevent other security breaches to our systems.
To the extent any disruption or security breach results in a loss or damage to our data, or inappropriate disclosure of our confidential information or that of others, it could impact our operations, cause significant damage to our reputation, affect our relationships with our customers and clients, lead to claims against us under various data privacy laws, result in regulatory action and ultimately have a material adverse effect on our business or operations. In addition, although we purchase limited cyber insurance, we may be required to incur significant costs to mitigate the damage caused by any security breach, to address any interruptions in our business, or to protect against future damage, which costs may not be covered by our cyber insurance.
•We also operate in a number of jurisdictions with strict data privacy and other related laws, which could be violated in the event of a significant cybersecurity incident, or by personnel. Failure to comply with these obligations can give rise to monetary fines and other penalties that could be significant.
Our business may be adversely affected if third-party outsourced service providers fail to satisfactorily perform certain technology and business process functions.
We outsource certain technology and business process functions to third parties. If we do not effectively develop and implement our outsourcing strategy, third-party providers do not perform as anticipated or we experience technological or other problems with a transition, we may not realize productivity improvements or cost efficiencies and may experience operational difficulties, increased costs and a loss of business. Our outsourcing of certain technology and business process functions to third parties may expose us to enhanced risk related to data security, which could result in monetary and reputational damages. In addition, our ability to receive services from third-party providers might be impacted by political instabilityfailure of the processes, people or unanticipated regulatory requirements. As a result, our ability to conduct our business might be adversely affected.
Wesystems that we rely on internal processes to maintain our operations and manage the operational risks inherent to our business; employee misconduct, errors or omissions in the execution of these processes may result in financial losses.business, including those outsourced to third parties.
We rely on the execution of internal processes to maintain and execute our operations. We seek to monitor and control our exposure to risks arising from these processes through an enterprise risk management framework, internal controls, management review and other processes. We cannot provide total assurance that these processes will effectively identify or control all risks, or that our employees and third-party agents will effectively execute them. Loss may result from, among other things, fraud; errors; or failure to document transactions properly, obtain proper internal authorization, comply with underwriting or other internal guidelines, or comply with regulatory requirements. These risks could result in losses that adversely affect our business, results of operations, or financial condition. Furthermore, insurance policies provided by third parties may not cover us if we experience a significant loss from these risks.
Regulatory RisksRisk
Regulatory risk meansrepresents the risk arising from our failure to comply with legal, statutory or regulatory obligationsobligations.
Compliance with laws and regulations governing the processing of personal data and information may impede our services or result in increased costs. Failure to comply with these data privacy laws and regulations could result in material fines or penalties imposed by data protection or financial services conduct regulators and/or awards of civil damages and any data breach may have a material adverse effect on our reputation, results of operations, or financial condition, or have other adverse consequences.
Our business relies on the processing of data in many jurisdictions and the movement of data across national borders. The collection, storage, handling, disclosure, use, transfer and security of personal information that occurs in connection with our business is subject to federal, state and foreign data privacy laws. These legal requirements are not uniform and continue to evolve, and regulatory scrutiny in this area is increasing around the world. In many cases, these laws apply not only to third-party transactions, but also to transfers of information among the Company and its subsidiaries. Privacy and data protection laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements.
The General Data Privacy Regulation ("GDPR") has extra-territorial effect. It requires all companies processing data of E.U. citizens to comply with the GDPR, regardless of the company’s location; it also imposes obligations on E.U. companies processing data of non-E.U. citizens. The GDPR imposes requirements regarding the processing of personal data and confers new rights on data subjects, including rights of access to their personal data, deletion of their personal data, the "right to be forgotten" and the right to "portability" of personal data.
The California Consumer Privacy Act ("CCPA") came into force on January 1, 2020 and confers rights on Californian residents including rights to know what personal information is collected about them, whether their personal information is sold and if so, to whom, to access their personal information that has been collected and to require a business to delete their personal information.
Compliance with the enhanced obligations imposed by the GDPR, the CCPA and other legislation (including Bermuda’s Personal Information Protection Act) requires investment in appropriate technical or organizational measures to safeguard the rights and freedoms of data subjects, may result in significant costs to our business and may require us to modify certain of our business practices. Enforcement actions, investigations and the imposition of substantial fines and penalties by regulatory authorities as a result of data security incidents and privacy violations have increased dramatically over the past several years. The enactment of more restrictive laws, rules, regulations, or future enforcement actions or investigations could impact us through increased costs or restrictions on our business, and noncompliance could result in regulatory penalties and significant legal liability.
In addition, unauthorized disclosure or transfer of sensitive or confidential client or Company data, whether through systems failure, employee negligence, fraud or misappropriation, by the Company or other parties with whom we do business, could subject us to significant litigation, monetary damages, regulatory enforcement actions, fines and criminal prosecution in one or more jurisdictions. Such events could also result in negative publicity and damage to our reputation and cause us to lose business, which could therefore have a material adverse effect on our results of operations or financial condition.
The regulatory system under which we operate, and potential changes thereto, could have a material adverse effect on our business.
•Our insurance and reinsurance subsidiaries conduct business globally and are subject to varying degrees of regulation and supervision in multiple jurisdictions. In the U.K., Lloyd's has supervisory powers that pose unique regulatory risks. The laws and regulations of the jurisdictions and markets, including Lloyd's in which our insurance and reinsurance subsidiaries are domiciled or operate require, among other things, that our subsidiaries maintain minimum levels of statutory capital and liquidity, meet solvency standards, participate in guaranty funds and submit to periodic examinations of their financial condition and compliance with underwriting and other regulations. These laws and regulations also limit or restrict payments of dividends and reductions in capital. Statutes, regulations and policies may also restrict the ability of these subsidiaries to write insurance and reinsurance contracts, make certain investments and distribute funds. The purpose of insurance laws and regulations generally is to protect insureds and ceding insurance companies, not our shareholders. We may not be ableadversely affected if we fail to comply fully with, or obtain appropriate exemptionsexemption, from these statutes and regulations, which could result in restrictions on our ability to do business or undertake activities that are regulated in one or more of the jurisdictions in which we conduct business and could subject us to fines and other sanctions. In addition, changes in the laws or regulations to which our insurance and reinsurance subsidiaries are subject or in the interpretation thereof by enforcement or regulatory agencies could have an adverse effect on our business.relevant regulations.
Potential government intervention in our industry as a result of recent events and instability in the marketplace for insurance products could hinder our flexibility and negatively affect the business opportunities that may be available to us in the market.
Government intervention and the possibility of future government intervention have created uncertainty in insurance/ reinsurance markets. Government and regulators are generally concerned with having insurers and reinsurers with high solvency ratios and localized capital to ensure the protection of policyholders to the possible detriment of other constituents, including shareholders of insurers and reinsurers.
In recent years certain U.S. and non-U.S. judicial and regulatory authorities, including U.S. Attorney’s Offices and certain state attorneys general, have commenced investigations into business practices in the insurance industry. In addition, although the U.S. federal government has not historically regulated insurance, there have been proposals from time to time, and especially after the most recent global financial crisis, to impose federal regulation on the U.S. insurance industry. For example, in 2010, Dodd-Frank established a Federal Insurance Office ("FIO") within the U.S. Treasury. The FIO has limited regulatory authority and is empowered to gather data and information regarding the insurance industry, and has conducted and submitted a study to the U.S. Congress on how to modernize and improve insurance regulation in the U.S. This study's findings are not expected to have a significant impact on the Company. Further, Dodd-Frank gives the Federal Reserve supervisory authority over a number of U.S. financial services companies, including insurance companies, if they are designated by a two-thirds vote of a Financial Stability Oversight Council as ‘systemically important’. While we do not believe that we are systemically important, as defined in Dodd-Frank, Dodd-Frank or additional federal or state regulation that is adopted in the future could impose significant burdens on us, impact the ways in which we conduct our business and govern our subsidiaries, increase compliance costs, increase the levels of capital required to operate our subsidiaries, duplicate state regulation and/or result in a competitive disadvantage.
Certain of our European legal entities are subject to local laws that implement the Solvency II Directive. Solvency II covers three main areas: (i) the valuation of assets and liabilities on a Solvency II economic basis and risk-based solvency and capital requirements; (ii) governance requirements including requirements relating to the key functions of compliance, internal audit, actuarial and risk management; and (iii) new supervisory legal entity and group reporting and disclosure requirements including public disclosures. The BMA is fully "equivalent" under the Solvency II Directive for Bermuda's commercial insurance sector, including Class 4 insurers.
While we cannot predict the exact nature, timing or scope of possible governmental initiatives, such proposals could adversely affect our business by, among other things:
Providing reinsurance capacity in markets and to consumers that we target;
Requiring our further participation in industry pools and guaranty associations;
Expanding the scope of coverage under existing policies; e.g., following large disasters;
Further regulating the terms of insurance and reinsurance contracts; or
Disproportionately benefiting the companies of one country over those of another.
Our international business is subject to applicable laws and regulations relating to sanctions and foreign corrupt practices, the violation of which could adversely affect our operations.
We must comply with all applicable economic and financial sanctions, other trade controls and anti-bribery laws and regulations of the U.S. and other foreign jurisdictions where we operate, including Bermuda, the U.K. and the European Community. U.S. laws and regulations applicable to us include the economic trade sanctions laws and regulations administered by the U.S. Department of Treasury’s Office of Foreign Assets Control as well as certain laws administered by the U.S. Department of State. In addition, we are subject to the Foreign Corrupt Practices Act and other anti-bribery laws, such as the Bermuda Bribery Act and the U.K. Bribery Act, which generally bar corrupt payments or unreasonable gifts. Although we have policies and controls in place that are designed to ensure compliance with these laws and regulations, it is possible that an employee or an agent acting on our behalf, could fail to comply with applicable laws and regulations and due to the complex nature of the risks, it may not always be possible for us to ascertain compliance with such laws and regulations. In such event, we could be exposed to civil penalties, criminal penalties and other sanctions, including fines or other unintended punitive actions. In addition, such violations could damage our business and/or our reputation. All of the foregoing could have a material adverse effect on our financial condition and operating results.
Future changes in current accounting practices may materially impact our reported financial results.
Future changes in accounting practices may result in significant additional expenses and may affect the calculation of financial statement line items. For example, this could occur if we are required to prepare information relating to prior periods or if we are required to apply new requirements retroactively.
Risks Related to the Ownership of our Securities
•In addition to the risks to our business listed above, there are certain other risks related to the ownership of our securities.
The price of our common shares may be volatile.
There has been significant volatility in the marketsecurities for equity securities in recent years. During 2019, 2018, and 2017 the price of our common shares fluctuated from a low of $50.95example relating to a high of $67.25, a low of $47.43 to a high of $60.69 and a low of $49.42 to a high of $71.06, respectively. The price of our common shares may not remain at or exceed current levels. The following factors, in addition to those described in other risk factors above, may have an impact on the market price of our common stock:
actual or anticipated variations in our quarterly results, including as a result of catastrophes or our investment performance;
any share repurchase program;
changes in market valuation of companies in the insurance/reinsurance industry;
changes in expectations of future financial performance or changes in estimates of securities analysts;
fluctuations in stock market processes and volumes;
issuances or sales of common shares or other securities in the future;
the addition or departure of key personnel;
changes in tax law; and
announcements by us or our competitors of acquisitions, investments or strategic alliances.
Stock markets in the U.S. continue to experience volatile price and volume fluctuations. Such fluctuations, as well as the general political situation, current economic conditions or interest rate or currency rate fluctuations, could adversely affect the market price of our stock.
Our ability to pay dividends and to make payments on indebtedness may be constrained by our holding company structure.
AXIS Capital is a holding company and has no direct operations of its own. AXIS Capital has no significant operationsstructure or assets other than its ownership of the shares of its operating insurance and reinsurance subsidiaries, AXIS Specialty Bermuda, AXIS Ventures Reinsurance Limited, AXIS Re SE, AXIS Specialty Europe, the Members of Lloyd's (AXIS Corporate Capital UK Limited and AXIS Corporate Capital UK II Limited), AXIS Re U.S., AXIS Specialty U.S., AXIS Surplus and AXIS Insurance Co. (collectively, our "Insurance Subsidiaries"). Dividends and other permitted distributions from our Insurance Subsidiaries (in some cases through our subsidiary holding companies), are our primary source of funds to meet ongoing cash requirements, including debt service payments and other expenses, and to pay dividends to our shareholders. Our Insurance Subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends and make distributions. The inability of our Insurance Subsidiaries to pay dividends in an amount sufficient to enable us to meet our cash requirements at the holding company level could have a material adverse effect on our business and our ability to pay dividends and make payments on our indebtedness.
AXIS Capital is a Bermuda company and it may be difficult for you to enforce judgments against it or its directors and executive officers.
AXIS Capital is incorporated pursuant to the laws of Bermuda and our business is based in Bermuda. In addition, some of our directors and officers reside outside the U.S., and all or a substantial portion of our assets and the assets of such persons are located in jurisdictions outside the U.S. As a result, it may be difficult or impossible to effect service of process within the U.S. upon those persons or to recover against us or them on judgments of U.S. courts, including judgments predicated upon civil liability provisions of the U.S. federal securities laws. Further, it may not be possible to bring a claim in Bermuda against us or our directors and officers for violation of U.S. federal securities laws because these laws may have no extraterritorial application under Bermuda law and do not have force of law in Bermuda. A Bermuda court may, however, impose civil liability, including the possibility of monetary damages, on us or our directors and officers if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda law.
There are provisions in our organizational documents that may reduce or increase the voting rights of our shares.and bye-laws.
Our bye-laws generally provide that shareholders have one vote for each common share held by them and are entitled to vote, on a non-cumulative basis, at all meetings of shareholders. However, the voting rights exercisable by a shareholder may be limited so that certain persons or groups are not deemed to hold 9.5% or more of the voting power conferred by our shares. Under these provisions, some shareholders may have the right to exercise their voting rights limited to less than one vote per share. Moreover, these provisions could have the effect of reducing the voting power of some shareholders who would not otherwise be subject to the limitation by virtue of their direct share ownership. In addition, our board of directors may limit a shareholder’s exercise of voting rights where it deems it necessary to do so to avoid adverse tax, legal or regulatory consequences.
We also have the authority under our bye-laws to request information from any shareholder for the purpose of determining whether a shareholder’s voting rights are to be limited pursuant to the bye-laws. If a shareholder fails to respond to our request for information or submits incomplete or inaccurate information in response to a request by us, we may, in our sole discretion, eliminate the shareholder’s voting rights.
There are provisions in our bye-laws that may restrict the ability to transfer common shares and which may require shareholders to sell their common shares.
Our board of directors may decline to register a transfer of any common shares under some circumstances, including if they have reason to believe that any non-de minimis adverse tax, regulatory or legal consequences to us, any of our subsidiaries or any of our shareholders may occur as a result of such transfer. Our bye-laws also provide that if our board of directors determines that share ownership by a person may result in non-de minimis adverse tax, legal or regulatory consequences to us, any of our subsidiaries or any of our shareholders, then we have the option, but not the obligation, to require that shareholder to sell to us or to third parties to whom we assign the repurchase right for fair value the minimum number of common shares held by such person which is necessary to eliminate the non-de minimis adverse tax, legal or regulatory consequences.
Applicable insurance laws may make it difficult to effect a change of control of our company.
Before a person can acquire control of a U.S. insurance company, prior written approval must be obtained from the insurance commissioner of the state where the domestic insurer is domiciled. Prior to granting approval of an application to acquire control of a domestic insurer, the state insurance commissioner will consider such factors as the financial strength of the acquirer, the integrity and management of the acquirer’s board of directors and executive officers, the acquirer’s plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. Generally, state statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10% or more of the voting securities of the domestic insurer. Because a person acquiring 10% or more of our common shares would indirectly control the same percentage of the stock of the AXIS U.S. Subsidiaries, the insurance change of control laws of Connecticut, Illinois and New York would likely apply to such a transaction.
The Insurance Act in Bermuda requires that where the shares of a registered insurer or reinsurer, or the shares of its parent, are traded on a recognized stock exchange, and a person becomes a 10%, 20%, 33% and 50% shareholder controller of that insurer or reinsurer, that person shall, within 45 days, notify the Bermuda Monetary Authority in writing that he has become a controller. In addition, a person who is a shareholder controller of a class 4 insurer or reinsurer (such as AXIS Specialty Bermuda) whose shares or shares of its parent company are traded on a recognized stock exchange must serve the Bermuda Monetary Authority with a notice in writing that he has reduced or disposed of his holding in the insurer or reinsurer where the proportion of voting rights in the insurer or reinsurer held by him will have reached or has fallen below 10%, 20%, 33% or 50% not later than 45 days after such disposal. A shareholder controller refers to a person who (i) holds 10% or more of the shares carrying rights to vote at a shareholders’ meeting of the registered insurer or reinsurer or its parent; (ii) is entitled to exercise 10% or more of the voting power at any shareholders meeting of the registered insurer or reinsurer or its parent; or (iii) is able to exercise significant influence over the management of the registered insurer or reinsurer or its parent by virtue of its entitlement to exercise, or control the exercise of, the voting at the shareholders’ meeting. The Bermuda Monetary Authority may object to any person who has become a shareholder at a specified level where it appears that such person is not, or is no longer, a fit and proper person to be a shareholder of the Bermuda registered insurance or reinsurance company.
In addition, the Insurance Acts and Regulations in Ireland require that anyone acquiring or disposing of a direct or indirect holding in an Irish authorized insurance or reinsurance company (such as AXIS Specialty Europe or AXIS Re SE) that represents 10% or more of the capital or of the voting rights of such company or that makes it possible to exercise a significant influence over the management of such company, or anyone who proposes to decrease or increase that holding to specified levels, must first notify the Central Bank of Ireland ("CBI") of their intention to do so. They also require any Irish authorized insurance or reinsurance company that becomes aware of any acquisitions or disposals of its capital involving the specified levels to notify the CBI. The specified levels are 20%, 33% and 50% or such other level of ownership that results in the company becoming the acquirer’s subsidiary within the meaning of article 20 of the European Communities (non-Life Insurance) Framework Regulations 1994.
The CBI has three months from the date of submission of a notification within which to oppose the proposed transaction if the CBI is not satisfied as to the suitability of the acquirer in view of the necessity "to ensure prudent and sound management of the insurance or reinsurance undertaking concerned." Any person owning 10% or more of the capital or voting rights or an amount that makes it possible to exercise a significant influence over the management of AXIS Capital would be considered to have a "qualifying holding" in AXIS Specialty Europe and AXIS Re SE.
In the U.K., the Prudential Regulation Authority ("PRA") and the Financial Conduct Authority ("FCA") regulate the acquisition of "control" of any U.K. Insurance companies and Lloyd's managing agents which are authorized under the Financial Services and Markets Act 2000 ("FSMA"). Any legal entity or individual that (together with any person with whom it or he is "acting in concert") directly or indirectly acquires 10% or more of the shares in a U.K. authorized insurance company or Lloyd's managing agent, or their parent company, or is entitled to exercise or control the exercise of 10% or more of the voting power in such authorized insurance company or Lloyd's managing agent or their parent company, would be considered to have acquired "control" for the purposes of the relevant legislation, as would a person who had significant influence over the management of such authorized insurance company or their parent company by virtue of his shareholding or voting power in either. A purchase of 10% or more of the ordinary shares of the Company would therefore be considered to have acquired "control" of AXIS Managing Agency Ltd. Under FSMA, any person proposing to acquire "control" over a U.K. authorized insurance company must give prior notification to the PRA of his intention to do so. The PRA, which will consult with the FCA, would then have 60 working days to consider that person's application to acquire "control" (although this 60 working day period can be extended by up to 30 additional working days in certain circumstances where the
regulators have questions relating to the application). Failure to make the relevant prior application could result in action being taken against AXIS Managing Agency Ltd. by the PRA.
A person who is already deemed to have "control" will require prior approval of the PRA if such person increases their level of "control" beyond certain percentages. These percentages are 20%, 30% and 50%. Similar requirements apply in relation to the acquisition of control of a U.K. authorized person which is an insurance intermediary (such as AXIS Underwriting Limited or Contessa Limited) except that the approval must be obtained from the FCA rather than the PRA and the threshold triggering the requirement for prior approval is 20% of the shares or voting power in the insurance intermediary or its parent company. The approval of the Council of Lloyd's is also required in relation to the change of control of a Lloyd's managing agent or member. Broadly, Lloyd's applies the same tests in relation to control as are set out in the FSMA (see above) and in practice coordinates its approval process with that of the PRA.
While our bye-laws limit the voting power of any shareholder to less than 9.5%, there can be no assurance that the applicable regulatory body would agree that a shareholder who owned 10% or more of our shares did not, because of the limitation on the voting power of such shares, control the applicable Insurance Subsidiary. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of the Company, including transactions that some or all of our shareholders might consider to be desirable.
Anti-takeover provisions in our bye-laws could impede an attempt to replace our directors or to effect a change in control, which could diminish the value of our common shares.
Our bye-laws contain provisions that may make it more difficult for shareholders to replace directors and could delay or prevent a change of control that a shareholder might consider favorable. These provisions include a staggered board of directors, limitations on the ability of shareholders to remove directors other than for cause, limitations on voting rights and restrictions on transfer of our common shares. These provisions may prevent a shareholder from receiving the benefit from any premium over the market price of our shares offered by a bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our shares if they are viewed as discouraging takeover attempts in the future.
Risks Related to Taxation
•We may be adversely impacted by changes in tax rules, or changes in the interpretation of existing tax rules in the multiple jurisdictions in which we operate.
Readers should carefully consider the risks noted above together with the risks detailed in Item 1A, 'Risk Factors' and all of the other information included in this report.
Website and Social Media Disclosure
We use our website (www.axiscapital.com) and our corporate Twitter (@AXIS_Capital) and LinkedIn (AXIS Capital) accounts as channels of distribution of Company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, e-mail alerts and other information about AXIS Capital may be received when enrolled in our "E-mail Alerts" program, which can be found in the Investor Information section of our website (www.axiscapital.com). The contents of our website and social media channels are not part of this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
In this Form 10-K, references to "AXIS Capital" refer to AXIS Capital Holdings Limited and references to "we", "us", "our", "AXIS", the "Group" or the "Company" refer to AXIS Capital Holdings Limited and its direct and indirect subsidiaries and branches, including: AXIS Specialty Holdings Bermuda Limited, AXIS Specialty Limited ("AXIS Specialty Bermuda"), AXIS Specialty Limited (Singapore Branch), AXIS Specialty Investments Limited, AXIS Specialty Investments II Limited, AXIS Specialty UK Holdings Limited, AXIS Managing Agency Ltd., AXIS Corporate Capital UK Limited (corporate member which provides 70% capital support to AXIS Syndicate 1686 ("Syndicate 1686")), Novae Group Limited, AXIS UK Services Limited, AXIS Underwriting Limited, AXIS Corporate Capital UK II Limited (sole corporate member of Novae Syndicate 2007 ("Syndicate 2007") and corporate member which provides 30% capital support to Syndicate 1686), AXIS Ventures Limited ("AXIS Ventures"), AXIS Reinsurance Managers Limited ("AXIS Reinsurance Managers"), AXIS Specialty Holdings Ireland Limited, AXIS Specialty Europe SE ("AXIS Specialty Europe"), AXIS Specialty Europe SE (U.K. Branch), AXIS Specialty Europe SE (Belgium Branch), AXIS Specialty Europe SE (Netherlands Branch), AXIS Reinsurance (DIFC) Limited, AXIS Re SE, AXIS Re SE, Dublin (Zurich Branch) ("AXIS Re Europe"), AXIS Re SE Escritório de Representação No Brasil Ltda., Contessa Limited, AXIS Specialty Global Holdings Limited, AXIS Specialty U.S. Holdings, Inc., AXIS Reinsurance Company ("AXIS Re U.S."), AXIS Reinsurance Company (Canadian Branch), AXIS Specialty U.S. Services, Inc., AXIS Specialty U.S. Services, Inc. (U.K. Branch), AXIS Specialty Canada Services, ULC, AXIS Group Services, Inc., AXIS Specialty Underwriters, Inc., AXIS Insurance Company ("AXIS Insurance Co."), AXIS Surplus Insurance Company ("AXIS Surplus"), AXIS Specialty Insurance Company ("AXIS Specialty U.S."), Ternian Insurance Group LLC, AXIS Specialty Finance LLC and AXIS Specialty Finance PLC, unless the context suggests otherwise.
Unless otherwise noted, tabular dollars are in thousands. Amounts may not reconcile due to rounding differences.
General
AXIS provides a broad range of specialty lines insurance and treaty reinsurance to our clients on a worldwide basis, through operating subsidiaries and branch networks based in Bermuda, the United States ("U.S."), Europe, Singapore and Canada. Our underwriting operations are organized around our global underwriting platforms, AXIS Insurance and AXIS Re.
The markets in which we operate have historically been cyclical. During periods of excess underwriting capacity, defined by the availability of capital, competition can result in lower pricing and less favorable policy terms and conditions for insurers and reinsurers. During periods of reduced underwriting capacity, pricing, and policy terms and conditions are generally more favorable for insurers and reinsurers. Historically, underwriting capacity has been impacted by several factors, including industry losses, catastrophes, changes in legal and regulatory guidelines, investment results and the ratings and financial strength of competitors. In 2020, we leveraged firming market conditions to increase our relevance in a select number of attractive specialty lines and treaty reinsurance markets and we continued to re-balance our portfolio towards less volatile lines of business.
At December 31, 2020, we had common shareholders’ equity of $4.7 billion, total capital of $6.6 billion and total assets of $25.9 billion.
Our Business Strategy
We are a hybrid specialty lines insurance and treaty reinsurance company that is a leader in many of the markets where we choose to compete. We provide our clients and distribution partners with a broad range of risk transfer products and services, and meaningful capacity, backed by excellent financial strength. We manage our portfolio holistically, aiming to construct the optimum portfolio of risks, consistent with our risk appetite and the development of our franchise. We nurture an ethical, entrepreneurial and disciplined culture that promotes outstanding client service, intelligent risk taking and the achievement of superior risk-adjusted returns for our shareholders. We believe that the achievement of our objectives will position us as a global leader in specialty risks.
We aim to execute on our business strategy through the following multi-pronged approach:
We offer a diversified range of products and services across market segments and geographies: Our position as a well-balanced hybrid specialty lines insurance and treaty reinsurance company gives us insight into the opportunities and challenges in a variety of markets. We are headquartered in Bermuda and have locations across the U.S., Canada and Europe including Dublin, London, Zurich and Brussels. We are actively pursuing opportunities throughout Latin America, mainly through our Miami office, which enables us to deliver a full range of facultative and treaty reinsurance solutions in Latin America. Our Singapore office serves as our regional hub in Asia and provides specialty insurance and reinsurance solutions in the Asia Pacific region.
We underwrite a balanced portfolio of risks, including complex and volatile lines,moderating overall volatility with risk limits, diversification and risk management: Risk management is a strategic priority embedded in our organizational structure and we are continuously monitoring, reviewing and refining our enterprise risk management practices. We combine judgment and experience with data-driven analysis, enhancing our overall risk selection process.
We modulate our risk appetite and deployment of capital across the underwriting cycle, commensurate with available market opportunities and returns: In response to market dynamics, we recognize opportunities as they develop and react quickly as new trends emerge. Our risk analytics provide important and continuous feedback, further assisting with the ongoing assessment of our risk appetite and strategic capital deployment. We have been successful in extending our product lines, finding new distribution channels and entering new geographies. When we do not find sufficiently attractive uses for our capital, we return excess capital to our shareholders through share repurchases or dividends.
We develop and maintain deep, trusting and mutually beneficial relationships with clients and distribution partners, offering high levels of service and effective solutions for risk management needs: Our management team has extensive industry experience, deep product knowledge and long-standing market relationships. We primarily transact in specialty markets, where risks are complex. We invest in data and technology capabilities and tools to empower our underwriters and enhance the service that we provide to our customers. Our intellectual capital and proven client-service capability attract clients and distribution partners looking for solutions.
We maintain excellent financial strength, characterized by financial discipline and transparency: Our total capital of $6.6 billion at December 31, 2020, as well as our high-quality and liquid investment portfolio and our operating subsidiary ratings of "A+" ("Strong") by Standard & Poor's and "A" ("Excellent") by the A.M. Best Company, Inc. ("A.M. Best") are key indicators of our financial strength.
We attract, develop, retain and motivate teams of experts: We aim to attract and retain the top talent in the industry and to motivate our employees to make decisions that are in the best interest of our clients and shareholders. We nurture an ethical, risk-aware, achievement-oriented culture that promotes professionalism, responsibility, integrity, discipline and entrepreneurship. As a result, we believe that our staff is well-positioned to make the best underwriting and strategic decisions for AXIS.
In 2020, our key metrics for performance measurement included operating return on average common equity ("operating ROACE") which is reconciled to the most comparable GAAP financial measure, return on average common equity ("ROACE"), in Item 7 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures Reconciliation' on an annual basis and relative total shareholder return ("TSR") over the long-term. We believe that the successful execution against long-term strategic plans should drive an increase in TSR over the long-term, and that TSR directly correlates to other relevant key performance metrics, including book value per diluted common share adjusted for dividends. Our goal is to achieve top-quintile industry operating ROACE and growth in book value per diluted common share adjusted for dividends, with volatility consistent with the industry average across underwriting cycles.
Segment Information
Our underwriting operations are organized around our global underwriting platforms, AXIS Insurance and AXIS Re. We have determined that we have two reportable segments, insurance and reinsurance. We do not allocate assets by segment, with the exception of goodwill and intangible assets.
Refer to Item 7 'Management’s Discussion and Analysis of Financial Condition and Results of Operations' for additional information relating to our reportable segments and Item 8, Note 3 to the Consolidated Financial Statements 'Segment Information' for additional information relating to our reportable segments and a description of the geographic distribution of gross premiums written based on the location of our subsidiaries.
The table below presents gross premiums written in each of our reportable segments for each of the most recent three years.
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| Year ended December 31, | 2020 | | 2019 | | 2018 | |
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| Insurance | $ | 4,018,399 | | | $ | 3,675,931 | | | $ | 3,797,592 | | |
| Reinsurance | 2,808,539 | | | 3,222,927 | | | 3,112,473 | | |
| Total | $ | 6,826,938 | | | $ | 6,898,858 | | | $ | 6,910,065 | | |
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Insurance Segment
Lines of Business and Distribution
Our insurance segment offers specialty insurance products to a variety of niche markets on a worldwide basis. The following are the lines of business in our insurance segment:
•Property: provides physical loss or damage, business interruption and machinery breakdown cover for virtually all types of property, including commercial buildings, residential premises, construction projects and onshore renewable energy installations. This line of business includes primary and excess risks, some of which are catastrophe-exposed.
•Marine: provides cover for traditional marine classes, including offshore energy, renewable offshore energy, cargo, liability, recreational marine, fine art, specie, and hull war. Offshore energy coverage includes physical damage, business interruption, operator's extra expense and liability coverage for all aspects of offshore upstream energy, from exploration and construction through the operation and distribution phases.
•Terrorism: provides cover for physical damage and business interruption of an insured following an act of terrorism and includes kidnap and ransom, and crisis management insurance.
•Aviation: provides hull and liability, and specific war cover primarily for passenger airlines but also for cargo operations, general aviation operations, airports, aviation authorities, security firms and product manufacturers.
•Credit and Political Risk: provides credit and political risk insurance products for banks, commodity traders, corporations and multilateral and export credit agencies. Cover is provided for a range of risks including sovereign default, credit default, political violence, currency inconvertibility and non-transfer, expropriation, aircraft non-repossession and contract frustration due to political events.
•Professional Lines: provides directors’ and officers’ liability, errors and omissions liability, employment practices liability, fiduciary liability, crime, professional indemnity, cyber and privacy insurance, medical malpractice and other financial insurance related covers for commercial enterprises, financial institutions, not-for-profit organizations and other professional service providers. This business is predominantly written on a claims-made basis.
•Liability: primarily targets primary and low to mid-level excess and umbrella commercial liability risks in the U.S. wholesale markets in addition to primary and excess of loss employers, public, and products liability business predominately in the U.K. Target industry sectors include construction, manufacturing, transportation and trucking, and other services.
•Accident and Health: includes accidental death, travel insurance and specialty health products for employer and affinity groups.
•Discontinued Lines - Novae: includes those lines of business that Novae exited or placed into run-off in the fourth quarter of 2016 and in the first quarter of 2017. These discontinued insurance lines include financial institutions, professional indemnity, international liability, and international direct and facultative property.
We produce business primarily through wholesale and retail brokers worldwide. Some of our insurance products are also distributed through managing general agents ("MGAs") and managing general underwriters ("MGUs"). In the U.S., we have the ability to write business on an admitted basis using forms and rates filed with state insurance regulators and on a non-admitted or surplus lines basis which provides flexibility in forms and rates, as these are not filed with state regulators. Our ability to write business on a non-admitted basis in the U.S. provides us with the pricing flexibility needed to write non-standard coverages. Substantially all of our insurance business is subject to aggregate limits, in addition to event limits.
Gross premiums written by broker, shown individually where premiums by broker were 10% or more of the total in any of the last three years, were as follows:
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| Years ended December 31, | 2020 | | 2019 | | 2018 | |
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| Marsh & McLennan Companies Inc. | $ | 496,913 | | | 12 | % | | $ | 434,108 | | | 12 | % | | $ | 380,238 | | | 10 | % | |
| Aon plc | 485,113 | | | 12 | % | | 393,645 | | | 11 | % | | 405,281 | | | 11 | % | |
| Other brokers | 2,310,687 | | | 58 | % | | 2,015,822 | | | 54 | % | | 2,067,447 | | | 54 | % | |
| Managing general agencies and underwriters | 725,686 | | | 18 | % | | 832,356 | | | 23 | % | | 944,626 | | | 25 | % | |
| Total | $ | 4,018,399 | | | 100 | % | | $ | 3,675,931 | | | 100 | % | | $ | 3,797,592 | | | 100 | % | |
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No insured accounted for more than 10% of the gross premiums written in the insurance segment.
Competitive Environment
In our insurance segment, where competition is focused on price, service, and availability in the form of capacity, appetite and distribution, among other considerations, we compete globally and locally with U.S. and non-U.S carriers. We believe we can achieve positive differentiation through underwriting expertise in our chosen lines of business and market segments, providing customized solutions for our strategic partners, and top caliber claim service levels to our customers. In addition, our investment in building an agile business model is expected to further position us to capitalize on opportunities and more quickly bring innovative products and services to market while advancing our efforts to strengthen our portfolio and drive profitable growth.
Reinsurance Segment
Lines of Business and Distribution
Our reinsurance segment provides treaty reinsurance to insurance companies on a worldwide basis, written on an excess of loss and a proportional basis. For excess of loss business, we typically indemnify the reinsured for a portion of losses, individually and in the aggregate, in excess of a specified individual or aggregate loss deductible. For proportional business, we assume an agreed percentage of the underlying premiums and accept liability for the same percentage of losses and loss expenses. Our business is primarily produced through reinsurance brokers worldwide. The following are the lines of business in our reinsurance segment:
•Catastrophe: provides protection for most catastrophic losses that are covered in the underlying insurance policies written by our cedants. The underlying policies principally cover property-related exposures but other exposures including workers compensation and personal accident are also covered. The principal perils covered by policies in this portfolio include hurricane and windstorm, earthquake, flood, tornado, hail and fire. In some instances, terrorism may be a covered peril or the only peril. This business is written on a proportional and excess of loss basis.
•Property: provides protection for property damage and related losses resulting from natural and man-made perils that are covered in the underlying personal and commercial lines insurance policies written by our cedants. The predominant exposure is property damage but other risks, including business interruption and other non-property losses, may also be covered when arising from a covered peril. The most significant perils covered by policies in this portfolio include windstorm, tornado and earthquake, but other perils such as freezes, riots, flood, industrial explosions, fire, hail and a number of other loss events are also included. This business is written on a proportional and excess of loss basis.
•Professional Lines: providesprotection for directors’ and officers’ liability, employment practices liability, medical malpractice, professional indemnity, environmental liability, cyber, and miscellaneous errors and omissions insurance risks. The underlying business is predominantly written on a claims-made basis. This business is written on a proportional and excess of loss basis.
•Credit and Surety: provides reinsurance of trade credit insurance products and includes proportional and excess of loss structures. The underlying insurance indemnifies sellers of goods and services in the event of a payment default by the buyer of those goods and services. Surety reinsurance provides protection for losses arising from a broad array of surety bonds issued by insurers to satisfy regulatory demands or contract obligations in a variety of jurisdictions around the world. Mortgage reinsurance is also provided to mortgage guaranty insurers and U.S. government-sponsored entities for losses related to credit risk transfer into the private sector.
•Motor: provides protection to insurers for motor liability and property damage losses arising out of any one occurrence. A loss occurrence can involve one or many claimants where the ceding insurer aggregates the claims from the occurrence. Traditional proportional and non-proportional reinsurance as well as structured solutions are offered.
•Liability: provides protection to insurers of admitted casualty business, excess and surplus lines casualty business and specialty casualty programs. The primary focus of the underlying business is general liability, workers' compensation, auto liability and excess casualty.
•Agriculture: provides protection for risks associated with the production of food and fiber on a global basis for primary insurance companies writing multi-peril crop insurance, crop hail and named peril covers, as well as custom risk transfer mechanisms for agricultural dependent industries with exposures to crop yield and/or price deviations. This business is written on a proportional and aggregate stop loss reinsurance basis.
•Engineering: provides protection for all types of construction risks and risks associated with erection, testing and commissioning of machinery and plants during the construction stage. This line of business also includes cover for losses arising from operational failures of machinery, plant and equipment and electronic equipment as well as business interruption. We decided to exit this line of business in 2020.
•Marine and Aviation: includes specialty marine classes such as cargo, hull, pleasure craft, marine liability, inland marine and offshore energy. The principal perils covered by policies in this portfolio include physical loss, damage and/or liability arising from natural perils of the seas or land, man-made events including fire and explosion, stranding/sinking/salvage, pollution, shipowners and maritime employers liability. This business is written on a non-proportional and proportional basis. Aviation provides cover for airline, aerospace and general aviation exposures. This business is written on a proportional and non-proportional basis.
•Accident and Health: includes personal accident, specialty health, accidental death, travel, life and disability reinsurance products which are offered on a proportional and catastrophic or per life excess of loss basis.
•Discontinued Lines - Novae: includes those lines of business that Novae exited or placed into run-off in the fourth quarter of 2016 and in the first quarter of 2017. These discontinued reinsurance lines include motor reinsurance, general liability reinsurance and international facultative property.
Gross premiums written by broker, shown individually where premiums by broker were 10% or more of the total in any of the last three years, were as follows:
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| Years ended December 31, | 2020 | | 2019 | | 2018 | |
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| Marsh & McLennan Companies Inc. | $ | 818,821 | | | 29 | % | | $ | 838,617 | | | 26 | % | | $ | 779,375 | | | 25 | % | |
| Aon plc | 694,712 | | | 25 | % | | 887,602 | | | 28 | % | | 765,779 | | | 25 | % | |
| Willis Tower Watson PLC | 435,498 | | | 16 | % | | 403,402 | | | 13 | % | | 361,983 | | | 12 | % | |
| Other brokers | 582,368 | | | 20 | % | | 795,352 | | | 24 | % | | 864,601 | | | 28 | % | |
| Direct | 105,777 | | | 4 | % | | 135,614 | | | 4 | % | | 178,568 | | | 6 | % | |
| Managing general agencies and underwriters | 171,363 | | | 6 | % | | 162,339 | | | 5 | % | | 162,167 | | | 5 | % | |
| Total | $ | 2,808,539 | | | 100 | % | | $ | 3,222,927 | | | 100 | % | | $ | 3,112,473 | | | 100 | % | |
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No cedant accounted for more than 10% of the gross premiums written in the reinsurance segment.
Competitive Environment
In our reinsurance segment, competition tends to be focused on availability, service, financial strength and price. We compete with major U.S. and non-U.S. reinsurers and reinsurance departments of numerous multi-line insurance organizations. In addition to traditional market participants, we also compete with new market entrants supported by alternative capital sources offering risk transfer solutions on a collateralized or other non-traditional basis. Our clients may also acquire reinsurance protection through capital market products such as catastrophe bonds and insurance loss warranties. We believe that we achieve a competitive advantage through our diversified global product offerings, responsiveness to customer needs and ability to provide sophisticated and innovative products. We offer excellent claims management, strong financial strength ratings and an ability to leverage our balance sheet and relationships with strategic capital partners to provide meaningful capacity.
Cash and Investments
We seek to balance the investment portfolios’ objectives of increasing book value with the generation of relatively stable investment income, while providing sufficient liquidity to meet our claims and other obligations. Liquidity needs arising from potential claims are of primary importance and are considered in asset class participation and the asset allocation process. A significant portion of our investment portfolio is dedicated to investment grade fixed maturities that will generate cash flows that match expected claim payouts.
To diversify risk and optimize the growth in book value, we may invest in other asset classes such as equity securities, high yield securities and alternative investments (e.g. private equity funds) which provide higher potential total rates of return. These individual investment classes involve varying degrees of risk, including the potential for more volatile returns and reduced liquidity. However, as part of a balanced portfolio, they also provide diversification from interest rate and credit risk.
With regard to our investment portfolio, we primarily utilize third-party investment managers for security selection and trade execution functions, subject to guidelines and objectives for each asset class. This enables us to actively manage our investment portfolio with access to top performers specializing in various products and markets. We select the managers based on various criteria including investment style, performance history and corporate governance. In addition, we monitor approved investment asset classes for each subsidiary through analysis of our operating environment, including expected volatility of cash flows, overall capital position, regulatory and rating agency considerations. The Finance Committee of our Board of Directors approves overall group asset allocation targets and investment policy to ensure that they are consistent with our overall goals, strategies and objectives. We also have an Investment and Finance Committee, comprised of members of our senior management team, which oversees the implementation of our investment strategy.
Refer to Item 7 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cash and Investments' and Item 8, Note 5 to the Consolidated Financial Statements 'Investments' for additional information regarding our investment portfolio.
Refer to 'Risk and Capital Management' for additional information regarding the management of investment risk.
REGULATION
General
The business of insurance and reinsurance is regulated in most countries, although the degree and type of regulation varies significantly from one jurisdiction to another. In addition, some jurisdictions are currently evaluating changes to their regulation and we are monitoring these potential developments. To the extent we are aware of impending changes in regulation, designated project teams prepare us to comply on a timely basis with such anticipated changes. The following describes the current material regulations under which the Company operates.
Bermuda
Our Bermuda insurance operating subsidiary, AXIS Specialty Bermuda, is a Class 4 general business insurer subject to the Insurance Act 1978 of Bermuda and related regulations, as amended (the "Insurance Act"). The Insurance Act provides that no person may carry on any insurance or reinsurance business in or from within Bermuda unless registered as an insurer by the Bermuda Monetary Authority (the "BMA") under the Insurance Act. The Insurance Act imposes upon Bermuda insurance companies solvency and liquidity standards and auditing and reporting requirements, and grants the BMA powers to supervise, investigate, require information and demand the production of documents and intervene in the affairs of insurance companies. Significant requirements pertaining to Class 4 insurers include the appointment of an independent auditor, the appointment of a loss reserve specialist, the appointment of a principal representative in Bermuda, the filing of annual Statutory Financial Returns, the filing of annual GAAP financial statements, the filing of an annual capital and solvency return, compliance with minimum and enhanced capital requirements, compliance with certain restrictions on reductions of capital and the payment of dividends and distributions, compliance with group solvency and supervision rules, if applicable, and compliance with the Insurance Code of Conduct. On July 30, 2018, the Insurance Amendment (No. 2) Act 2018 amended the Insurance Act to provide for the prior payment of policyholders' liabilities ahead of general unsecured creditors in the event of the liquidation or winding up of an insurer. Effective January 1, 2019, this amendment applies to general business insurers and provides that, subject to certain statutorily preferred debts, the insurance debts of an insurer must be paid in priority to all other unsecured debts of the insurer. Insurance debt is defined as a debt to which an insurer is or may become liable pursuant to an insurance contract, excluding debts owed to an insurer under an insurance contract where the insurer is the person insured.
Effective January 1, 2016, the BMA was granted full "equivalence" under Solvency II (refer to"Ireland" below) for Bermuda’s commercial insurance sector, including Class 4 insurers.
The BMA acts as group supervisor of AXIS Capital and has designated AXIS Specialty Bermuda as the ‘designated insurer’ of the Group. In accordance with the group supervision and insurance group solvency rules, AXIS Capital is required to prepare and submit annual audited group GAAP financial statements, an annual group Statutory Financial Return, an annual group Capital and Solvency Return and quarterly group unaudited GAAP financial statements, and to appoint both a group actuary and a group auditor. AXIS Capital also files an annual capital and solvency return and must ensure compliance with minimum and enhanced capital requirements.
Effective September 23, 2020, AXIS Ventures Reinsurance Limited deregistered as a Class 3A insurer with the BMA and AXIS Ventures deregistered as an insurance manager with the BMA. AXIS Ventures Reinsurance Limited is currently pending dissolution.
AXIS Reinsurance Managers is regulated by the BMA as an insurance manager. Insurance managers are subject to the Insurance Act which provides that no person may carry on business as an insurance manager unless registered with the BMA under the Insurance Act. Insurance managers are required to comply with the Insurance Manager Code of Conduct.
AXIS Capital, AXIS Specialty Bermuda, AXIS Specialty Holdings Bermuda Limited, AXIS Specialty Investments Limited, AXIS Ventures, AXIS Specialty Investments II Limited and AXIS Reinsurance Managers must comply with provisions of the Bermuda Companies Act 1981, as amended (the "Companies Act"), regulating the payment of dividends and distributions. A Bermuda company may not declare or pay a dividend or make a distribution out of contributed surplus if there are reasonable grounds for believing that: (a) the company is, or would after the payment be, unable to pay its liabilities as they become due; or (b) the realizable value of the company’s assets would thereby be less than its liabilities.
The Singapore branch of AXIS Specialty Bermuda, AXIS Specialty Limited (Singapore Branch), established in 2008, is regulated by the Monetary Authority of Singapore (the "MAS") pursuant to The Insurance Act of Singapore, which imposes significant regulations relating to capital adequacy, risk management, governance, audit and actuarial requirements. AXIS Specialty Limited (Singapore Branch) is registered by the Accounting and Corporate Regulatory Authority ("ACRA") as a foreign company in Singapore and is also regulated by ACRA pursuant to the Singapore Companies Act. Prior to establishing its Singapore branch, AXIS Specialty Bermuda had maintained a representative office in Singapore since 2004.
AXIS Specialty Bermuda has reinsurance permissions in China and the Netherlands. AXIS Specialty Limited (Singapore Branch) has separate reinsurance permissions in China.
AXIS Re SE may write reinsurance in Bermuda under Solvency II equivalence between Bermuda and the E.U.
AXIS Managing Agency Ltd. may write general insurance and reinsurance in Bermuda using Lloyd's of London ("Lloyd's") licenses (refer to "U.K. and Lloyd's of London" below).
United States
U.S. Insurance Holding Company Regulation of AXIS Capital’s Insurance Subsidiaries
As members of an insurance holding company system, each of AXIS Insurance Co., AXIS Re U.S., AXIS Specialty U.S. and AXIS Surplus, collectively AXIS Capital’s U.S. insurance subsidiaries (collectively, the "U.S. Insurance Subsidiaries") are subject to the insurance holding company system laws and regulations of the states in which they do business. These laws generally require each of the U.S. Insurance Subsidiaries to register with its domestic state insurance department and to furnish financial and other information which may materially affect the operations, management or financial condition within the holding company system. All transactions within a holding company system that involve an insurance company must be fair and equitable. Notice to the applicable insurance department is required prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and an entity in its holding company system, and certain transactions may not be consummated without the department’s prior approval.
State Insurance Regulation
AXIS Re U.S. is licensed to transact insurance and reinsurance throughout the U.S. and in Puerto Rico. AXIS Re U.S. is also authorized to transact insurance and reinsurance throughout Canada through its Canadian branch and has reinsurance permissions in Argentina, Brazil, China, Columbia, Ecuador, Guam, Guatemala, Honduras, Panama, India and Mexico. AXIS Insurance Co. is licensed to transact insurance and reinsurance throughout the U.S. AXIS Specialty U.S. is licensed to transact insurance and reinsurance throughout the U.S., except California, Iowa, Maine, New Mexico, New York and Wyoming. AXIS Surplus is eligible to write insurance on a surplus lines basis throughout the U.S., Puerto Rico and the U.S. Virgin Islands.
Our U.S. Insurance Subsidiaries also are subject to regulation and supervision by their respective states of domicile and by other jurisdictions in which they do business. The regulations generally are derived from statutes that delegate regulatory and supervisory powers to an insurance official. The regulatory framework varies from state to state, but generally relates to approval of policy forms and rates, the standards of solvency that must be met and maintained, including risk-based capital standards, material transactions between an insurer and its affiliates, the licensing of insurers, agents and brokers, restrictions on insurance policy terminations, the nature of and limitations on the amount of certain investments, limitations on the net amount of insurance of a single risk compared to the insurer’s surplus, deposits of securities for the benefit of policyholders, methods of accounting, periodic examinations of the financial condition and market conduct of insurance companies, the form and content of reports of financial condition required to be filed, reserves for unearned premiums, losses, expenses and other obligations.
Our U.S. Insurance Subsidiaries are required to file detailed quarterly statutory financial statements with state insurance regulators in each of the states in which they conduct business. In addition, the U.S. Insurance Subsidiaries’ operations and accounts are subject to financial condition and market conduct examination at regular intervals by state regulators.
Regulators and rating agencies use statutory surplus as a measure to assess our U.S. Insurance Subsidiaries’ ability to support business operations and pay dividends. Our U.S. Insurance Subsidiaries are subject to various state statutory and regulatory restrictions that limit the amount of dividends that may be paid from earned surplus without prior approval from regulatory authorities. These restrictions differ by state, but generally are based on calculations using statutory surplus, statutory net
income and investment income. In addition, many state regulators use the National Association of Insurance Commissioners promulgated risk-based capital requirements as a means of identifying insurance companies which may be under-capitalized.
Although generally the insurance industry is not directly regulated by the federal government, federal legislation and initiatives can affect the industry and our business. Certain sections of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank") pertain to the regulation and business of insurance. Specifically, the Federal Insurance Office ("FIO") has limited authority to collect information and report on the business of insurance to Congress. In addition, Dodd-Frank contains the Non-Admitted and Reinsurance Reform Act of 2010 ("NRRA"). NRRA attempts to coordinate the payment of surplus lines taxes, simplify the granting of alien insurers to become surplus lines authorized and coordinates the credit for certain reinsurance. The Company continues to monitor the implementation of Dodd-Frank.
Ternian Insurance Group LLC, a leading provider of voluntary, limited benefit, affordable health plans and other employee benefits coverage for hourly and part-time workers and their families, is an authorized insurance producer in all 50 states of the U.S. except Hawaii. As a resident insurance producer in Arizona, Ternian Insurance Group LLC is subject to regulation and supervision by the Arizona Department of Insurance and is also subject to the regulation and supervision of the other states in which Ternian transacts business.
AXIS Specialty Underwriters, Inc., a Florida licensed reinsurance intermediary, is subject to regulation and supervision by the Florida Department of Financial Services. AXIS Specialty Underwriters, Inc. operates as the Latin American and Caribbean regional coverholder for Syndicate 1686, providing facultative reinsurance coverage to the Latin American and Caribbean market.
U.S. Authorizations of our Non-U.S. Insurance Subsidiaries
The insurance laws of each state of the U.S. regulate or prohibit the sale of insurance and reinsurance by insurers and reinsurers that are not admitted to do business within their jurisdictions, or conduct business pursuant to exemptions. AXIS Specialty Europe is eligible to write surplus lines business throughout the U.S. and in Puerto Rico. AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to (i) write surplus lines business throughout the U.S. and in all U.S. territories, (ii) write insurance business, except life insurance business, in the states of Illinois, Kentucky and in the U.S. Virgin Islands and (iii) write non-life reinsurance business throughout the U.S. and in all U.S. territories, except for accident and health reinsurance in New York.
In addition to the regulatory requirements imposed by the jurisdictions in which they are licensed, reinsurers’ business operations are affected by regulatory requirements in various states of the U.S. governing "credit for reinsurance" that are imposed on their ceding companies. In general, a ceding company obtaining reinsurance from a reinsurer that is licensed, accredited or approved by the jurisdiction or state in which the ceding company files statutory financial statements is permitted to reflect in its statutory financial statements a credit in an aggregate amount equal to the ceding company’s liability for unearned premiums (which is that portion of premiums written which applies to the unexpired portion of the policy period), loss reserves and loss expense reserves ceded to the reinsurer. The great majority of states, however, permit a credit to statutory surplus resulting from reinsurance obtained from a non-licensed or non-accredited reinsurer to be recognized to the extent that the reinsurer provides a letter of credit, trust fund or other acceptable security arrangement. A few states do not allow credit for reinsurance ceded to non-licensed reinsurers except in certain limited circumstances, and others impose additional requirements that make it difficult to become accredited. In connection with the establishment of a Multi-Beneficiary Reinsurance Trust, AXIS Specialty Bermuda obtained accredited or trusteed reinsurer status in all U.S. jurisdictions except for New York.
Ireland
Our Ireland domiciled insurer and reinsurer are subject to the Solvency II Directive (Directive 2009/138/EC), as amended. Solvency II represents a consolidation and modernization of existing European Commission Solvency I insurance and reinsurance regulation and supervision and includes a harmonized risk-based solvency and reporting regime for the insurance/reinsurance sector. Solvency II covers three main areas: (i) the valuation of assets and liabilities and related solvency capital requirements; (ii) governance requirements including key functions of compliance, internal audit, actuarial and risk management; and (iii) legal entity and European Union ("E.U.") group reporting and disclosure requirements including public disclosures. The capital requirement must be computed using the Solvency II standard formula unless the Central Bank of Ireland ("CBI") has previously authorized a company to use its own internal model. Certain of our European legal entities are subject to Solvency II.
AXIS Specialty Europe
AXIS Specialty Europe is a European public limited liability company incorporated as a non-life insurer under the laws of Ireland. It is a Societas Europaea (SE), or European society company, and has been registered in accordance with E.U. law. As a SE company, AXIS Specialty Europe can more easily merge with companies in European member states and also transfer its domicile to other member states of the E.U. AXIS Specialty Europe is authorized and regulated by the CBI pursuant to the Insurance Acts 1909 to 2000, as amended, repealed or replaced, the Central Bank Acts 1942 – 2014, as amended, repealed or replaced, and E.U. regulation relating to general insurance and statutory instruments made thereunder. AXIS Specialty Europe is authorized to conduct business in 16 non-life insurance classes throughout the E.U. and the European Economic Area ("EEA"), which includes each of the member countries of the E.U. with the addition of Iceland, Liechtenstein and Norway. AXIS Specialty Europe may also write reinsurance business within the classes of insurance business for which it is authorized.
AXIS Specialty Europe is subject to Solvency II. In accordance with Solvency II, AXIS Specialty Europe is permitted to provide insurance services to clients located in any EEA Member State ("Freedom of Services"), subject to compliance with any "general good requirements" as may be established by the applicable EEA Member State regulator. AXIS Specialty Europe has notified the CBI of its intention to provide insurance services on a Freedom of Services basis in all EEA countries.
Solvency II also permits AXIS Specialty Europe to carry on insurance business in any EEA Member State under the principle of "Freedom of Establishment" subject to the prior approval of the CBI. AXIS Specialty Europe operates under Freedom of Establishment in the U.K., Belgium and the Netherlands through its branches established in each of these jurisdictions.
AXIS Specialty Europe's U.K. branch transacts general insurance business in the U.K., trading as AXIS Specialty London. The U.K. withdrew from the E.U. on December 31, 2020 and is now considered a third country. In order to maintain business continuity, AXIS Specialty Europe submitted an application to the Prudential Regulatory Authority (the "PRA") in 2018 for authorization of a third country branch. As this application is still pending, AXIS Specialty Europe entered into the PRA's Temporary Permissions Regime (the "TPR"), under which it is able to maintain business continuity. AXIS Specialty Europe will remain in the TPR, fully regulated by the PRA and the Financial Conduct Authority ("FCA"), until the earlier of the third year anniversary of its admission to the TPR and the date the PRA application has been fully assessed and approved.
Effective January 1, 2019, Compagnie Belge d’Assurances Aviation NV/SA merged into AXIS Specialty Europe by way of merger by absorption and dissolved without going into liquidation (the "Aviabel Merger"). In connection with the Aviabel Merger, AXIS Specialty Europe established two new branches in Belgium and the Netherlands (see "Belgium" and the "Netherlands" below).
AXIS Specialty Europe has local regulatory permission to carry on insurance business in Jersey and has reinsurance permissions in India, China, Argentina, Mexico, Panama, Paraguay, Chile, Honduras, Ecuador, Colombia and Guatemala.
AXIS Re SE
AXIS Re SE is a European public limited liability company incorporated as a reinsurer under the laws of Ireland. AXIS Re SE is also a Societas Europaea (SE), or European society company, registered in accordance with E.U. law. AXIS Re SE is authorized by the CBI as a composite reinsurer (non-life and life) in accordance with the Insurance Acts 1909 to 2000, as amended, repealed or replaced, the Central Bank Acts 1942 – 2014, as amended, repealed or replaced, and E.U. regulation applicable to reinsurance and statutory instruments made thereunder. AXIS Re SE is authorized to transact reinsurance throughout the E.U. and the EEA and is subject to Solvency II.
AXIS Re SE conducts business through its branch in Zurich, Switzerland, trading as AXIS Re Europe (see "Switzerland" below).
AXIS Re SE Escritório de Representação No Brasil Ltda. was established in Brazil as a subsidiary of AXIS Re SE to facilitate the Brazilian Superintendence of Private Insurance ("SUSEP") regulatory requirements for approval of a representative office of AXIS Re SE and for the registration of AXIS Re SE with SUSEP as an Admitted Reinsurer.
AXIS Re SE's representative offices in France and Spain were closed during 2019.
AXIS Re SE has reinsurance permissions in Argentina, Bolivia, Brazil, China, Chile, Colombia, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, India, Mexico, Nicaragua, Panama, Paraguay, Peru and Venezuela.
AXIS Specialty Holdings Ireland Limited
AXIS Specialty Holdings Ireland Limited is the limited liability holding company for AXIS Specialty Europe and AXIS Re SE, each incorporated under the laws of Ireland, Contessa Limited, a U.K. licensed insurance intermediary, and AXIS Reinsurance (DIFC) Limited, a Dubai licensed insurance intermediary.
AXIS Specialty Bermuda may write reinsurance under Solvency II equivalence granted to Bermuda by the E.U.
AXIS Managing Agency Ltd. is eligible to write insurance (except permanent health) and reinsurance business in Ireland through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" below).
AXIS Specialty Global Holdings Limited
AXIS Specialty Global Holdings Limited is the limited liability holding company for AXIS Capital's U.S. Insurance subsidiaries.
U.K. and Lloyd's of London
In the U.K., under the Financial Services and Markets Act 2000 ("FSMA"), no person may carry on a regulated activity unless authorized or exempt. Effecting or intermediating contracts of insurance or reinsurance are regulated activities requiring authorization. Effecting contracts of insurance requires authorization by the PRA and is regulated by the FCA. Intermediating contracts of insurance requires authorization by the FCA.
Under the Financial Services Act 2012, the FCA is a conduct regulator for all U.K. firms carrying on regulated activity in the U.K. while the PRA is the prudential regulator of U.K. banks, building societies, credit unions, insurers and major investment firms. As a prudential regulator, the PRA's general objective is to promote the safety and soundness of the firms it regulates. The PRA rules require financial firms to hold sufficient capital and have adequate risk controls in place.
The FCA's statutory strategic objective is to ensure that relevant markets function well and have operational objectives to protect consumers, protect financial markets and promote competition. It makes rules covering how the firm must be managed and requirements relating to the firm’s systems and controls, how business must be conducted and the firm’s arrangements to manage financial crime risk. The PRA and the FCA require regular and ad hoc reporting and monitor compliance with their respective rulebooks through a variety of means including the collection of data, industry reviews and site visits. The directors and senior managers of AXIS Managing Agency Ltd. must be "approved persons" under FSMA, making them directly and personally accountable for ensuring compliance with the requirements of the PRA and the FCA.
AXIS Managing Agency Ltd.
AXIS Managing Agency Ltd. is authorized and regulated by the PRA and regulated by the FCA to conduct insurance and reinsurance business and is a Lloyd's managing agent authorized by Lloyd's to manage our syndicates, Syndicate 1686 and Syndicate 2007. AXIS Managing Agency Ltd. is also the managing agent for SPA 6129, a third-party Lloyd's special purpose arrangement.
To consolidate our Lloyd’s business under Syndicate 1686, Syndicate 2007 ceased accepting new business and was placed into run-off on January 1, 2019. The final underwriting year of Syndicate 2007 and SPA 6129 will close by way of a reinsurance to close arrangement which took effect on January 1, 2021.
Lloyd’s is a society of corporate and individual members which underwrite insurance and reinsurance as members of syndicates. A syndicate is made up of one or more members that form a group to accept insurance and reinsurance risks. Each syndicate is managed by a managing agent. Managing agents write insurance business on behalf of the members of the syndicate, which members receive profits or bear losses in proportion to their respective shares in the syndicate for each underwriting year of account.
Lloyd’s is subject to U.K. law and is authorized under the FSMA. The Lloyd’s Act 1982 defines the governance structure and rules under which the society operates. Under the Lloyd's Act 1982, the Council of Lloyd’s is responsible for the management and supervision of the Lloyd’s market and supports the Lloyd's market. Lloyd's manages and protects the Lloyd's network of international licenses. Lloyd's agrees to syndicates' business plans and evaluates performance against
those plans. Syndicates are required to underwrite only in accordance with their agreed business plans. If they fail to do so, Lloyd’s can take a range of actions including, as a last resort, prohibiting a syndicate from underwriting. Lloyd’s also monitors syndicates’ compliance with Lloyd’s minimum standards and responsible for setting both member and central capital levels.
Lloyd’s has a global network of licenses and authorizations, and underwriters at Lloyd's may write business in and from countries where Lloyd’s has authorized status or exemptions available to non-admitted insurers or reinsurers. Lloyd’s licenses can only be used if the Syndicate Business Forecast, agreed annually with Lloyd’s, names those countries.
AXIS Managing Agency Ltd. operates an underwriting division at Lloyd’s Insurance Company (China) Limited, a wholly owned subsidiary of the Corporation of Lloyd’s which allows it to underwrite reinsurance in China.
AXIS Corporate Capital UK Limited
Until December 31, 2018, AXIS Corporate Capital UK Limited was the sole corporate member of Syndicate 1686. Effective January 1, 2019, both AXIS Corporate Capital UK Limited and AXIS Corporate Capital UK II Limited are corporate members of Syndicate 1686, providing 70% and 30% capital support, respectively. Syndicate 1686 is managed by AXIS Managing Agency Ltd.
AXIS Corporate Capital UK II Limited
(formerly Novae Corporate Underwriting Limited)
Following the acquisition of Novae Group Limited, management of Syndicate 2007 was transferred to AXIS Managing Agency Ltd. AXIS Corporate Capital UK II Limited is the sole corporate member of Syndicate 2007.
AXIS Underwriting Limited
AXIS Underwriting Limited, formerly known as Novae Underwriting Limited, is authorized and regulated by the FCA as an insurance intermediary and underwrites insurance at Lloyd's on behalf of Syndicate 1686.
Contessa Limited
Effective December 2019, Contessa Limited ceased writing insurance on behalf of AXIS Specialty Europe. Contessa Limited will continue to manage the AXIS Specialty Europe book of business on a run-off basis.
In January 2021, Contessa Limited surrendered its license as an insurance intermediary with the FCA.
AXIS Specialty UK Holdings Limited
AXIS Specialty UK Holdings Limited is a limited liability holding company for AXIS Managing Agency Ltd., AXIS Corporate Capital UK Limited and Novae Group Limited, and is incorporated under the laws of England and Wales.
Regulatory Impact Due to Brexit
On June 23, 2016, the U.K. voted to exit the E.U. ("Brexit") and on December 31, 2020, the U.K. completed its withdrawal from the E.U. Although an agreement was reached between the E.U. and the U.K., this agreement does not cover financial services. The parties have committed to enter into a Memorandum of Understanding covering financial services by March 2021. The following addresses the current impact to our insurers and reinsurers as a result of the U.K.'s withdrawal from the E.U.
Insurance
AXIS Specialty Europe established its branch in the U.K. pursuant to the right to Freedom of Establishment under E.U. law. As it was anticipated that AXIS Specialty Europe would lose its authorization to conduct business in the U.K. as a result of the U.K.'s exit from the E.U., an application for authorization of a third country branch was submitted to the PRA in 2018. As this application is still pending, AXIS Specialty Europe entered into the TPR to obtain temporary authorization. Under the TPR, AXIS Specialty Europe has authority to operate as a third country branch in the U.K. and is fully regulated by the PRA and FCA. As a result, AXS Specialty Europe's operations in the U.K. have been able to continue without interruption.
In preparation for Brexit, Lloyd’s established Lloyd's Insurance Company S.A in Brussels ("Lloyd’s Brussels") to retain access to the EEA markets and transferred all EEA risks to Lloyd’s Brussels.Lloyd's Brussels has been approved by the National Bank of Belgium ("NBB") and the Belgian conduct regulator, the Financial Services and Markets Authority ("Belgian FSMA") with authorization to write non-life insurance risks throughout the EEA. Effective with Brexit, all EEA risks are written by Lloyd’s Brussels.AXIS Managing Agency Ltd. has retained its access to the EEA markets through Lloyd's Brussels.
In January 2021, Lloyd’s Brussels updated Lloyd’s managing agents on its ongoing discussions with Lloyd’s, NBB and the Belgian FSMA regarding Lloyd’s Brussels’ operating model and the activities performed on behalf of Lloyd’s Brussels by Lloyd’s managing agents. We continue to monitor these discussions and are prepared to address any required changes to our operating model in the U.K. or the EEA.
Reinsurance
AXIS Managing Agency Ltd. remains able to conduct non-life facultative, proportional and excess of loss reinsurance throughout the EEA via Lloyd’s Brussels. The E.U. has not yet granted equivalence to the U.K. under Solvency II, however the review is ongoing and a decision is expected in the coming months.
AXIS Re SE currently transacts reinsurance business in the EEA pursuant to European law. In November 2020, the U.K. granted equivalence under Solvency II to EEA supervised reinsurers, including AXIS Re SE, allowing such reinsurers to continue operations without interruption.
Switzerland
AXIS Re SE's branch in Zurich, Switzerland trades as AXIS Re Europe and is registered in Zurich as AXIS Re SE, Dublin (Zurich branch). The CBI remains responsible for the prudential supervision of the branch. The Swiss Financial Market Supervisory Authority does not impose additional regulation upon a Swiss branch of an EEA reinsurer.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write all classes of insurance business, except life, sickness and legal expenses, and is authorized to write all classes of reinsurance business in Switzerland.
Singapore
AXIS Specialty Bermuda conducts insurance and reinsurance business from its branch in Singapore, AXIS Specialty Limited (Singapore Branch), subject to the supervision of the BMA and the MAS which imposes significant regulations relating to capital adequacy, risk management, governance and audit and actuarial requirements. AXIS Specialty Limited (Singapore Branch) is registered by ACRA as a foreign company in Singapore and regulated by ACRA pursuant to the Singapore Companies Act.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write insurance from Singapore with the exception of certain compulsory classes and life business. Singapore business may also be written from outside Singapore in certain circumstances where it is placed with a Singapore intermediary licensed by the MAS to place business at Lloyd's or by dealing directly with the insured.
Canada
AXIS Re U.S. conducts insurance and reinsurance business from AXIS Reinsurance Company (Canadian Branch), its branch in Canada, subject to the supervision of the New York State Department of Financial Services and the Office of the Superintendent of Financial Institutions Canada ("OSFI"), the federal regulatory authority that supervises federal Canadian and non-Canadian insurance companies operating in Canada pursuant to the Insurance Companies Act (Canada). The branch is authorized by OSFI to transact insurance and reinsurance. In addition, the branch is subject to the laws and regulations of each of the provinces and territories in which it is licensed.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses subject to the laws and regulations of each of the provinces and territories in which it is licensed and to write insurance in or from Canada, with the following exceptions: hail insurance in respect of crop in the province of Quebec; home warranty insurance in the province of British Columbia; life insurance; credit protection insurance; title insurance; surety; and mortgage default insurance. Syndicate 1686, through Lloyd's, is authorized to write reinsurance in or from Canada subject to certain restrictions relating to life reinsurance.
Belgium
AXIS Specialty Europe conducts insurance from its Belgium branch, AXIS Specialty Europe SE (Belgium Branch), which is subject to CBI prudential supervision and limited regulation by the NBB.
AXIS Specialty Europe also has permission to write insurance and reinsurance on a Freedom of Services basis in Belgium.
AXIS Re SE has permission to write reinsurance on a Freedom of Services basis in Belgium.
AXIS Managing Agency Ltd. is eligible to write insurance (except permanent health) and reinsurance business in Belgium through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" above).
Netherlands
AXIS Specialty Europe conducts insurance from its Netherlands branch, AXIS Specialty Europe SE (Netherlands Branch), which is subject to CBI prudential supervision and limited regulation by the Dutch National Bank.
AXIS Specialty Europe has permission to write insurance and reinsurance on a Freedom of Services basis in the Netherlands.
AXIS Re SE has permission to write reinsurance on a Freedom of Services basis in the Netherlands.
AXIS Managing Agency Ltd. is eligible to write insurance (except permanent health) and reinsurance business in the Netherlands through Lloyd's Brussels (see "Regulatory Impact Due to Brexit" above).
Dubai
AXIS Reinsurance (DIFC) Limited was granted a prudential Category 4 license by the Dubai Financial Services Authority in December 2017 and operated as an intermediary under binding authority granted by the Board of Directors of AXIS Re SE to underwrite accident and health reinsurance. In December 2020, AXIS Reinsurance (DIFC) Limited surrendered its license and is currently in liquidation proceedings.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write reinsurance in or from Dubai with certain exceptions.
Non-Admitted Insurance and Reinsurance
The Company also insures and reinsures risks in many countries, including the above countries, pursuant to regulatory permissions and exemptions available to non-admitted insurers and reinsurers.
AXIS Managing Agency Ltd. is eligible to use Lloyd's licenses to write insurance and reinsurance business where Lloyd's has authorized status or pursuant to regulatory exemptions available to non-admitted insurers and reinsurers.
TRADEMARKS
We use our trademarks, including among others, our "AXIS" trademarks for the global marketing of our products and services, and we believe that we sufficiently safeguard our trademark portfolio to protect our rights.
HUMAN CAPITAL MANAGEMENT
As a company, AXIS Capital’s mission is not only to deliver outstanding financial results, but also to help our clients, brokers and partners navigate the challenges of a volatile world. We believe our employees distinguish us from our competitors and are critical to our success as an insurance and reinsurance company that leads with purpose. Our workforce’s strength is grounded in our One AXIS culture, which celebrates collaboration, diversity and integrity, as well as relentless execution, continuous learning, adapting and improving. We recognize that our strength lies in our people, and therefore, one of our core strategies is to invest in and support our employees, including the following areas of focus:
Health, Safety and Wellness
We are committed to the health, safety and wellness of our workforce. In response to the ongoing COVID-19 pandemic, most of our employees have worked remotely since March 2020, and we suspended all nonessential business travel. We provided employees with an office and technology stipend to assist with the transition to working from home and have developed educational tools and materials focused on the well-being of our employees, including remote working best practices, leadership of virtual teams and managing stress while working from home. We also offered flexible work schedules, added half-day well-being days and allowed flexibility with paid time off and sick leave policies for employees directly impacted by COVID-19. We are carefully reviewing and monitoring health information and shelter-in-place orders in the regions in which we operate, and we have reopened certain of our offices only on an optional and limited basis and in accordance with the rules and regulations of the applicable jurisdiction. Our Board of Directors is focused on our response to the COVID-19 pandemic, receiving regular updates on the health and safety of employees, protocols to address actual or suspected COVID-19 exposures or cases and the status of any return to work decisions.
Diversity, Equity and Inclusion
We see diversity, equity and inclusion as a strategic imperative that is core to our business and our culture. We believe that encouraging a wide range of experiences, backgrounds and perspectives and ensuring equal treatment for all makes AXIS a more rewarding place to work, enables us to attract talented teammates, enriches our perspectives and makes us stronger as a global organization. Below are strategies and initiatives enacted in 2020 to further the advancement of our diverse, equitable and inclusive culture:
•Diversity & Inclusion Council: We established a Diversity & Inclusion Council comprised of global employees representing a full spectrum of experiences and viewpoints. The Council was established to ensure that employees with diverse perspectives and backgrounds can share their thoughts, ideas and recommendations. The Council is supported by an ancillary group of D&I Advocates who actively engage and promote the work of the Council.
•Educational Initiatives: AXIS is committed to diversity, equity and inclusion educational initiatives and offers them through varying mediums. Initiatives included:
◦Mandatory unconscious bias training for all employees;
◦Monthly "knowledge tests" on various diversity, equity and inclusion topics for all employees;
◦Informational toolkits serving as quick reference guides; and
◦The establishment of an anti-racism resource center.
The year was highlighted by a global forum on racial justice and equality with an external moderator and panel of AXIS colleagues.
•Recruitment: We continued to broaden our recruiting strategies to identify, source and develop a diverse pipeline of candidates. Initiatives included:
◦Establishing and enhancing existing relationships with diverse universities and external professional organizations;
◦Participating in diverse apprenticeship programs in Bermuda, London and the U.S.;
◦Further building out our internship program with strong diverse representation;
◦Providing recruitment training and manager coaching with a focus on enhancing managers’ effectiveness at recruiting diverse candidates; and
◦Ensuring management succession plans have diverse representation.
•Advocacy: AXIS participated in the Lloyd's Dive In festival, a festival for diversity and inclusion in the insurance sector, by sponsoring and participating in local committees in Atlanta, Bermuda, London, New York and Zurich.
•Tracking:We established quarterly measurement of diverse hiring, turnover, promotions, succession planning and candidate slates. In support of this work, we measure gender pay gap semi-annually and conduct annual pay audits. We also continued to partner with a human capital analytics firm that advises companies with respect to diversity, equity and inclusion metrics to help us set, track and consistently improve our diversity, equity and inclusion.
•Disclosure: We believe transparency will play a critical role in driving action by shining light on the areas where we can increase underrepresented populations in our workforce. In 2020, AXIS participated in the Bloomberg Gender Equality Index (the "GEI"), an index of public companies committed to disclosing their efforts to achieve gender equality, to build
greater parity between genders within our organization. This participation, in turn, earned AXIS inclusion in the 2021 GEI.
Talent Development
At AXIS, investing in our people is a top priority. We provide our employees with a variety of professional development resources to help them achieve their career goals. Some of our 2020 initiatives in furtherance of this goal are described below:
•Career Mobility Within the Organization: In 2020, 20% of our open positions were filled by internal candidates.
•AXIS Academy: We provide our employees access to AXIS Academy, which serves as our learning and development hub and reflects our commitment to continuing education. AXIS Academy includes over 5,000 online training courses.
•Professional Development: We also offer financial assistance for external professional development opportunities and tuition reimbursement for certain part-time business-related degree programs.
•Early Careers Program: Our Early Careers Program aims to build a strong pipeline of early career talent through our internship and development programs.
•AXIS Careers: We created AXIS Careers to ensure our people feel empowered to "own their careers" – offering a comprehensive suite of professional development tools, resources and training modules to help navigate career experiences and upskilling across our global organization. This includes leadership development, mentoring, and job secondments, shadows and swaps.
Employee Engagement
We understand that employee engagement leads to a more satisfying and fulfilling workplace and motivates employees to do their best work. Our employee engagement initiatives include: (i) AXIS Applause (our global recognition program to recognize the contributions of other AXIS members), (ii) community building events for AXIS employees and their families and (iii) our employee-led charitable giving program which helps our employees give back to their communities.
During 2020, we conducted an enterprise-wide engagement survey, measuring engagement and inclusion. Managers and teams reflected on the survey results and developed enterprise-wide and local action plans to address areas identified for growth.
Compensation and Benefits
To attract and retain our industry’s top talent, we offer employees a total rewards program that is designed to incentivize exceptional performance and deliver equal pay for equal work. Our compensation packages align with our pay-for-performance philosophy and are assessed on an annual basis through year-end performance reviews. Our packages are also regularly benchmarked against similarly sized insurance, reinsurance and financial services companies in each of our talent markets. Compensation components include market competitive salaries and short-term annual incentive programs (i.e., bonus payments) and, for senior level employees, long-term incentives such as equity grants. Our comprehensive benefits packages include medical plans for employees and their families, flexible spending accounts, retirement savings plans with employer contributions and work-life benefits, including parental leave policies, flexible work arrangements for eligible employees and charitable matching programs.
Succession Planning
We have a robust talent and succession planning process. On an annual basis, management conducts a talent and succession plan for each member of our Executive Committee and their direct reports, focusing on high performing and high potential talent, diverse talent, and the succession plan for each position. On an annual basis, our Board of Directors receives a comprehensive succession plan for each member of our Executive Committee. In light of the COVID-19 pandemic, in 2020, the Compensation Committee also received a report on the emergency succession plan for the Executive Committee.
Employees
At December 31, 2020, we had 1,921 employees. During fiscal year 2020, the number of employees increased by approximately 17%, primarily due to increases in our Business Technology Solutions team in our newly opened Halifax, Nova Scotia office. During fiscal 2020, our voluntary turnover rate was approximately 8%.
Below is an approximate summary of our employees by region at December 31, 2020:
| | | | | | | | | | | |
| | | |
| | Employees | |
| | | |
| North America | 1,212 | |
| Europe, Middle East and Africa | 677 | |
| Asia Pacific | 32 | |
| Total employees | 1,921 | |
| | | |
At December 31, 2020, our global employees had approximately the following gender demographics:
| | | | | | | | | | | | | | |
| | | | |
| | Women | Men | |
| | | | |
| Total employees(1) | 43% | 55% | |
| | | | |
(1)2% of employees did not identify.
At December 31, 2020, our U.S. employees had approximately the following racial and ethnic demographics:
| | | | | | | | | | | |
| | | |
| | All U.S. Employees(2)(3) | |
| | | |
| Black / African American | 14% | |
| Asian | 10% | |
| Hispanic / Latinx | 4% | |
| White | 59% | |
| Multiracial, Native American and Pacific Islander | 2% | |
| | | |
(2)This information is presented for U.S. employees only. We continue to gather global demographic information to demonstrate our racial and ethnic diversity.
(3)11% of employees did not identify.
INFORMATION SECURITY
Information security is one of our highest priorities. Our information security ecosystem is designed to evolve with the changing security threat environment through ongoing assessment and measurement. We use commercial and proprietary security monitoring technologies and techniques to continuously monitor and respond to cyber threats. We also regularly engage independent third-party security auditors to test our systems and controls against relevant security standards and regulations.
Our employees and contractors are required to comply with our IT End User policy and certify their compliance annually. Information security awareness training is mandatory for all new hires and for existing employees and contractors on a regular basis.
Our Board of Directors, along with the Risk Committee and Audit Committee of the Board of Directors, oversee our information security program. In 2020, our Board of Directors received periodic updates throughout the year on cybersecurity matters, and these updates are part of the Board of Directors' standing agenda.
AVAILABLE INFORMATION
Our Internet website address is www.axiscapital.com. Information contained in our website is not part of this report.
We make available free of charge, through our internet website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Current copies of the charter for each of our Audit Committee, Corporate Governance and Nominating Committee, Compensation Committee, Finance Committee, Executive Committee and Risk Committee, as well as our Corporate Governance Guidelines and Code of Business Conduct, are available on our internet website at www.axiscapital.com.
RISK AND CAPITAL MANAGEMENT
Risk Management Framework – Overview
Mission and Objectives
The mission of Enterprise Risk Management ("ERM") at the Company is to promptly identify, assess, manage, monitor and report risks that affect the achievement of our strategic, operational and financial objectives. The key objectives of our risk management framework are to:
•Protect our capital base and earnings by monitoring our risks against our stated risk appetite and limits;
•Promote a sound risk management culture through disciplined and informed risk taking;
•Enhance value creation and contribute to an optimal risk-return profile by providing the basis for efficient capital deployment;
•Support our group-wide decision-making process by providing reliable and timely risk information; and
•Safeguard our reputation.
The risk management framework applies to all lines of business and corporate functions across our insurance and reinsurance segments.
Risk Governance
At the heart of our risk management framework is a governance process with responsibilities for identifying, assessing, managing, monitoring and reporting risks. We articulate roles and responsibilities for risk management throughout the organization, from the Board of Directors and the Chief Executive Officer to our business and corporate functions, thus embedding risk management throughout the Company (refer to 'Risk Governance and Risk Management Organization' below).
To support our governance process, we rely on our documented policies and procedures. Our risk policies are a formal set of documents we use to specify our approach and risk mitigation/control philosophy for managing individual and aggregate risks. We also have procedures to approve exceptions and procedures for referring risk issues to senior management and the Board of Directors. Our qualitative and quantitative risk reporting framework provides transparency and early warning indicators to senior management with regard to our overall risk profile, adherence to risk appetite and limits and improvement actions at an operating entity and Group level.
Various governance and control bodies coordinate to help ensure that objectives are being achieved, risks are identified, and appropriately managed, and internal controls are in place and operating effectively.
Internal Capital Model
An important aspect of our risk management framework is our internal capital model. Utilizing this modeling framework provides us with a holistic view of the capital we put at risk in any year by allowing us to understand the relative interaction
among the known risks impacting us. This integrated approach recognizes that a single risk factor can affect different sub-portfolios and that different risk factors can have different mutual dependencies. We continuously review and update our model and its parameters as our risk landscape and external environment continue to evolve.
As well as being used to measure internal risk capital (refer to 'Capital Management' below), our internal capital model is used as a tool in managing our business, planning capital allocations, portfolio monitoring, reinsurance and retrocession (collectively referred to as "reinsurance") purchasing and investment asset allocations.
Our internal capital model is an integral part of the business planning process which provides an assessment as to whether our prospective business and investment strategies are in line with our defined risk appetite and objectives at the group and operating entity level. The model also provides a basis for optimizing our risk-return profile by providing consistent risk measurement across the Group. The model outputs are reviewed and supplemented with management’s judgment and business experience and expertise.
Risk Diversification
As a global insurer and reinsurer with a wide product offering across different businesses, diversification is a key component of our business model and risk framework. Diversification enhances our ability to manage our risks by limiting the impact of a single event and contributing to relatively stable long-term results and our general risk profile. The degree to which the diversification effect can be realized depends not only on the correlation between risks but also the level of relative concentration of those risks. Therefore, our aim is to maintain a balanced risk profile without any disproportionately large risks. Our internal capital model considers the level of correlation and diversification between individual risks and we measure concentration risk consistently across our business in terms of pre/post diversified internal risk capital requirements.
Risk Appetite and Limit Framework
Our integrated risk management framework considers material risks that arise from our operations. Large risks that might accumulate and have the potential to produce substantial losses are subject to our group-wide risk appetite and limit framework. Our risk appetite, as authorized by the Board of Directors, represents the amount of risk that we are willing to accept within the constraints imposed by our capital resources as well as the expectations of our stakeholders as to the type of risks we hold within our business. At an annual aggregated level, we also monitor and manage the potential financial loss from the accumulation of risk exposure in any one year.
Specific risk limits are defined and translated into a consistent framework across our identified risk categories and across our operating entities and are intended to limit the impact of individual risk types or accumulations of risk. Individual limits are established through an iterative process to ensure that the overall framework complies with our group-wide requirements on capital adequacy and risk accumulation.
We monitor risk through, for example, risk dashboards and limit consumption reports. These are intended to allow us to detect potential deviations from our internal risk limits at an early stage.
External Perspectives
Various external stakeholders, among them regulators, rating agencies, investors and accounting bodies, place emphasis on the importance of sound risk management in the insurance/reinsurance industry. We monitor developments in the external environment and evolve our risk management practices accordingly.
Risk Governance and Risk Management Organization
The key elements of our governance framework, as it relates specifically to risk management, are described below:
Board of Directors’ Level
The Risk Committee of the Board of Directors ("Risk Committee") assists the directors in overseeing the integrity and effectiveness of our ERM framework and ensuring that our risk assumption and risk mitigation activities are consistent with that framework. The Risk Committee reviews, approves and monitors our overall risk strategy, risk appetite and key risk limits and receives regular reports from the Group Risk Management function ("Group Risk") to ensure any significant risk issues are being addressed by management. The Risk Committee further reviews, with management and Internal Audit, the Group’s general policies and procedures and satisfies itself that effective systems of risk management and controls are established and maintained. Among its other responsibilities, the Risk Committee also reviews and approves our annual Own
Risk and Solvency Assessment ("ORSA") report. The Risk Committee assesses the independence and objectivity of our Group Risk function, approves its terms of reference and reviews its ongoing activities.
Following a recommendation by the Chief Executive Officer, the Risk Committee also conducts a review and provides a recommendation to the Board of Directors regarding the appointment and/or removal of the Chief Risk Officer. The Risk Committee meets with the Chief Risk Officer in separate executive sessions on a regular basis.
The Finance Committee of the Board of Directors oversees the Group’s investment of funds and adequacy of financing facilities. This includes approval of the Group’s strategic asset allocation plan. The Audit Committee of the Board of Directors, which is supported Internal Audit, is responsible for overseeing internal controls and compliance procedures, and also reviews with management and the Chairman of the Risk Committee, the Group’s policies regarding risk assessment and risk management.
Group Executive Level
The Executive Committee formulates our business objectives and risk strategy within the overall risk appetite set by the Board of Directors. It allocates capital resources and sets limits across the Group, with the objective of balancing return and risk. While the Executive Committee is responsible overall for risk management, it has delegated some authority to the executive level Risk Management Committee ("RMC") consisting of the Chief Executive Officer, Chief Financial Officer, Chief Strategy Officer, Head of Group Underwriting, Chief Executive Officers of each segment, Chief Risk Officer, Group Chief Actuary and General Counsel & Corporate Secretary.
The RMC is responsible for overseeing the integrity and effectiveness of the Group's ERM framework and ensuring that the Group's risk assumption and risk mitigation activities are consistent with that framework, including a review of the annual business plan relative to our risk limits. In addition to the RMC, there is an established framework of separate yet complementary management committees and subcommittees, focusing on particular aspects of ERM including the following:
Management Committees
•The Business Council oversees underwriting strategy and performance, establishes return targets and manages risk/exposure constraints across each line of business, consistent with the Company’s strategic goals.
•The Product Board for each major line of business aims to develop a coherent strategy for portfolio management, set underwriting guidelines and risk appetite and leverage expertise across the multiple geographies where we operate. The Product Boards also oversee exposure management frameworks and view of risk.
•The Investment & Finance Committee oversees the Group’s investment activities which includes monitoring market risks, the performance of our investment managers and the Group’s asset-liability management, liquidity positions and investment policies and guidelines. The Investment & Finance Committee also prepares the Group’s strategic asset allocation and presents it to the Finance Committee of the Board of Directors for approval.
•The Capital Management Committee oversees the integrity and effectiveness of the Company’s capital management policy, including the capital management policies of the Company’s legal entities and branches, and oversees the availability of capital within the Group.
•The Group Reserving Committee ensures appropriate oversight and challenge of the Group and Segment loss reserves.
RMC Sub-Committees
•The Natural Catastrophe Committee oversees the Group's natural catastrophe risk management framework, including the validation of modeling and accumulation practices.
•The Non-Natural Catastrophe Committee oversees the Group's non-natural catastrophe risk management framework, including the validation of modeling and accumulation practices.
•The Reinsurance Security Committee ("RSC") sets out the financial security requirements of our reinsurance counterparties and approves our counterparties, as needed.
•The Internal Model Committee oversees the Group's internal model framework, including the key model assumptions, methodology and validation framework.
•The Operational Risk Committee oversees the Group's operational risk framework for identifying, assessing, managing, monitoring and reporting of operational risk and facilitates the embedding of effective operational risk management practices throughout the Group.
•The Emerging Risks Working Group oversees the processes for identifying, assessing, managing, monitoring and reporting current and potential emerging risks.
•The Climate Change Working Group focuses specifically on climate-related risks and oversees the implementation of our climate risk management framework.
Group Risk Management Organization
As a general principle, management in each of our lines of business, segments and corporate functions is responsible in the first instance for the risks and returns of its decisions. Management is the 'owner' of risk management processes and is responsible for managing our business within defined risk limits.
The Chief Risk Officer reports to the Chief Financial Officer and the Chairman of the Risk Committee, leads our independent Group Risk function, and is responsible for oversight and implementation of the Group's ERM framework, as well as providing guidance and support for risk management practices. Group Risk is responsible for developing methods and processes for identifying, assessing, managing, monitoring and reporting risk. This forms the basis for informing the Risk Committee and RMC of the Group’s risk profile. Group Risk develops our risk management framework and oversees the adherence to this framework at the Group and operating entity level. Our Chief Risk Officer regularly reports risk matters to the Chief Financial Officer, Executive Committee, RMC and the Risk Committee.
Internal Audit, an independent, objective function, reports to the Audit Committee of the Board of Directors on the effectiveness of our risk management framework. This includes assurance that key business risks have been adequately identified and managed appropriately and that our system of internal control is operating effectively. Internal Audit also provides independent assurance around the validation of our internal capital model and coordinates risk-based audits, compliance reviews and other specific initiatives to evaluate and address risk within targeted areas of our business.
Our risk governance structure is further complemented by our legal team which seeks to mitigate legal and regulatory compliance risks with support from other teams. This includes ensuring that significant developments in law and regulation are observed and that we react appropriately to impending legislative and regulatory changes and applicable court rulings.
Risk Landscape
Our risk landscape comprises strategic, insurance, credit, market, operational and liquidity risks that arise as a result of doing business. We provide definitions of these risk categories as well as descriptions of management of these risks below. Across these risk categories, we identify and evaluate emerging threats and opportunities through a framework that includes the assessment of potential surprise factors that could affect exposures.
Our risk landscape is reviewed on a regular basis to ensure that it remains up-to-date based on the evolving risk profile of the Company. In addition, we undertake ongoing risk assessments across all enterprise risks, the output of which is captured in our risk register which is reviewed and reported through our governance structure.
Insurance Risk
Insurance risk is the inherent uncertainty as to the occurrence, amount and timing of insurance and reinsurance liabilities transferred to us through the underwriting process.
Since our inception in 2001, we have expanded our international presence, with underwriting offices in Bermuda, the U.S., Europe, Singapore and Canada. Our disciplined underwriting approach coupled with a peer review process has enabled us to manage this growth in a controlled and consistent manner.
A key component of the Group's underwriting risk governance is our peer review processes which allow for a collaborative review of risk and pricing and ensures that underwriting is within established guidelines and procedures. Underwriting guidelines are in place to provide a framework for consistent pricing and risk analysis and ensuring alignment to the Group's risk appetite. Limits are set on underwriting capacity, and cascade authority to individuals based on their specific roles and expertise.
We also have significant audit coverage across our lines of business, including Management Initiated Audits ("MIAs"). MIAs are audits of underwriting and claims files performed by teams independent of those who originated the transactions, the purpose of which is to test the robustness of our underwriting and claims processes and to recognize any early indicators of future trends in our operational risk environment.
Reinsurance Purchasing
Another key component of our mitigation of insurance risk is the purchase of reinsurance to protect our short and long tail lines of business on a treaty (covering a portfolio of risks) and facultative (single risk) basis.
For treaty reinsurance, we purchase proportional and non-proportional cover. Under proportional reinsurance, we cede an agreed percentage of the premiums and the losses and loss expenses on the policies we underwrite. We primarily use proportional reinsurance on our liability, professional lines and cyber portfolios, as well as on select property portfolios, where we protect against higher loss frequency rather than specific events. We also purchase proportional reinsurance on our assumed property catastrophe reinsurance portfolio, casualty, and credit and surety portfolios, which includes cessions to our Strategic Capital Partners. In addition, we use non-proportional reinsurance, whereby losses up to a certain amount (i.e. our retention) are borne by us. By using non-proportional reinsurance, we can limit our liability with a retention, which reflects our willingness and ability to bear risk, and is therefore in line with our risk appetite. We primarily purchase the following forms of non-proportional reinsurance:
•Excess of loss per risk – the reinsurer indemnifies us for loss amounts of all individual policies effected, defined in the treaty terms and conditions. Per risk treaties are an effective means of risk mitigation against large single losses (e.g. a large fire claim).
•Catastrophe excess of loss – provides aggregate loss cover for our insurance portfolio against the accumulation of losses incurred from a single event (e.g. windstorm).
We have a centralized risk funding department, which coordinates external treaty reinsurance purchasing across the Group and is overseen by our Reinsurance Purchasing Group ("RPG"). The RPG, which includes, among others, our Chief Executive Officer, Chief Financial Officer, Chief Risk Officer, Head of Group Underwriting and representatives from the business leadership team, approves each treaty placement, and aims to ensure that appropriate diversification exists within our RSC approved counterparty panels.
Facultative reinsurance is case by case risk transfer. In certain circumstances, we use facultative reinsurance to complement treaty reinsurance by covering additional risks above and beyond what is already covered by treaties. Facultative reinsurance is monitored by the risk funding team.
Natural Peril Catastrophe Risk
Natural catastrophes such as hurricanes, windstorms, earthquakes, floods, tornados, hail and fire represent a challenge for risk management due to their accumulation potential and occurrence volatility. In managing natural catastrophe risk, our internal risk limit framework aims to limit the loss of capital due to a single event and the loss of capital that would occur from multiple (but perhaps smaller events) in any year. Within this framework, we have an established risk limit for single event, single zone probable maximum loss ("PML") within defined zones and at various return periods. For example, at the 1-in-250-year return period, we are not willing to expose more than 20% of common equity to a single event within a single zone.
The table below shows our mean PML to a single natural peril catastrophe event within certain defined single zones which correspond to peak industry catastrophe exposures at January 1, 2021 and 2020:
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| At January 1,
(in millions of U.S. dollars) | 2021 | | 2020 | |
| Single zone/single event | | Perils | 50 Year
Return
Period | | 100 Year
Return
Period | | 250 Year
Return
Period | | 50 Year
Return
Period | | 100 Year
Return
Period | | 250 Year
Return
Period | |
| | | | | | | | | | | | | | | |
| Southeast | | U.S. Hurricane | $ | 286 | | | $ | 408 | | | $ | 625 | | | $ | 262 | | | $ | 310 | | | $ | 428 | | |
| Northeast | | U.S. Hurricane | 42 | | | 115 | | | 262 | | | 53 | | | 145 | | | 236 | | |
| Mid-Atlantic | | U.S. Hurricane | 90 | | | 263 | | | 520 | | | 120 | | | 214 | | | 349 | | |
| Gulf of Mexico | | U.S. Hurricane | 175 | | | 263 | | | 431 | | | 202 | | | 249 | | | 283 | | |
| California | | Earthquake | 193 | | | 396 | | | 504 | | | 176 | | | 249 | | | 292 | | |
| Europe | | Windstorm | 136 | | | 182 | | | 240 | | | 195 | | | 238 | | | 316 | | |
| Japan | | Earthquake | 103 | | | 179 | | | 336 | | | 138 | | | 247 | | | 414 | | |
| Japan | | Windstorm | 113 | | | 186 | | | 220 | | | 114 | | | 195 | | | 256 | | |
| | | | | | | | | | | | | | | |
The return period refers to the frequency with which losses of a given amount or greater are expected to occur. A zone is a geographic area in which the insurance risks are considered to be correlated to a single catastrophic event. Estimated losses from a modeled event are grouped into a single zone, as shown above, based on where the majority of the total estimated industry loss is expected to occur. In managing zonal concentrations, we aim to ensure that the geography of single events is suitably captured, but distinct enough that they track specific types of events. For example, our definition of Southeast wind encompasses five states, including Florida, while our definition of Gulf Wind encompasses four states, including Texas.
Our PMLs take into account the fact that an event may trigger claims in a number of lines of business. For instance, our U.S. hurricane modeling includes the estimated pre-tax impact to our financial results arising from our catastrophe, property, engineering, energy, marine and aviation lines of business. Our PMLs include assumptions regarding the location, size and magnitude of an event, the frequency of events, the construction type and a property’s susceptibility to damage and the cost of rebuilding the property. Loss estimates for non-U.S. zones will be subject to foreign exchange rates, although we may mitigate this currency variability from a book value perspective.
As indicated in the table above, our modeled single occurrence 1-in-100-year return period PML for a Southeast U.S. hurricane, net of reinsurance, is approximately $0.4 billion. According to our modeling, there is a one percent chance that on an annual basis losses incurred from a Southeast hurricane event could be in excess of $0.4 billion. Conversely, there is a 99% chance that on an annual basis the loss from a Southeast hurricane will fall below $0.4 billion.
We have developed our PML estimates by combining judgment and experience with the outputs from the catastrophe model,commercially available from AIR Worldwide ("AIR"), which we also use for pricing catastrophe risk. This model covers the major peril regions where we face potential exposure. Additionally, we have included our estimate of non-modeled perils and other factors which we believe provides us with a more complete view of catastrophe risk.
Our PML estimates are based on assumptions that are inherently subject to significant uncertainties and contingencies. These uncertainties and contingencies can affect actual losses and could cause actual losses to differ materially from those expressed above. We aim to reduce the potential for model error in a number of ways, the most important of which is by ensuring that management’s judgment supplements the model outputs. We also perform ongoing model validation at the line of business and at a group level including through our catastrophe model validation team. These validation procedures include sensitivity testing of models to understand their key variables and, where possible, backtesting the model outputs to actual results.
Estimated net losses from peak zone catastrophes may change from period to period as a result of several factors, which include but are not limited to, updates to vendor catastrophe models, changes to our internal modeling, changes in our underwriting portfolios, changes to our reinsurance purchasing strategy and changes in foreign exchange rates.
Man-Made Catastrophe Risk
Consistent with our management of natural peril catastrophe exposures, we take a similarly focused and analytical approach to the management of man-made catastrophes. Man-made catastrophes, which include such risks as train collisions, airplane crashes or terrorism, are harder to model in terms of assumptions regarding intensity and frequency. For these risks we couple the vendor models (where available) with our bespoke modeling and underwriting judgment and expertise. This allows us to take advantage of business opportunities related to man-made catastrophe exposures particularly where we can measure and limit the risk sufficiently as well as obtain risk-adequate pricing.
As an example of our approach, our assessment of terrorism risk is based on a mixture of qualitative and quantitative data (e.g. for estimating property damage, business interruption, mortality and morbidity subsequent to an attack of a predefined magnitude), which we use to limit and manage our aggregate terrorism exposure. We use commercially available vendor modeling and bespoke modeling tools to measure accumulations around potential terrorism accumulation zones on a deterministic and probabilistic basis. We supplement the results of our modeling with underwriting judgment.
Reserving Risk
The estimation of loss reserves is subject to uncertainty as the settlement of claims that arise before the balance sheet date is dependent on future events and developments. There are many factors that would cause loss reserves to increase or decrease, which include, but are not limited to emerging claims and coverage issues, changes in the legislative, regulatory, social and economic environment and unexpected changes in loss inflation. The estimation of loss reserves could also be adversely affected by the failure of our loss limitation strategy and/or the failure of models used to support key decisions.
We calculate reserves for losses and loss expenses ("loss reserves") in accordance with actuarial best practice based on substantiated methodologies and assumptions. In addition, we have well established processes in place for determining loss reserves, which we ensure are consistently applied. Our loss reserving process demands data quality and reliability and requires a quantitative and qualitative review of overall reserves and individual large claims. Within a structured control framework, claims information is communicated on a regular basis throughout our organization, including to senior management, to provide an increased awareness of losses that have occurred throughout the insurance markets. The detailed and analytical reserving approach that follows is designed to absorb and understand the latest information on reported and unreported claims, to recognize the resultant exposure as quickly as possible, and to record appropriate loss reserves in our consolidated financial statements.
Reserving for long-tail lines of business represents a significant component of reserving risk. When loss trends prove to be higher than those underlying our reserving assumptions, the risk is greater because of a stacking-up effect: loss reserves recorded in our consolidated financial statements cover claims arising from several years of underwriting activity and these reserves are likely to be adversely affected by unfavorable loss trends. We manage and mitigate reserving risk on long-tail business in a variety of ways. First, the long-tail business we write is part of a well-balanced and diversified global portfolio of business. In 2020, long-tail net premiums written (namely liability and motor business) represented 23% of total net premiums written and long-tail net loss reserves represented 35% of total net loss reserves. We also purchase reinsurance on liability business to manage our net positions. Second, we follow a disciplined underwriting process that utilizes available information, including industry trends.
Another significant component of reserving risk relates to the estimation of losses in the aftermath of a major catastrophe event. Refer to Item 7 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates – Reserves for Losses and Loss Expenses' for further details.
Claims Handling Risk
In accepting risk, we are committing to the payment of claims and therefore these risks must be understood and controlled. We have claims teams embedded in our main lines of business. Our claim teams include a diverse group of experienced professionals, including claims adjusters and attorneys. We also use approved external service providers, such as independent adjusters and appraisers, surveyors, accountants, investigators and specialist attorneys, as appropriate.
We maintain claims handling guidelines which include details on claims reporting controls and claims reporting escalation procedures in all our claims teams. Large claims matters are reviewed during weekly claims meetings. The minutes from each meeting are circulated to our underwriters, senior management and others involved in the reserving process. To maintain communication between underwriting and claims teams, claims personnel regularly report at underwriting meetings and frequently attend client meetings.
We foster a strong culture of review among our claims teams. This includes MIAs, whereby senior claims handlers audit a sample of claim files. The process is designed to ensure consistency between the claims teams and to develop group-wide best practices.
When we receive notice of a claim, regardless of size, it is recorded in our claims and underwriting systems. In addition, we have developed a standard format and procedure to produce "flash reports" for significant events and potential losses, regardless of whether we have exposure. Our process for flash reporting allows a direct notification to be communicated to underwriters and senior management worldwide. Similarly, for natural peril catastrophes, we have developed a catastrophe database, along with catastrophe coding in certain systems, that allows for the gathering, analyzing and reporting of loss information as it develops from early modeled results to fully adjusted and paid losses.
Strategic Risk
Strategic risks affect or are created by an organization’s business strategy and strategic objectives. Our review of strategic risk evaluates not only internal and external challenges that might cause our chosen strategy to fail but also evaluates major risks that could affect our long-term performance and position. We believe it is imperative that we consider the business risks associated with, and mitigated by, each strategy. We also view strategic risk not only as the negative impact of risk but also the sub-optimization of gain. Fundamentally, we believe that we are set up for success if we analyze both value protection and value creation.
A strategy function was formed as part of our enterprise-wide transformation to ensure that the prioritization and coordination of enterprise-wide resources is done efficiently and effectively to drive targeted strategic outcomes. On no less than a quarterly basis, the Executive Committee meets and receives holistic information about execution against strategy and makes decisions to adjust and/or advance strategy. In addition, strategies employed throughout our business in support of the broader enterprise strategy are reviewed in the context of a broader governance structure by the Business Council and business leadership, and are ultimately approved by the Board of Directors.
Market Risk
Market risk is the risk that our financial instruments may be negatively impacted by movements in financial market prices or rates such as equity prices, interest rates, credit spreads and foreign exchange rates. Fluctuations in market prices or rates primarily affect our investment portfolio.
Through asset and liability management, we aim to ensure that market risks influence the economic value of our investments and our loss reserves and other liabilities in the same way, thus mitigating the effect of market fluctuations. For example, we reflect important features of our liabilities, such as maturity patterns and currency structures, on the assets side of the balance sheet by acquiring investments with similar characteristics.
We supplement our asset-liability management with various internal policies and limits. As part of our strategic asset allocation process, different asset strategies are simulated and stressed in order to evaluate the ‘optimal’ portfolio (given return objectives and risk constraints). Our investments team manages asset classes to control aggregation of risk and provide a consistent approach to constructing portfolios and the selection process of external asset managers. We have limits on the concentration of investments by single issuers and certain asset classes, and we limit the level of illiquid investments (refer to 'Liquidity Risk' below). Further, our investment guidelines do not permit the use of leverage in any of our fixed maturity portfolios.
We stress test our investment portfolios using historical and hypothetical scenarios to analyze the impact of unusual market conditions and to ensure potential investment losses remain within our risk appetite. At an annual aggregated level, we manage the total risk exposure to our investment portfolio so that the ‘total return’ investment loss in any one year is unlikely to exceed a defined percentage of our common equity at a defined return period.
We mitigate foreign currency risk by seeking to match our estimated insurance and reinsurance liabilities payable in foreign currencies with assets, including cash and investments that are denominated in the same currencies. Where necessary, we use derivative financial instruments for economic hedging purposes. For example, in certain circumstances, we use forward contracts and currency options to economically hedge portions of our un-matched foreign currency exposures.
Liquidity Risk
Liquidity risk is the risk that we may not have sufficient financial resources to meet our obligations when they are due, or would have to incur excessive costs to do so. As an insurer and reinsurer, our core business generates liquidity primarily
through premiums, investment income and the maturity/sale of investments. Our exposure to liquidity risk stems mainly from the need to cover potential extreme loss events and regulatory constraints that limit the flow of funds within the Group. To manage these risks, we have a range of liquidity policies and procedures in place:
•We maintain cash and cash equivalents and a high quality, liquid investment portfolio to meet expected outflows, as well as those that could result from a range of potential stress events. We place limits on the maximum percentage of cash and investments which may be in an illiquid form as well as on the minimum percentage of unrestricted cash and liquid investment grade fixed income securities.
•We maintain committed borrowing facilities, as well as access to diverse funding sources to cover contingencies. Funding sources include asset sales, external debt issuances and lines of credit.
Credit Risk
Credit risk represents the risk of incurring financial loss due to the diminished creditworthiness (reduced financial strength and, ultimately, possibly default) of our third-party counterparties. We distinguish between: various forms of credit exposure; the risk of issuer default from instruments in which we invest, such as corporate bonds; counterparty exposure in a direct contractual relationship, such as reinsurance; the credit risk related to our premium receivables, including those from brokers and other intermediaries; and the risk we assume through our insurance contracts, such as our credit and political risk and credit and surety lines of business.
Credit Risk Aggregation
We monitor and manage the aggregation of credit risk on a group-wide basis, allowing us to consider exposure management strategies for individual companies, countries, regions, sectors and any other relevant inter-dependencies. Our credit exposures are aggregated based on the origin of risk. Credit risk aggregation is managed through minimizing overlaps in underwriting, financing and investing activities. As part of our credit aggregation framework, we assign aggregate credit limits by country and by single counterparty (or parent of affiliated counterparties). These limits are based and adjusted on a variety of factors including the prevailing economic environment and the nature of the underlying credit exposures.
Our credit aggregation measurement and reporting process is facilitated by our credit risk exposure database, which contains relevant information on counterparty details and credit risk exposures. The database is accessible by management throughout the Group, thus providing transparency to allow for the implementation of active exposure management strategies. We also license third-party tools to provide credit risk assessments. We monitor all our credit aggregations and, where appropriate, adjust our internal risk limits and/or take specific actions to reduce our risk exposures
Credit Risk Relating to Cash and Investments
In order to mitigate concentration and operational risks related to cash and cash equivalents, we limit the maximum amount of cash that can be deposited with a single counterparty and additionally limit acceptable counterparties based on current rating, outlook and other relevant factors.
Our fixed maturity investment portfolio, which represents approximately $12 billion or 47% of our total assets, is exposed to potential losses arising from the diminished creditworthiness of issuers of bonds as well as third-party counterparties such as custodians. Our investment portfolio is managed by external investment managers in accordance with its investment guidelines. We limit such credit risk through diversification, issuer exposure limits graded by ratings and, with respect to custodians, contractual and other legal remedies. Excluding U.S. government and agency securities, we limit our concentration of credit risk to any single corporate issuer to 2% or less of our investment grade fixed maturities portfolio for securities rated A- or above and 1% or less of our investment grade fixed maturities portfolio for securities rated below A-.
Credit Risk Relating to Reinsurance Recoverable Assets
We are exposed to the credit risk of a reinsurer failing to meet its obligations under our reinsurance contracts. To help mitigate this, our purchases of reinsurance is subject to financial security requirements specified by our RSC. The RSC 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 limits 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 RSC requires reinsurers who do not meet specified requirements to provide collateral.
Credit Risk Relating to Premium Receivables
The diversity of our client base limits credit risk associated with premium receivables. 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 premium receivables against corresponding payments for losses and loss expenses.
Brokers and other intermediaries collect premiums from customers on our behalf. We have procedures in place to manage and monitor credit risk from intermediaries with a focus on day-to-day monitoring of the largest positions.
These contractual rights contribute to the mitigation of credit risk, together with the monitoring of aged premium receivable balances. In light of these mitigating factors and considering that a significant portion of premium receivables are not currently due based on the terms of the underlying contracts, we do not utilize specific credit quality indicators to monitor our premium receivable balances.
Credit Risk Relating to our Underwriting Portfolio
In the insurance segment, we provide credit insurance primarily for lenders (financial institutions) seeking to mitigate the risk of non-payment from their borrowers. This product complements our traditional political risk insurance business. For the credit insurance contracts, it is necessary for the buyer of the insurance, most often a bank, to hold an insured asset, most often an underlying loan, in order to claim compensation under the insurance contract. The vast majority of the credit insurance provided is for single-name illiquid risks, primarily in the form of senior secured bank loans that can be individually analyzed and underwritten. As part of the underwriting process, an evaluation of creditworthiness and reputation of the obligor is critical. We generally require our clients to retain a share of each transaction that we insure. A key element to our underwriting analysis is the assessment of recovery in the event of default and, accordingly, the strength of the collateral and the enforceability of rights to the collateral are paramount.
We avoid insurance for structured finance products defined by pools of risks and insurance for synthetic products that would expose us to mark-to-market losses. We also seek to avoid terms in our credit insurance contracts which introduce liquidity risk, most notably in the form of a collateralization requirement upon a ratings downgrade.
We also provide protection against sovereign default or sovereign actions that result in impairment of cross-border investments for banks and corporations. Our contracts generally include conditions precedent to our liability relating to the enforceability of the insured transaction and restricting amendments to the transaction documentation, obligations on the insured to prevent and minimize losses, subrogation rights (including rights to have the insured asset transferred to us) and waiting periods. Under most of our policies, a loss payment is made in the event the debtor failed to pay our client when payment is due subject to a waiting period of up to 180 days.
In the reinsurance segment, we provide reinsurance of credit and surety bond insurers exposed to the risks of financial loss arising from non-payment of trade receivables covered by a policy (credit insurance) or non-performance of obligations (surety). Our credit insurance exposures are concentrated primarily within developed economies, while our surety bond exposures are concentrated primarily in Latin America and developed economies. We also provide coverage to the mortgage industry through insurance and reinsurance of mortgage insurance companies and U.S. government-sponsored entity credit risk sharing transactions. We focus on credit risk transfer from Federal Home Loan Mortgage Corporation and Federal National Mortgage Association, in the single-family, fixed rate, conforming mortgage space. We provide this cover on a proportional and non-proportional basis globally through AXIS Re U.S., AXIS Specialty Bermuda and AXIS Managing Agency Ltd. Our exposure to mortgage risk is monitored and managed through robust underwriting within defined parameters for mortgage credit quality and concentration, continuous monitoring of the housing market, as well as limits on our PML resulting from a severe economic downturn in the housing market.
Operational Risk
Operational risk represents the risk of loss as a result of inadequate processes, system failures, human error or external events, including but not limited to direct or indirect financial loss, reputational damage, customer dissatisfaction and legal and regulatory penalties.
Group Risk is responsible for coordinating and overseeing a group-wide framework for operational risk management. As part of this, we maintain an operational loss-event database which helps us monitor and analyze potential operational risk, identify any trends, and, where necessary, put in place improvement actions to avoid occurrence or recurrence of operational loss events.
We manage transaction type operational risks through the application of process controls throughout our business. In testing these controls, we supplement the work of our internal audit team with regular underwriting and claim MIAs (as discussed above).
We have specific processes and systems in place to focus on high priority operational matters, such as information security, managing business continuity and third-party vendor risk:
•Major failures and disasters which could cause a severe disruption to working environments, facilities and personnel, represent a significant operational risk to us. Our Business Continuity Management framework strives to protect critical business functions from these effects to enable us to carry out our core tasks in time and at the quality required. During 2020, we continued to review our Business Continuity Planning procedures through cyclical planned tests.
•We have developed a number of Information Technology ("IT") platforms, applications and security controls to support our business activities worldwide. Dedicated security standards are in place for our IT systems to ensure the proper use, availability and protection of our information assets.
•Our use of third-party vendors exposes us to a number of increased operational risks, including the risk of security breaches, fraud, non-compliance with laws and regulations or internal guidelines and inadequate service. We manage material third-party vendor risk, by, among other things, performing a thorough risk assessment on potential large vendors, reviewing a vendor’s financial stability, ability to provide ongoing service and business continuity planning.
Capital Management
Our capital management strategy is to maximize long-term shareholder value by, among other things, optimizing capital allocation and minimizing our cost of capital. We manage our capital in accordance with our Target Capital Range ("TCR") concept. The TCR defines the preferred level of capital needed to absorb shock losses and still satisfy our minimum solvency targets in relation to key capital benchmarks including our "own view" of risk from our internal capital model and regulatory and rating agency capital requirements:
•Internal risk capital - We use our internal capital model to assess the capital consumption of our business, measuring and monitoring the potential aggregation of risk at extreme return periods.
•Regulatory capital requirements - In each country in which we operate, the local regulator specifies the minimum amount and type of capital that each of the regulated entities must hold in support of their liabilities and business plans. We target to hold, in addition to the minimum capital required to comply with the solvency requirements, an adequate buffer to ensure that each of our operating entities meets its local capital requirements. Refer to Item 8, Note 21 to the Consolidated Financial Statements, 'Statutory Financial Information' for further details.
•Rating agency capital requirements - Rating agencies apply their own models to evaluate the relationship between the required risk capital of a company and its available capital resources. The assessment of capital adequacy is usually an integral part of the rating agency process. Meeting rating agency capital requirements and maintaining strong credit ratings are strategic business objectives of the Company. Refer to Item 7 'Management’s Discussion and Analysis of Financial Condition and Results of Operations –Liquidity and Capital Resources' for further details.
The TCR identifies the point at which management needs to consider raising capital, amending our business plan or executing capital management activities well before capital approaches the minimum requirements ("early warning indicator"). This allows us to take appropriate measures to ensure the continued strength and appropriateness of our capital and solvency positions, and enables us to take advantage of opportunities as they arise. Such measures are performed as and when required and include traditional capital management tools (e.g. dividends, share buy-backs, issuance of shares or debt) or through changes to our risk exposure (e.g. recalibration of our investment portfolio or changes to our reinsurance purchasing strategy).
The TCR also considers an amount of capital beyond which capital could be considered "excess". Where we do not find sufficiently attractive opportunities and returns for our excess capital, we may return capital to our shareholders through share repurchases and/or dividends. In doing so, we seek to maintain an appropriate balance between higher returns for our shareholders and the security provided by a sound capital position.
ITEM 1A.RISK FACTORS
COVID-19
The ultimate scale and scope of the ongoing, novel coronavirus (COVID-19) pandemic is currently unknown and is expected to continue to adversely impact our business. The overall impact on our business, results of operations, financial condition or liquidity could be material.
During the first quarter of 2020, there was a global outbreak of the novel coronavirus, COVID-19, which has spread to over 200 countries and territories, including our key business locations of Bermuda, Europe, the U.K. and the U.S. The World Health Organization has designated COVID-19 as a pandemic, and numerous countries in which we operate, including Bermuda, the U.K., Switzerland and the U.S., have declared national emergencies. The global impact of the outbreak continued to evolve during 2020, and many countries reacted by instituting social distancing measures and quarantines, placing restrictions on travel, restricting trading, limiting operations of non-essential businesses and issuing shelter-in-place orders. While some initial restrictions have been relaxed, resurgence of the pandemic in many countries have seen new or continued restrictions to social and economic activity. Such actions have created disruption in global supply chains, and adversely impacted operations in many sectors of the economy. The outbreak will likely have a continued adverse impact on economic and market conditions, and has triggered a global economic slowdown.
The scale and scope of the COVID-19 pandemic may heighten the potential adverse effects on our business, results of operation, financial condition or liquidity of many of the other risk factors described herein, including without limitation:
•We have substantial exposure to losses resulting from catastrophe events, including pandemics. The extent of our losses from the COVID-19 pandemic will ultimately depend on its severity and duration and such losses could have a material adverse effect on our results of operations, financial condition or liquidity. We have identified exposures arising from our underwriting of insurance and reinsurance policies that cover accident and health (including travel), event cancellation, property/business interruption, and potential exposures arising from our underwriting of insurance and reinsurance policies that cover credit and surety (including mortgage) and professional lines (medical malpractice and directors’ and officers’ liability) among others. These exposures and potential exposures include direct claims relating to COVID-19 (e.g. business interruption following a shelter-in-place order) and indirect exposures arising from an ensuing economic downturn. We note that other lines may be affected as the pandemic and associated economic downturn develop and new information is discovered.
•Our exposures are controlled and limited by our insurance and reinsurance contracts, which include specific terms and conditions defining if and how our policies respond to losses arising from the COVID-19 pandemic. However, legislative, regulatory or judicial actions (e.g. the UK Financial Conduct Authority test case on business interruption insurance and subsequent legal actions, including appeals) and social influences could alter the interpretation of our contracts or extend or change coverage (beyond the obligations set forth within those contracts or beyond what was intended by the parties). We set our reserves based on our best interpretation of the current legal position in applicable jurisdictions, but these legislative, regulatory or judicial actions make it difficult to predict the total amount of losses we could incur as a result of the pandemic.
•Actual claims may exceed loss reserves. While we believe that net reserves for losses and loss expenses at December 31, 2020 are adequate, changes in the duration, severity and scope of the impact of the COVID-19 pandemic from current expectations may result in ultimate losses being materially greater or less than the net reserves for losses and loss expenses currently provided. Among the factors that would cause net reserves for losses and loss expenses to increase or decrease are changes in claim frequency or severity driven by the COVID-19 pandemic or its related impact on the economy.
•Uncertainty and market turmoil caused by the COVID-19 pandemic could continue to affect, among other aspects of our business, the demand for our products and the ability of customers, counterparties and others to establish or maintain their relationships with us. In addition, the market for insurance and reinsurance could be smaller and certain industries for which we write business have been, and will likely continue to be, particularly impacted by the pandemic (such as,
energy, aviation, retail, hospitality and construction lines, among others), resulting in downward pressure on our premium levels.
•The performance of our cash and investments portfolio has a significant impact on our financial results. The impact of the COVID-19 pandemic has heightened the risks to which our portfolios are subject, including risks relating to general economic conditions, interest rate fluctuations, equity price risk, foreign currency movements, pre-payment or reinvestment risk, liquidity risk and credit risk. Our investments in equities, corporate debt and hedge funds have experienced an increase in price volatility and persistent low interest rates. Government imposed restrictions on movements and/or social distancing practices have led to sharp declines in the revenue of many companies and industries, and we have some debt and/or equity exposure to some of these highly impacted sectors. We believe that the negative impacts of the COVID-19 pandemic may continue for some time.
•The COVID-19 pandemic may impact cashflows and could require access to liquidity in excess of prior forecasts. There is a risk that accessing additional required liquidity may be difficult or have costs associated as a result of the COVID-19 pandemic.
•The impact of the COVID-19 pandemic on financial markets may impact our ability to acquire additional capital, should we desire to do so, or our ability to effectively deploy existing capital resources.
•Certain of our policyholders and intermediaries may not pay premiums owed to us due to insolvency or other reasons. Insolvency, liquidity problems, distressed financial condition due to the impact of the COVID-19 pandemic or the general effects of economic recession may increase the risk that policyholders or intermediaries, such as insurance brokers, may not pay a part of or the full amount of premiums owed to us, despite an obligation to do so. The terms of our contracts, or actions by our regulators, may not permit us to cancel our insurance even though we have not received payment. We may further decide (or be obliged by regulation) to refund premiums already paid where it is judged that the COVID-19 pandemic has reduced the customer need for insurance. If refunds or non-payments become widespread, whether as a result of insolvency, lack of liquidity, adverse economic conditions, operational failure or otherwise, it could have a material adverse impact on our revenues and results of operations.
•The COVID-19 pandemic could impact our ability to obtain reinsurance and retrocessional arrangements on favorable terms, which could limit the amount of business we are willing to write or reduce our reinsurance protection for large loss events.
•While the financial strength of the reinsurance industry generally remains strong, it is possible that our reinsurance and retrocession counterparties may experience financial distress and therefore, may be unable to pay the amounts owed to us under the applicable contracts.
•Our reinsurers and retrocession counterparties may be unwilling to pay claims due to disagreements or differing interpretation of contracts.
•There is a risk of reputational damage resulting from claims disputes and underwriting renewal actions.
In addition, the COVID-19 pandemic may have an adverse impact on our business and financial condition due to significant disruption in other areas, including:
•We may experience decreased worker productivity, including as a result of prolonged remote working arrangements, or increased medical, emergency or other leave.
•The extended period of remote working by our employees could strain our technology resources and introduce operational risks, including heightened cybersecurity risk. Remote working environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit the COVID-19 pandemic.
•Similarly, third parties on whom we rely to provide key business services on an outsourced basis (including, but not limited to delegated underwriting, claims processing, finance operations, IT support) also may experience operational or system disruption, or cybersecurity issues, impacting their provision of service to us, and in turn, our operational performance.
•The COVID-19 pandemic could impact our ability to attract and retain key personnel which could adversely impact our business.
•Limitation on travel, social distancing requirements implemented in response to COVID-19, alongside economic conditions, may challenge our ability to write new insurance or reinsurance business and market our products and services as anticipated prior to COVID-19.
The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the extent and effectiveness of government actions to support the economy. The duration and severity of the economic downturn is uncertain, as well as the impact of these and other factors on our employees, customers and partners. Such impact on our business, results of operations, financial condition or liquidity could be material.
Insurance Risk
Insurance risk is the inherent uncertainty as to the occurrence, amount and timing of insurance and reinsurance liabilities transferred to us through the underwriting process.
The insurance/reinsurance business is historically cyclical, and we expect to experience periods with excess underwriting capacity and unfavorable premium rates.
The insurance/reinsurance business historically has been a cyclical industry characterized by periods of intense price competition due to excess underwriting capacity as well as periods when shortages of capacity permitted favorable premium levels. An increase in premium rates is often offset by an increasing supply of insurance and reinsurance capacity, via capital provided by new entrants, new capital market instruments and structures and/or the commitment of additional capital by existing insurers and reinsurers, which may cause prices to decrease. Any of these factors could lead to a significant reduction in premium rates, less favorable policy terms and fewer submissions for our underwriting services. In addition to these considerations, changes in the frequency and severity of losses suffered by insureds and insurers may affect the cycles of the insurance/reinsurance business significantly.
Results of operations, financial condition or liquidity could be adversely affected by the occurrence of natural and man-made disasters, as well as outbreaks of pandemic or contagious diseases.
We have substantial exposure to unexpected losses resulting from natural disasters, man-made catastrophes and other catastrophe events. Catastrophes can be caused by various events, including hurricanes, typhoons, earthquakes, tsunamis, hailstorms, floods, severe winter weather, fires, drought and other natural disasters and outbreaks of pandemic or contagious diseases, including the COVID-19 pandemic. Catastrophes can also be man-made, such as terrorist attacks and other intentionally destructive acts, including those involving nuclear, biological, chemical or radiological events, cyber-attacks, explosions and infrastructure failures. The incidence and severity of catastrophes are inherently unpredictable and losses from catastrophes could be substantial.
Increases in the values and concentrations of insured property, particularly along coastal regions, as well as increases in the cost of construction materials required to rebuild affected properties, may increase the impact of catastrophe events in the future. Changes in global climate conditions may further increase the frequency and severity of catastrophe activity and losses in the future. Similarly, changes in global political and economic conditions may increase both the frequency and severity of man-made catastrophe events in the future. The impact of catastrophe events included the recognition of the net losses and loss expenses of:
•$774 million in the aggregate, primarily related to the COVID-19 pandemic, Hurricanes Laura, Sally, Zeta and Delta, the Midwest derecho and wildfires across the West Coast of the United States in 2020;
•$336 million, in the aggregate, primarily related to Japanese Typhoons Hagibis, Faxai and Tapah, Hurricane Dorian and Australia Wildfires in 2019; and
•$430 million, in the aggregate, primarily related to Hurricanes Michael and Florence, California Wildfires and Typhoon Jebi in 2018.
These events materially reduced net income in the years noted. Although we manage our exposure to such events through the use of underwriting controls and the purchase of third-party reinsurance, catastrophe events are inherently unpredictable and
the actual nature of such events when they occur could be more frequent or severe than contemplated in our pricing and risk management expectations. As a result, the occurrence of one or more catastrophe events could have a material adverse effect on our results of operations, financial condition or liquidity.
Cyber events are man-made perils and as such the threat landscape is dynamic and evolving. There is a risk that increases in the frequency and severity of losses to our clients from cyber events could adversely affect our results of operations, financial condition or liquidity. The losses incurred from this risk are also dependent on our clients’ cybersecurity practices and defenses and the interaction of our policy wordings with the evolving threat landscape. In addition, our exposure to cyber events potentially includes exposure through 'non-affirmative' coverages, meaning risks and potential losses associated with policies where cyber risk is not explicitly included or excluded in the policy wording. As this is a relatively new peril, even in cases where losses from cyber events are explicitly excluded, there can be no assurance that a court or arbitration panel will interpret policy language in line with the intention of the exclusion.
Global climate change may have an adverse effect on our results of operations, financial condition or liquidity.
We are potentially exposed to different aspects of climate risk, specifically, physical, liability and transition risks, as a result of climate change.
Physical risks describe weather-related events and longer-term shifts in climate and emanate primarily from underwriting of property insurance and reinsurance. Climate change may expose us to an increased frequency and/or severity of these weather-related losses, and there is a risk that our pricing of these perils or our management of the associated aggregations does not or will not appropriately allow for changes in climate. Over the longer term, climate change may have an impact on the economic viability of certain lines of business if suitable adjustments in price and coverage cannot be achieved.
We may also be exposed to liability risks. Liability risks relate to losses or damages suffered by our insureds from physical or transition risks, such as losses stemming from climate-related litigation in liability lines. These risks could arise from management and boards of directors not fully considering or responding to the impacts of climate change, or not appropriately disclosing current and future risks.
There is additionally a risk that certain elements of our business cease to be viable as a result of climate change ‘transition’ risks, which relate to losses driven by changes in technology, governments and regulators putting into place measures to encourage and support this transition, and society as a whole adapting to a lower-carbon economy. Recognizing the importance of this transition, effective 2020 AXIS Capital ceased underwriting risks for (and investing in the securities of) companies whose primary activity relates to thermal coal mining or power generation, or tar sands extraction, and effective 2021, AXIS Capital committed to not underwrite new insurance or facultative reinsurance contracts, or provide investment support, for projects covering the exploration, production or transportation of oil and gas in the Arctic National Wildlife Refuge. There remains a risk that our financial condition or operating performance may be impacted by changes in our business model arising from climate change transition, and by the performance of strategies we put in place to manage this transition.
Furthermore, we may be exposed to losses in the value of our investments arising from the physical and transition impacts of climate change, including 'stranded assets', on the companies and securities in which we invest.
We could face unanticipated losses from war, terrorism, political unrest, and geopolitical uncertainty and these or other unanticipated losses could have an adverse effect on our results of operations, financial condition or liquidity.
We have substantial exposure to unexpected losses resulting from war, acts of terrorism, political unrest and geopolitical instability in many regions of the world. In certain instances, we specifically insure and reinsure risks resulting from acts of terrorism. Even in cases where we attempt to exclude losses from terrorism and certain other similar risks from some coverages written by us, there can be no assurance that a court or arbitration panel will interpret policy language or otherwise issue a ruling favorable to us. Accordingly, we can offer no assurance that our reserves for losses and loss expenses ("loss reserves") will be adequate to cover losses should they materialize.
We have limited terrorism coverage in our own reinsurance program for our exposure to catastrophe losses related to acts of terrorism. On December 20, 2019, the President of the United States signed the Terrorism Risk Insurance Program Reauthorization Act of 2019 ("TRIP"), extending the program through December 31, 2027. Although TRIP provides benefits in the event of certain acts of terrorism, those benefits are subject to a deductible and to other limitations. Under TRIP, once losses attributable to certain acts of terrorism exceed 20% of direct commercial property and liability insurance premiums for the preceding calendar year, the federal government will reimburse insurers for 80% of losses in excess of this deductible.
Notably, TRIP does not provide coverage for reinsurance losses. Given the unpredictable frequency and severity of terrorism losses, as well as the limited terrorism coverage in our own reinsurance program, future losses from acts of terrorism could materially and adversely affect our results of operations, financial condition or liquidity in future periods.
Our credit and political risk insurance line of business protects insureds with interests in foreign jurisdictions in the event that governmental action prevents them from exercising their contractual rights, and may also protect their assets against physical damage perils. The insurance provided may include cover for losses arising from expropriation, forced abandonment, license cancellation, trade embargo, contract frustration, non-payment, war on land or political violence (including terrorism, revolution, insurrection and civil unrest).
Our credit and political risk line of business also provides non-payment coverage on specific loan obligations. We insure sovereign non-payment and corporate non-payment as a result of commercial as well as political risk events. The vast majority of the corporate non-payment credit insurance provided is for single-named illiquid risks, primarily in the form of senior bank loans that can be individually analyzed and underwritten. We avoid insurance for structured finance products defined by pools of risks and insurance for synthetic products that would expose us to mark-to-market losses. We also avoid terms in our credit insurance contracts which introduce liquidity risk, most notably, in the form of a collateralization requirement upon a ratings downgrade. We also manage our exposure, by among other things, setting credit limits by country, region, industry and individual counterparty, and regularly reviewing our aggregate exposures. However, due to globalization, political instability in one region can spread to other regions. Geopolitical uncertainty regarding a variety of domestic and international matters, such as the U.S. political and regulatory environment, the potential for default by one or more European sovereign debt issuers and Brexit (as defined below) could have a material adverse effect on our results of operations, financial condition or liquidity.
The effects of emerging claim and coverage issues on our business are uncertain.
As industry practices and legal, judicial, social, political, technological and other environmental conditions change, unexpected issues related to claims and coverage may emerge. These issues may adversely affect our business by either extending coverage beyond our underwriting intent or by increasing the frequency and/or severity of claims. For example, the last global financial crisis resulted in a higher level of claim activity on professional lines insurance and reinsurance business. Moreover, legislative, regulatory, judicial or social influences may impose new obligations on insurers or reinsurers in connection with the COVID-19 pandemic that extend coverage beyond the intended contractual obligations, or result in an increase in the frequency or severity of claims beyond expected levels, as described in the COVID-19 risk factor above. In some instances, the effects of these changes may not become apparent until sometime after we have issued the impacted insurance or reinsurance contracts. In addition, actual losses may vary materially from the current estimate of losses based on a number of factors (refer to "If actual claims exceed our loss reserves, our financial results could be adversely affected" below). As a result, the full extent of liability under an insurance or reinsurance contract may not be known for many years after the contract is issued and a loss occurs.
If actual claims exceed loss reserves, our financial results could be adversely affected.
While we believe that loss reserves at December 31, 2020 are adequate, new information, events or circumstances, unknown at the original valuation date, may lead to future developments in ultimate losses being significantly greater or less than the loss reserves currently provided. The actual final cost of settling claims outstanding at December 31, 2020, as well as claims expected to arise from the unexpired period of risk, is uncertain. For example, our loss reserves recorded in 2020 associated with the COVID-19 pandemic remain subject to significant uncertainty. There are many factors that would cause loss reserves to increase or decrease, which include, but are not limited to changes in claim severity, changes in the expected level of reported claims, judicial action changing the scope and/or liability of coverage, changes in the legislative, regulatory, social and economic environment and unexpected changes in loss inflation.
When establishing our single point best estimate of loss reserves at December 31, 2020, management considered actuarial estimates and applied informed judgment regarding qualitative factors that may not be fully captured in actuarial estimates. Such factors included, but were not limited to, the timing of the emergence of claims, volume and complexity of claims, social and judicial trends, potential severity of individual claims and the extent of internal historical loss data versus industry information.
Changes to previous estimates of prior year loss reserves can adversely impact the reported calendar year underwriting results if loss reserves prove to be insufficient or can favorably impact reported results if loss reserves prove to be higher than actual claim payments. If net income is insufficient to absorb a required increase in loss reserves, we would incur a net loss and could incur a reduction in capital.
We may be adversely impacted by inflation.
Our operations, like those of other insurers and reinsurers, are susceptible to the effects of inflation because premiums are established before the ultimate amounts of losses and loss expenses are known. Although we consider the potential effects of inflation when setting premium rates, premiums may not fully offset the effects of inflation and thereby essentially result in underpricing the risks we insure and reinsure. Loss reserves include assumptions about future payments for settlement of claims and claims-handling expenses, such as the value of replacing property, associated labor costs for the property business we write and litigation costs. To the extent inflation causes costs to increase above loss reserves established for claims, we will be required to increase loss reserves with a corresponding reduction in net income in the period in which the deficiency is identified, which may have a material adverse effect on our results of operations or financial condition. Unanticipated higher inflation could also lead to higher interest rates, which would negatively impact the value of our fixed income securities and potentially other investments.
The failure of our loss limitation strategy could have an adverse effect on our results of operations, financial condition or liquidity.
We seek to mitigate loss exposure through multiple methods. For example, we write a number of reinsurance contracts on an excess of loss basis. Excess of loss reinsurance indemnifies the reinsured for losses in excess of a specified amount. We generally limit the line size for each client and line of business on our insurance business and purchase reinsurance for many of our lines of business. In the case of proportional reinsurance treaties, we seek per occurrence limitations or losses and loss expenses ratio caps to limit the impact of losses from any one event. In proportional reinsurance, the reinsurer shares a proportional part of the premiums and losses of the reinsured. We also seek to limit our loss exposure through geographic diversification. Geographic zone limitations involve significant underwriting judgments, including the determination of the area of the zones and the inclusion of a particular policy within a particular zone’s limits. In addition, various provisions of our insurance policies and reinsurance contracts, such as limitations or exclusions from coverage or choice of forum negotiated to limit our risks, may not be enforceable in the manner we intend. We cannot be sure that these loss limitation methods will effectively prevent a material loss exposure, which could have a material adverse effect on our results of operations, financial condition or liquidity.
If we choose to purchase reinsurance, we may be unable to do so.
We purchase reinsurance for our insurance and reinsurance operations in order to mitigate the volatility of losses on our financial results. From time to time, market conditions have limited, and in some cases have prevented, insurers and reinsurers from obtaining the types and amounts of reinsurance that they consider adequate for their business needs. There is no guarantee that our desired amounts of reinsurance or retrocessional reinsurance will be available in the marketplace in the future. In the current environment, our ability to renew our current reinsurance or retrocessional reinsurance arrangements or obtain desired amounts of new or replacement coverage on favorable terms may be substantially reduced as a result of the COVID-19 pandemic. In addition to capacity risk, the remaining capacity may not be on terms we deem appropriate or acceptable or with companies with whom we want to do business. If we are unable to renew our current reinsurance or retrocessional reinsurance or purchase new or replacement coverage, the amount of business we are willing to write may be limited or our protection from losses due to large loss events may be materially reduced.
We utilize models to assist our decision making in key areas such as underwriting, reserving, reinsurance purchasing and the evaluation of our catastrophe risk but actual results could differ from model output.
We employ various modeling techniques (for example, scenarios, predictive, stochastic and/or forecasting) to analyze and estimate exposures, loss trends and other risks associated with our assets and liabilities. We utilize modeled outputs and related analyses to assist us in decision-making, for example, related to underwriting and pricing, reserving, reinsurance purchasing and the evaluation of our catastrophe risk through estimates of probable maximum losses, or "PMLs". The modeled outputs and related analyses, both from proprietary and third-party models, are subject to various assumptions, professional judgment, uncertainties and the inherent limitations of any statistical analysis, including the use and quality of historical internal and industry data. Consequently, actual losses from loss events, whether from individual components (for example, wind, flood, earthquake, etc.) or in the aggregate, may differ materially from modeled results. If, based upon these models or other factors, we misprice our products or underestimate the frequency and/or severity of loss events, our results of operations, financial condition or liquidity may be adversely affected.
With respect to the evaluation of our catastrophe risk, our modeling utilizes a mix of historical data, scientific theory and mathematical methods. Output from multiple commercially available vendor models serves as a key input in our PML estimation process. We believe that there is considerable uncertainty in the data and parameter inputs for these vendor
models. In that regard, there is no universal standard in the preparation of insured data for use in the models and the running of modeling software. In our view, the accuracy of the models depends heavily on the availability of detailed insured loss data from actual recent large catastrophes. Due to the limited number of events, there is significant potential for substantial differences between the modeled loss estimate and actual company experience for a single large catastrophe event. This potential difference could be even greater for perils with limited or no modeled annual frequency. We perform our own vendor model validation (including sensitivity analysis and backtesting, where possible) and supplement model output with historical loss information and analysis and management judgment. In addition, we derive our own estimates for non-modeled perils. Despite this, our PML estimates are subject to a high degree of uncertainty and actual losses from catastrophe events may differ materially.
We could be adversely affected if managing general agents, general agents, coverholders, other producers and third-party administrators in our program business exceed their underwriting and/or claims settlement authorities or otherwise breach obligations owed to us.
In program business conducted by the insurance segment, following our underwriting, financial, claims and information technology due diligence reviews, we authorize managing general agents, general agents, coverholders and other producers to write business on our behalf within underwriting authorities prescribed by us. Once a program/coverholder commences, we must rely on the underwriting controls of these entities to write business within the underwriting authorities provided by us. Although we monitor our programs/coverholders on an ongoing basis, our monitoring efforts may not be adequate or these entities may exceed their underwriting or claims settlement authorities or otherwise breach obligations owed to us. To the extent that these entities exceed their authorities or otherwise breach obligations owed to us in the future, our results of operations or financial condition could be materially adversely affected.
Strategic Risk
Strategic risks affect or are created by an organization’s business strategy and strategic objectives. Our review of strategic risk evaluates not only internal and external challenges that might cause our chosen strategy to fail but also evaluates major risks that could affect our long-term performance and position.
Competition and consolidation in the insurance/reinsurance industry could reduce our growth and profitability.
The insurance/reinsurance industry is highly competitive. We compete on an international and regional basis with major U.S., Bermuda, European and other international insurers and reinsurers and underwriting syndicates, including Lloyd's, some of which have greater financial, marketing and management resources than we do. We also compete with new companies that continue to be formed to enter the insurance/reinsurance markets. In addition, capital market participants have created alternative products that are intended to compete with insurance and reinsurance products. New and alternative capital inflows in the insurance/reinsurance industry and the retention by insured and cedants of more business may cause an excess supply of insurance and reinsurance capital. There has been a large amount of merger and acquisition activity in the insurance/reinsurance sector in recent years, which may continue; we may experience increased competition as a result of that consolidation with consolidated entities having enhanced market power. Increased competition could result in fewer submissions, lower premium rates, less favorable policy terms and conditions and greater costs of customer acquisition and retention. If industry pricing does not meet our hurdle rate, we may reduce our future underwriting activities. These factors could have a material adverse effect on our growth and profitability.
The insurance industry is undergoing extensive technological change. There is increasing focus by traditional insurance industry participants, technology companies, "InsurTech" start-up companies and others on using technology and innovation to disrupt current business models. This will potentially enable enhanced customer focus, greater efficiencies, more relevant products and other sources of competitive advantage. If we do not adapt to these technological changes, it could harm our ability to compete, which could have a material adverse impact on our growth or profitability.
Furthermore, innovation, technological change and changing customer preferences in the markets in which we operate also pose other risks to our businesses. For example, they could result in increasing expenses as we are required to make investments to allow our products and services to reflect such innovation and changes.
Global economic conditions could adversely affect our business, results of operations or financial condition.
Worldwide financial markets can be volatile, and the COVID-19 pandemic has set off a period of increased volatility and a global economic slowdown. Governments in the U.S. and other countries have reacted to the COVID-19 outbreak with unprecedented levels of market intervention, including interest rate cuts and major economic stimulus programs. Many of
these interventions are ongoing as at December 31 2020, and their long-term impact on financial markets and the real economy is still uncertain. Uncertainty and market turmoil has affected and may in the future affect, among other aspects of our business, the demand for and claims made under our products, the ability of customers, counterparties and others to establish or maintain their relationships with us, our ability to access and efficiently use internal and external capital resources and our investment performance and portfolio. We also provide coverage to the mortgage industry through insurance and reinsurance of mortgage insurance companies and U.S. government sponsored entity credit risk sharing transactions, and deteriorating economic conditions could cause mortgage insurance losses to increase and adversely affect our results of operations or financial condition.
In addition, steps taken by governments to stabilize financial markets and improve economic conditions may be ineffective and actual or anticipated efforts to continue to unwind some of such steps could disrupt financial markets and/or could adversely impact the value of our investment portfolio. Continuation of the current low interest rate environment may result in reductions in our investment income as new funds and proceeds from sales and maturities of fixed income securities are reinvested at lower rates. This reduces our overall future profitability.While inflation has recently been moderate and that trend may continue, it is possible that steps taken by governments throughout the world in response to the COVID-19 pandemic, expansionary monetary policies or other factors could lead to an inflationary environment.
Given the ongoing global economic uncertainties, evolving market conditions may continue to affect our results of operations, financial condition, and capital resources. In the event that there is additional deterioration or volatility in financial markets or general economic conditions, our results of operations, financial condition, capital resources, and competitive landscape could be materially and adversely affected.
Acquisitions that we made or may make could turn out to be unsuccessful.
As part of our strategy, we have pursued and may continue to pursue growth through acquisitions. For example, as part of our strategy to develop a market leading international specialty insurance business, we acquired Novae Group plc, a specialty insurer and reinsurer that operated through Lloyd's in 2017. The negotiation of potential acquisitions as well as the integration of an acquired business or new personnel could result in a substantial diversion of management resources. Successful integration will depend on, among other things, our ability to effectively integrate acquired businesses or new personnel into our existing risk management and financial and operational reporting systems, our ability to effectively manage any regulatory issues created by our entry into new markets and geographic locations, our ability to retain key personnel and other operational and economic factors. There can be no assurance that the integration of acquired businesses or new personnel will be successful, that we will realize anticipated synergies, cost savings and operational efficiencies, or that the business acquired will prove to be profitable or sustainable. The failure to integrate acquired businesses successfully or to manage the challenges presented by the integration process may adversely impact our financial results. Acquisitions could involve numerous additional risks such as potential losses from unanticipated litigation or levels of claims and inability to generate sufficient revenue to offset acquisition costs.
Our ability to grow through acquisitions will depend, in part, on our success in addressing these risks. Any failure by us to effectively implement our acquisitions strategy could have a material adverse effect on our business, results of operations or financial condition.
The exit of the U.K. from the E.U. could adversely affect us.
On June 23, 2016, the U.K. voted in favor of Brexit and on December 31, 2020, the U.K. left the EU. A Trade and Cooperation Agreement, excluding financial services, was entered into between the E.U. and the U.K. on December 24, 2020, and the parties have committed to entering into a Memorandum of Understanding covering financial services by March 2021. As the U.K. has officially left the single market, AXIS Specialty Europe SE has retained its access to the U.K. market under the PRA's Temporary Permissions Regime. In order to maintain its access to the U.K. market, AXIS Specialty Europe SE has applied for authorization to operate as a third country branch in the U.K. There is a risk that the PRA could reject this application, in which case, AXIS Specialty Europe SE would be required to seek regulatory approval to form a new U.K. domiciled insurance company. This could impact AXIS Specialty Europe SE's ability to operate in the U.K.
AXIS Managing Agency Ltd. accesses the EEA market through Lloyd's Insurance Company, based in Belgium, which has been approved by the National Bank of Belgium and the Financial Services and Markets Authority. However, discussions among Lloyd's Insurance Company and the Belgium regulators are currently in process regarding certain elements of the corporate structure of Lloyd's Insurance Company. Depending upon the outcome, AXIS Managing Agency Ltd.'s access to the EEA market could be impacted.
Any of these effects of Brexit, and others we cannot anticipate, could adversely affect our business, results of operations, or financial condition.
Since we depend on a few brokers for a large portion of our revenues, loss of business provided by any one of them could adversely affect us.
We market our insurance and reinsurance products worldwide primarily through insurance and reinsurance brokers and derive a significant portion of our business from a limited number of brokers. Marsh & McLennan Companies, Inc., including its subsidiary Guy Carpenter & Company, Inc., Aon plc and Willis Towers Watson PLC, provided 47% of gross premiums written in 2020. The merger of Aon and Willis Towers Watson will further concentrate the broker market. Our relationships with these brokers are based on the quality of our underwriting and claims services, as well as our financial strength ratings. Any deterioration in these factors could result in the brokers advising our clients to place their business with other insurers and reinsurers. In addition, these brokers also have, or may in the future acquire, ownership interests in insurance and reinsurance companies that may compete with us; these brokers may then favor their own insurers and reinsurers over other companies. Loss of all or a substantial portion of the business provided by one or more of these brokers could have a material adverse effect on our business.
A downgrade in our financial strength or credit ratings by one or more rating agencies could adversely affect our business, results of operations, financial condition or liquidity.
Claims paying and financial strength ratings are important factors in establishing the competitive position of insurance companies and maintaining customer confidence is us and in our ability to market insurance products. Independent rating agencies analyze the financial performance and condition of insurers on an ongoing basis.
On May 5, 2020, A.M. Best revised its rating and outlook from A+ and negative to A and stable, respectively. Third-party rating agencies continually monitor companies, therefore, our ratings could change at any time.
There can be no assurance that we will not experience a further ratings downgrade. A downgrade, withdrawal or negative watch/outlook by any independent rating agency could cause our competitive position in the insurance/reinsurance industry to suffer and make it more difficult for us to market our products. In addition, if we experience a credit rating downgrade, withdrawal or negative watch/outlook in the future, we could incur higher borrowing costs and may have more limited means to access capital. A downgrade, withdrawal or negative watch/outlook could also result in a substantial loss of business for us, as ceding companies and brokers that place such business may move to other insurers and reinsurers with higher ratings. We would also be required to post collateral under the terms of certain of our policies of reinsurance.
We may require additional capital in the future, which may not be available or may only be available on unfavorable terms.
Our future capital requirements depend on many factors, including rating agency and regulatory requirements, the performance of our investment portfolio, our ability to write new business successfully, the frequency and severity of catastrophe events and our ability to establish premium rates and loss reserves at levels sufficient to cover losses. We may need to raise additional funds through financings. If we are unable to do so, it may curtail our ability to conduct our business. Any equity or debt financing, if available at all, may be on terms that are not favorable to us. As the COVID-19 pandemic continues, it is possible that access to the capital markets may become more constrained and cost of capital may increase (refer to "The ultimate scale and scope of the ongoing, novel coronavirus (COVID-19) pandemic is currently unknown and is expected to continue to adversely impact our business. The overall impact on our business, results of operations, financial condition or liquidity could be material." above). Equity financings could be dilutive to our existing shareholders and could result in the issuance of securities that have rights, preferences and privileges that are senior to those of our other securities. If we cannot obtain adequate capital on favorable terms or at all, our business, operating results and financial condition could be adversely affected.
Our inability to obtain the necessary credit could adversely affect our ability to offer reinsurance in certain markets.
Neither AXIS Specialty Bermuda nor AXIS Re SE is licensed or admitted as an insurer or reinsurer in any jurisdiction other than Bermuda, Ireland, Singapore and Brazil. Because the U.S. and some other jurisdictions do not permit insurance companies to take credit on their statutory financial statements for reinsurance obtained from unlicensed or non-admitted insurers unless appropriate security mechanisms are in place, our reinsurance clients in these jurisdictions typically require AXIS Specialty Bermuda and AXIS Re SE to provide letters of credit or other collateral. Our credit facilities are used to post letters of credit. However, if our credit facilities are not sufficient or if we are unable to renew our credit facilities or arrange
for other types of security on commercially affordable terms, AXIS Specialty Bermuda and AXIS Re SE could be limited in their ability to write business for some of our clients.
We could be adversely affected by the loss of one or more key executives or by an inability to attract and retain qualified personnel or by the inability of an executive to obtain a Bermuda work permit.
Our success depends on our ability to retain the services of our existing key executives and to attract and retain additional qualified personnel in the future. The loss of the services of any of our key executives or the inability to hire and retain other highly qualified personnel in the future could adversely affect our ability to conduct our business. Changes in local employment legislation, taxation and the approach of regulatory bodies to compensation practice within our operating jurisdictions may impact our ability to recruit and retain qualified personnel or the cost to us of doing so. In addition, the COVID-19 pandemic could impact our ability to attract and retain key personnel. There can be no assurance that we will be successful in identifying, hiring or retaining successors on terms acceptable to us.
With a few exceptions generally under Bermuda law only Bermudians, spouses of Bermudians or Permanent Resident Certificate holders (collectively "Residents") may engage in any gainful occupation in Bermuda without an appropriate governmental work permit. Work permits may be granted or extended by the Bermuda government only upon showing that, after proper public advertisement (in most cases), no Residents who meet the minimum standard requirements for the advertised position have applied for the position. Work permits are generally granted for one-, three- or five-year durations. Expatriate workers can, subject to the above, continue to be employed in Bermuda indefinitely by reapplying for work permits. All executive officers who work in our Bermuda office who require work permits have obtained them.
Market Risk
Market risk is the risk that our financial instruments may be negatively impacted by movements in financial market prices or rates such as equity prices, interest rates, credit spreads and foreign exchange rates.
Our investment and derivative instrument portfolios are exposed to significant capital markets risk related to changes in interest rates, credit spreads and equity prices, as well as other risks, which may adversely affect our results of operations or financial condition.
The performance of our cash and investments portfolio has a significant impact on our financial results. A failure to successfully execute our investment strategy could have a significant impact on our results of operations or financial condition.
Our investment portfolio is subject to a variety of market risks, including risks relating to general economic conditions, interest rate fluctuations, equity price risk, foreign currency movements, pre-payment or reinvestment risk, liquidity risk and credit risk. Although we manage market risks through, among other things, stressing diversification and conservation of principal and liquidity in our investment guidelines, the volatility in global financial markets that resulted from the COVID-19 pandemic adversely impacted, and may once again adversely impact the value of our investments portfolio (refer to(refer to "The ultimate scale and scope of the ongoing, novel coronavirus (COVID-19) pandemic is currently unknown and is expected to continue to adversely impact our business. The overall impact on our business, results of operations, financial condition or liquidity could be material." above).
Our fixed maturities, which represent 84% of our total investments and 77% of total cash and investments at December 31, 2020, may be adversely impacted by changes in interest rates. Increases in interest rates could cause the fair value of our investment portfolio to decrease, resulting in a lower book value (refer to Item 7A 'Quantitative and Qualitative Disclosure About Market Risk' for further details) and capital resources. A decline in interest rates or a continuation of the current low interest rate environment may result in reductions in our investment income as new funds and proceeds from sales and maturities of fixed income securities are reinvested at lower rates. This reduces our overall future profitability. Interest rates are highly sensitive to many factors, including governmental and central bank monetary policies, inflation, domestic and international economic and political conditions and other factors beyond our control.
Our portfolios of "other investments" and equity securities expose us to market price variability, driven by a number of factors outside of our control including, but not limited to global equity market performance. Given our reliance on external investment managers, we are also exposed to operational risks, which may include, but are not limited to a failure to follow our investment guidelines, technological and staffing deficiencies and inadequate disaster recovery plans.
Our derivative instrument counterparties may default on amounts owed to us due to bankruptcy, insolvency, lack of liquidity, adverse economic conditions, operational failure, fraud or other reasons. Even if we are entitled to collateral in circumstances of default, such collateral may be illiquid or proceeds from such collateral when liquidated may not be sufficient to recover the full amount of the obligation.
Changes in the method for determining LIBOR and the potential replacement of LIBOR may adversely affect our cost of capital and net investment income.
On July 27, 2017, the FCA announced its intention to cease sustaining LIBOR after 2021. On November 30, 2020, the FCA announced that subject to confirmation following its consultation with the administrator of LIBOR, it would cease publication of the one-week and two-month USD LIBOR immediately after December 31, 2021 and cease publication of the remaining tenors immediately after June 30, 2023. Additionally, the U.S. Federal Reserve Board has advised banks to stop entering into new USD LIBOR based contracts.
Uncertainty as to the nature of such potential changes, alternative reference rates or other reforms may adversely affect the trading market for LIBOR-based securities, including those held in our investment portfolio. Changes or reforms to the determination or supervision of LIBOR or successor reference rate may result in a sudden or prolonged increase or decrease in reported LIBOR or to a successor, which could have an adverse impact on the market for floating rate securities and the value of our investment portfolio and insurance products which directly or indirectly reference LIBOR or its successor.
At December 31, 2020, our investment portfolio included $1.9 billion of floating rate investments for which the interest rate was tied to LIBOR. The instruments and agreements governing our investments generally provide for appropriate fall-back language if the current index is no longer available, however there is no assurance that the alternative index will provide comparable returns. There is currently no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. As such, the potential effect of any such event on net investment income cannot yet be determined and any changes to benchmark interest rates could decrease net investment income, which could impact our results of operations, liquidity, or the market value of our investments.
Our operating results may be adversely affected by currency fluctuations.
Our reporting currency is the U.S. dollar. However, a portion of gross premiums are written and ceded in currencies other than the U.S. dollar and a portion of gross and ceded loss reserves are in non-U.S. currencies. In addition, a portion of our investment portfolio is denominated in currencies other than the U.S dollar. We may experience losses or gains resulting from fluctuations in the values of these non-U.S. currencies. If the U.S. dollar strengthens relative to local currencies for a sustained period of time, our operating results may be adversely affected. Although we manage our foreign currency exposure through matching of our major foreign-denominated assets and liabilities, as well as through use of currency derivatives, there is no guarantee that we will successfully mitigate our exposure to foreign exchange losses due to unfavorable currency fluctuations. Political unrest, sovereign debt concerns or other economic factors in jurisdictions in which we operate, as well as the COVID-19 pandemic, may magnify these risks.
Liquidity Risk
Liquidity risk is the risk that we may not have sufficient financial resources to meet our obligations when they are due, or would have to incur excessive costs to do so.
Our underwriting activities may expose us to liquidity risks.
Our exposure to liquidity risk stems mainly from the need to cover potential extreme loss events and regulatory constraints that limit the flow of funds within the Group. We maintain cash and cash equivalents and high quality, liquid investment portfolios to meet expected outflows, as well as those that could result from a range of potential stress events. We place internal limits on the maximum percentage of cash and investments which may be in an illiquid form as well as on the minimum percentage of our asset portfolio which may be invested in unrestricted cash and liquid investment grade fixed income securities.
Additionally, we have access to diverse funding sources to cover contingencies. Funding sources include asset sales and external debt issuances and we may seek to establish borrowing facilities to cover such contingencies. We conduct stress tests to ensure the sufficiency of these funding sources in extreme scenarios; however, there remains a risk that in certain circumstances, our results of operations or financial condition may be adversely impacted by our inability to access appropriate liquidity, or the cost of doing so.
Credit Risk
Credit risk represents the risk of incurring financial loss due to the diminished creditworthiness (reduced financial strength and, ultimately, possibly default) of our third-party counterparties.
If we successfully purchase reinsurance, we may be unable to collect amounts due to us.
A reinsurer’s insolvency, or inability or refusal to make payments under the terms of its reinsurance agreement with us, could have a material adverse effect on our business because we remain liable to the insured. We face counterparty risk whenever we purchase reinsurance or retrocessional reinsurance, and the COVID-19 pandemic has heightened this risk as counterparties experience economic strains. Consequently, the insolvency, inability or unwillingness of any of our present or future reinsurers to make timely payments to us under the terms of our reinsurance or retrocessional agreements could have a material adverse effect on our results of operations, financial condition, or liquidity.
Our reliance on brokers subjects us to credit risk.
In accordance with industry practice, we pay amounts owed on claims under our insurance and reinsurance contracts to brokers, and these brokers pay these amounts over to the clients that have purchased insurance and reinsurance from us. Although the law is unsettled and depends upon the facts and circumstances of the particular case, in some jurisdictions, if a broker fails to make such a payment, we might remain liable to the insured or ceding insurer for the deficiency.
Conversely, in certain jurisdictions, when the insured or ceding insurer pays premiums for these policies to brokers for payment over to us, these premiums might be considered to have been paid to us and the insured or ceding insurer will no longer be liable to us for those amounts, whether or not we have actually received the premiums from the broker. Consequently, we assume a degree of credit risk associated with brokers with whom we transact business. These risks are heightened during periods characterized by financial market instability and/or an economic downturn or recession.
Certain of our policyholders and intermediaries may not pay premiums owed to us due to insolvency or other reasons.
Insolvency, liquidity problems, distressed financial condition or the general effects of economic recession, including due to the effects of the COVID-19 pandemic, may increase the risk that policyholders or intermediaries, such as insurance brokers, may not pay a part of or the full amount of premiums owed to us, despite an obligation to do so. The terms of our contracts may not permit us to cancel our insurance even though we have not received payment. If non-payment becomes widespread, whether as a result of insolvency, lack of liquidity, adverse economic conditions, operational failure or otherwise, it could have a material adverse impact on our revenues and results of operations.
Operational Risk
Operational risk represents the risk of loss as a result of inadequate processes, system failures, human error or external events, including but not limited to direct or indirect financial loss, reputational damage, customer dissatisfaction and legal and regulatory penalties.
If we experience difficulties with technology and/or data security, our ability to conduct our business might be adversely affected.
While technology can streamline many business processes and ultimately reduce the cost of operations, technology initiatives present certain risks. Our business is dependent upon our employees’ and outsourcers’ ability to perform, in an efficient and uninterrupted fashion, necessary business functions such as processing policies and paying claims. An extended period of remote working due to the COVID-19 pandemic could strain our technology resources. A shutdown or inability to access one or more of our facilities, a power outage, or a failure of one or more of our information technology, telecommunications or other systems could significantly impair our ability to perform such functions on a timely basis. If sustained or repeated, such a business interruption, system failure or service denial could result in a deterioration of our ability to write and process business, provide customer service, pay claims in a timely manner or perform other necessary business functions. Unauthorized access, computer viruses, deceptive communications (phishing), malware, hackers and other external hazards including catastrophe events could expose our data systems to security breaches. These risks could expose us to data loss and damages.
Like other global companies, we may be regularly the target of attempted cyber and other security threats and must continuously monitor and develop our information technology networks and infrastructure to prevent, detect, address and mitigate the risk of threats to our data and systems. Over time, and particularly recently, the sophistication of these threats
continues to increase. An extended period of remote work arrangements due to the COVID-19 pandemic could heighten cybersecurity risks. Remote working environments may be less secure and more susceptible to hacking attacks, including phishing and social engineering attempts that seek to exploit the COVID-19 pandemic. While administrative and technical controls, along with other preventive actions, reduce the risk of cyber incidents and protect our information technology, they may be insufficient to thwart cyber attacks and/or prevent other security breaches to our systems.
To the extent any disruption or security breach results in a loss or damage to our data, or inappropriate disclosure of our confidential information or that of others, it could impact our operations, cause significant damage to our reputation, affect our relationships with our customers and clients, lead to claims against us under various data privacy laws, result in regulatory action and ultimately have a material adverse effect on our business or operations. In addition, although we purchase limited cyber insurance, we may be required to incur significant costs to mitigate the damage caused by any security breach, to address any interruptions in our business or to protect against future damage, which costs may not be covered by our cyber insurance.
We also operate in a number of jurisdictions with strict data privacy and other related laws, which could be violated in the event of a significant cybersecurity incident, or by personnel. Failure to comply with these obligations can give rise to monetary fines and other penalties that could be material.
Our business may be adversely affected if third-party outsourced service providers fail to satisfactorily perform certain technology and business process functions.
We outsource certain technology and business process functions to third parties. If we do not effectively develop and implement our outsourcing strategy, third-party providers do not perform as anticipated or we experience technological or other problems with a transition, we may not realize productivity improvements or cost efficiencies and may experience operational difficulties, increased costs and a loss of business. Our outsourcing of certain technology and business process functions to third parties may expose us to enhanced risk related to data security, which could result in monetary and reputational damages. The COVID-19 pandemic has increased the strain on business processes and technology at our third-party partners. In addition, our ability to receive services from third-party providers might be impacted by political instability or unanticipated regulatory requirements. As a result, our ability to conduct our business might be materially adversely affected.
We rely on internal processes to maintain our operations and manage the operational risks inherent to our business; employee misconduct, errors or omissions in the execution of these processes may result in financial losses.
We rely on the execution of internal processes to maintain and execute our operations. We seek to monitor and control our exposure to risks arising from these processes through an enterprise risk management framework, internal controls, management review and other processes. We cannot provide total assurance that these processes will effectively identify or control all risks, or that our employees and third-party agents will effectively execute them. Loss may result from, among other things, fraud; errors; or failure to document transactions properly, obtain proper internal authorization, comply with underwriting or other internal guidelines, or comply with regulatory requirements. These risks could result in losses that adversely affect our business, results of operations, or financial condition. An extended period of remote work arrangements could increase or introduce new operational risk and adversely affect our ability to manage our exposure to risks arising from our internal processes. Furthermore, insurance policies provided by third parties may not cover us if we experience a significant loss from these risks.
Regulatory Risk
Regulatory risk represents the risk arising from our failure to comply with legal, statutory or regulatory obligations.
Compliance with laws and regulations governing the processing of personal data and information may impede our services or result in increased costs. Failure to comply with these data privacy laws and regulations could result in material fines or penalties imposed by data protection or financial services conduct regulators and/or awards of civil damages and any data breach may have an adverse effect on our reputation, results of operations or financial condition, or have other adverse consequences.
Our business relies on the processing of data in many jurisdictions and the movement of data across national borders. The collection, storage, handling, disclosure, use, transfer and security of personal information that occurs in connection with our business is subject to federal, state and foreign data privacy laws. These legal requirements are not uniform and continue to evolve, and regulatory scrutiny in this area is increasing around the world. In many cases, these laws apply not only to third-
party transactions, but also to transfers of information within the Group. Privacy and data protection laws may be interpreted and applied differently from country to country and may create inconsistent or conflicting requirements.
The General Data Privacy Regulation ("GDPR") has extra-territorial effect. It requires all companies processing data of E.U. citizens to comply with the GDPR, regardless of the company’s location, and also imposes obligations on E.U. companies processing data of non-E.U. citizens. In particular, the GDPR imposes requirements regarding the processing of personal data and confers new rights on data subjects, including rights of access to their personal data, deletion of their personal data, the "right to be forgotten" and the right to "portability" of personal data.
The California Consumer Privacy Act ("CCPA") became effective on January 1, 2020 and confers rights on California residents including rights to know what personal information is collected about them and whether their personal information is sold (and if so, to whom), to access their personal information that has been collected and to require a business to delete their personal information. The California Privacy Rights Act ("CPRA") will take effect on January 1, 2023 and become fully enforceable on July 1, 2023. There will be a "look back" to January 1, 2022, meaning that data collected in the 2022 calendar year is subject to the terms of the CPRA beginning on January 1, 2023. The CPRA will work as an addendum to the CCPA, strengthening the rights of California residents, tightening business regulations on the use of personal information and establishing a new government agency for state-wide data privacy enforcement.
Compliance with the enhanced obligations imposed by the GDPR, the CCPA (as enhanced by the CPRA) and other legislation (including Singapore's recently amended Personal Data Protection Act and Bermuda’s Personal Information Protection Act) requires investment in appropriate technical or organizational measures to safeguard the rights and freedoms of data subjects, may result in significant costs to our business and may require us to modify certain of our business practices. Enforcement actions, investigations and the imposition of substantial fines and penalties by regulatory authorities as a result of data security incidents and privacy violations have increased dramatically over the past several years. The enactment of more restrictive laws, rules, regulations or future enforcement actions or investigations could impact us through increased costs or restrictions on our business, and noncompliance could result in regulatory penalties and significant legal liability.
In addition, unauthorized disclosure or transfer of sensitive or confidential client or Company data, whether through systems failure, employee negligence, fraud or misappropriation, by the Company or other parties with whom we do business, could subject us to significant litigation, monetary damages, regulatory enforcement actions, fines and criminal prosecution in one or more jurisdictions. Such events could also result in negative publicity and damage to our reputation and cause us to lose business, which could therefore have a material adverse effect on our results of operations or financial condition.
The regulatory system under which we operate, and potential changes thereto, could have an adverse effect on our business.
Our insurance and reinsurance subsidiaries conduct business globally and are subject to varying degrees of regulation and supervision in multiple jurisdictions. In the U.K., Lloyd's has supervisory powers that pose unique regulatory risks. The laws and regulations of the jurisdictions and markets, including Lloyd's, in which our insurance and reinsurance subsidiaries are domiciled or operate require, among other things, that our subsidiaries maintain minimum levels of statutory capital and liquidity, meet solvency standards, participate in guaranty funds and submit to periodic examinations of their financial condition and compliance with underwriting and other regulations. These laws and regulations also limit or restrict payments of dividends and reductions in capital. Statutes, regulations and policies may also restrict the ability of these subsidiaries to write insurance and reinsurance contracts, make certain investments and distribute funds. In addition, the COVID-19 pandemic has heightened regulatory scrutiny on the insurance industry, and the costs of complying with related regulatory inquires could be significant. The purpose of insurance laws and regulations generally is to protect insureds and ceding insurance companies, not our shareholders. We may not be able to comply fully with, or obtain appropriate exemptions from, these statutes and regulations, which could result in restrictions on our ability to do business or undertake activities that are regulated in one or more of the jurisdictions in which we conduct business and could subject us to fines and other sanctions. In addition, changes in the laws or regulations to which our insurance and reinsurance subsidiaries are subject or in the interpretation thereof by enforcement or regulatory agencies could have a material adverse effect on our business.
Potential government intervention in our industry as a result of recent events and instability in the marketplace for insurance products could hinder our flexibility and negatively affect the business opportunities that may be available to us in the market.
Government intervention and the possibility of future government intervention have created uncertainty in insurance and reinsurance markets. Government and regulators are generally concerned with having insurers and reinsurers with high solvency ratios and localized capital to ensure the protection of policyholders to the possible detriment of other constituents,
including shareholders of insurers and reinsurers. Government, regulatory and judicial actions across multiple jurisdictions in relation to business interruption insurance has exacerbated the uncertainty by altering the interpretation of our contracts or extend or change coverage (beyond the obligations set forth within those contracts or beyond what was intended by the parties).
In recent years, certain U.S. and non-U.S. judicial and regulatory authorities, including U.S. Attorney’s Offices and certain state attorneys general, have commenced investigations into business practices in the insurance industry. In addition, although the U.S. federal government has not historically regulated insurance, there have been proposals from time to time, and especially after the most recent global financial crisis, to impose federal regulation on the U.S. insurance industry. For example, in 2010, Dodd-Frank established a Federal Insurance Office ("FIO") within the U.S. Treasury. The FIO has limited regulatory authority to gather data and information regarding the insurance industry, and has conducted and submitted a study to the U.S. Congress on how to modernize and improve insurance regulation in the U.S. This study's findings are not expected to have a significant impact on the Company. Further, Dodd-Frank gives the Federal Reserve supervisory authority over a number of U.S. financial services companies, including insurance companies, if they are designated as 'systemically important' by a two-thirds vote of a Financial Stability Oversight Council. While we do not believe that we are systemically important, as defined in Dodd-Frank, Dodd-Frank or additional federal or state regulation that is adopted in the future could impose significant burdens on us, impact the ways in which we conduct our business and govern our subsidiaries, increase compliance costs, increase the levels of capital required to operate our subsidiaries, duplicate state regulation and/or result in a competitive disadvantage.
Certain of our European legal entities are subject to local laws that implement the Solvency II Directive. Solvency II covers three main areas: (i) the valuation of assets and liabilities on a Solvency II economic basis and risk-based solvency and capital requirements; (ii) governance requirements including requirements relating to the key functions of compliance, internal audit, actuarial and risk management; and (iii) new supervisory legal entity and group reporting and disclosure requirements including public disclosures. The BMA is fully equivalent under the Solvency II Directive for Bermuda's commercial insurance sector, including Class 4 insurers.
While we cannot predict the exact nature, timing or scope of possible governmental initiatives, such proposals could materially adversely affect our business by, among other things:
•Providing reinsurance capacity in markets and to consumers that we target;
•Requiring our further participation in industry pools and guaranty associations;
•Expanding the scope of coverage under existing policies; e.g. following large disasters;
•Further regulating the terms of insurance and reinsurance contracts; or
•Disproportionately benefiting the companies of one country over those of another.
Our international business is subject to applicable laws and regulations relating to sanctions and foreign corrupt practices, the violation of which could adversely affect our operations.
We must comply with all applicable economic and financial sanctions, other trade controls and anti-bribery laws and regulations of the U.S. and other foreign jurisdictions where we operate, including Bermuda, the U.K. and the European Community. U.S. laws and regulations applicable to us include the economic trade sanctions laws and regulations administered by the U.S. Department of Treasury’s Office of Foreign Assets Control as well as certain laws administered by the U.S. Department of State. In addition, we are subject to the Foreign Corrupt Practices Act and other anti-bribery laws, such as the Irish Criminal Justice (Corruption Offences) Act, the Bermuda Bribery Act and the U.K. Bribery Act, which generally bar corrupt payments or unreasonable gifts. Although we have policies and controls in place that are designed to ensure compliance with these laws and regulations, it is possible that an employee or an agent acting on our behalf, could fail to comply with applicable laws and regulations and due to the complex nature of the risks, it may not always be possible for us to ascertain compliance with such laws and regulations. In such event, we could be exposed to civil penalties, criminal penalties and other sanctions, including fines or other unintended punitive actions. In addition, such violations could damage our business and/or our reputation. All of the foregoing could have a material adverse effect on our financial condition and operating results.
Risks Related to the Ownership of our Securities
In addition to the risks to our business listed above, there are certain other risks related to the ownership of our securities.
The price of our common shares may be volatile.
There has been significant volatility in the market for equity securities in recent years. During 2020, 2019, and 2018 the price of our common shares fluctuated from a low of $33.29 to a high of $65.80, a low of $50.95 to a high of $67.25 and a low of $47.86 to a high of $60.12, respectively. The price of our common shares may not remain at or exceed current levels. The following factors, in addition to those described in other risk factors above, may have a material adverse effect on the market price of our common stock:
•actual or anticipated variations in our quarterly results, including as a result of catastrophes or our investment performance;
•any share repurchase program;
•changes in market valuation of companies in the insurance/reinsurance industry;
•changes in expectations of future financial performance or changes in estimates of securities analysts;
•fluctuations in stock market processes and volumes;
•issuances or sales of common shares or other securities in the future;
•the addition or departure of key personnel;
•changes in tax law; and
•announcements by us or our competitors of acquisitions, investments or strategic alliances.
Stock markets in the U.S. continue to experience volatile price and volume fluctuations. Such fluctuations, as well as the general political situation, current economic conditions or interest rate or currency rate fluctuations, could materially adversely affect the market price of our stock.
Our ability to pay dividends and to make payments on indebtedness may be constrained by our holding company structure.
AXIS Capital is a holding company and has no direct operations of its own. AXIS Capital has no significant operations or assets other than its ownership of the shares of its operating insurance and reinsurance subsidiaries, AXIS Specialty Bermuda, AXIS Re SE, AXIS Specialty Europe, the Members of Lloyd's (AXIS Corporate Capital UK Limited and AXIS Corporate Capital UK II Limited), AXIS Re U.S., AXIS Specialty U.S., AXIS Surplus and AXIS Insurance Co. (collectively, our "Insurance Subsidiaries"). Dividends and other permitted distributions from our Insurance Subsidiaries (in some cases through our subsidiary holding companies) are our primary source of funds to meet ongoing cash requirements, including debt service payments and other expenses, and to pay dividends to our shareholders. Our Insurance Subsidiaries are subject to significant regulatory restrictions limiting their ability to declare and pay dividends and make distributions. In addition, certain jurisdictions may consider imposing dividend restrictions on insurance companies in response to the COVID-19 pandemic which, if enacted, could further limit our Insurance Subsidiaries’ ability to declare and pay dividends and make distributions (refer to (refer to "The ultimate scale and scope of the ongoing, novel coronavirus (COVID-19) pandemic is currently unknown and is expected to continue to adversely impact our business. The overall impact on our business, results of operations, financial condition or liquidity could be material."above). The inability of our Insurance Subsidiaries to pay dividends in an amount sufficient to enable us to meet our cash requirements at the holding company level could have a material adverse effect on our business and our ability to pay dividends and make payments on our indebtedness.
AXIS Capital is a Bermuda company and it may be difficult to enforce judgments against it or its directors and executive officers.
AXIS Capital is incorporated pursuant to the laws of Bermuda and our business is based in Bermuda. In addition, some of our directors and officers reside outside the U.S., and all or a substantial portion of our assets and the assets of such persons are located in jurisdictions outside the U.S. As a result, it may be difficult or impossible to effect service of process within the U.S. upon those persons or to recover against us or them on judgments of U.S. courts, including judgments predicated upon civil liability provisions of the U.S. federal securities laws. Further, it may not be possible to bring a claim in Bermuda against us or our directors and officers for violation of U.S. federal securities laws because these laws may have no extraterritorial application under Bermuda law and do not have force of law in Bermuda. A Bermuda court may, however, impose civil liability, including the possibility of monetary damages, on us or our directors and officers in a suit brought in
the Supreme Court of Bermuda if the facts alleged in a complaint constitute or give rise to a cause of action under Bermuda law.
There are provisions in our organizational documents that may reduce or increase the voting rights of our shares.
Our bye-laws generally provide that shareholders have one vote for each common share held by them and are entitled to vote, on a non-cumulative basis, at all meetings of shareholders. However, the voting rights exercisable by a shareholder may be limited so that certain persons or groups are not deemed to hold 9.5% or more of the voting power conferred by our shares. Under these provisions, some shareholders may have the right to exercise their voting rights limited to less than one vote per share. Moreover, these provisions could have the effect of reducing the voting power of some shareholders who would not otherwise be subject to the limitation by virtue of their direct share ownership. In addition, our Board of Directors may limit a shareholder’s exercise of voting rights where it deems it necessary to do so to avoid adverse tax, legal or regulatory consequences.
We also have the authority under our bye-laws to request information from any shareholder for the purpose of determining whether a shareholder’s voting rights are to be limited pursuant to the bye-laws. If a shareholder fails to respond to our request for information or submits incomplete or inaccurate information in response to a request by us, we may, in our sole discretion, eliminate the shareholder’s voting rights.
There are provisions in our bye-laws that may restrict the ability to transfer common shares and which may require shareholders to sell their common shares.
Our Board of Directors may decline to register a transfer of any common shares under some circumstances, including if they have reason to believe that any non-de minimis adverse tax, regulatory or legal consequences to us, any of our subsidiaries or any of our shareholders may occur as a result of such transfer. Our bye-laws also provide that if our Board of Directors determines that share ownership by a person may result in non-de minimis adverse tax, legal or regulatory consequences to us, any of our subsidiaries or any of our shareholders, then we have the option, but not the obligation, to require that shareholder to sell to us or to third parties to whom we assign the repurchase right for fair value the minimum number of common shares held by such person which is necessary to eliminate the non-de minimis adverse tax, legal or regulatory consequences.
Applicable insurance laws may make it difficult to effect a change of control of our company.
Before a person can acquire control of a U.S. insurance company, prior written approval must be obtained from the insurance commissioner of the state where the domestic insurer is domiciled. Prior to granting approval of an application to acquire control of a domestic insurer, the state insurance commissioner will consider such factors as the financial strength of the acquirer, the integrity and management of the acquirer’s board of directors and executive officers, the acquirer’s plans for the future operations of the domestic insurer and any anti-competitive results that may arise from the consummation of the acquisition of control. Generally, state statutes provide that control over a domestic insurer is presumed to exist if any person, directly or indirectly, owns, controls, holds with the power to vote, or holds proxies representing, 10% or more of the voting securities of the domestic insurer. Because a person acquiring 10% or more of our common shares would indirectly control the same percentage of the stock of the AXIS U.S. Subsidiaries, the insurance change of control laws of Connecticut, Illinois and New York would likely apply to such a transaction.
The Insurance Act in Bermuda requires that where the shares of a registered insurer or reinsurer, or the shares of its parent, are traded on a recognized stock exchange, and a person becomes a 10%, 20%, 33% or 50% shareholder controller of that insurer or reinsurer, that person shall, within 45 days, notify the BMA in writing that they have become such a controller. In addition, a person who is a shareholder controller of a class 4 insurer or reinsurer (such as AXIS Specialty Bermuda) whose shares or shares of its parent company are traded on a recognized stock exchange must serve the BMA with a notice in writing that he has reduced or disposed of his holding in the insurer or reinsurer where the proportion of voting rights in the insurer or reinsurer held by him will have reached or has fallen below 10%, 20%, 33% or 50%, as the case may be, not later than 45 days after such disposal. The definition of shareholder controller is set out in the Insurance Act but generally refers to a person who (i) holds 10% or more of the shares carrying rights to vote at a shareholders’ meeting of the registered insurer or reinsurer or its parent; (ii) is entitled to exercise 10% or more of the voting power at any shareholders meeting of the registered insurer or reinsurer or its parent; or (iii) is able to exercise significant influence over the management of the registered insurer or reinsurer or its parent by virtue of its shareholding or its entitlement to exercise, or control the exercise of, the voting power at any shareholders’ meeting. The BMA may object to any person holding 10% or more of our common shares if it appears to the BMA that such person is not, or is no longer, a fit and proper person to be such a holder. In such a case, the BMA may require the shareholder to reduce its holding of common shares and direct, among other things, that
voting rights attaching to the common shares shall not be exercisable. A person who does not comply with such a notice or direction from the BMA will be guilty of an offense.
In addition, the Insurance Acts and Regulations in Ireland require that anyone acquiring or disposing of a direct or indirect holding in an Irish authorized insurance or reinsurance company (such as AXIS Specialty Europe or AXIS Re SE) that represents 10% or more of the capital or of the voting rights of such company or that makes it possible to exercise a significant influence over the management of such company, or anyone who proposes to decrease or increase that holding to specified levels, must first notify the Central Bank of Ireland ("CBI") of their intention to do so. They also require any Irish authorized insurance or reinsurance company that becomes aware of any acquisitions or disposals of its capital involving the specified levels to notify the CBI. The specified levels are 20%, 33% and 50% or such other level of ownership that results in the company becoming the acquirer’s subsidiary within the meaning of article 20 of the European Communities (Non-Life Insurance) Framework Regulations 1994.
The CBI has three months from the date of submission of a notification within which to oppose the proposed transaction if the CBI is not satisfied as to the suitability of the acquirer in view of the necessity "to ensure prudent and sound management of the insurance or reinsurance undertaking concerned". Any person owning 10% or more of the capital or voting rights or an amount that makes it possible to exercise a significant influence over the management of AXIS Capital would be considered to have a "qualifying holding" in AXIS Specialty Europe and AXIS Re SE.
In the U.K., the Prudential Regulation Authority ("PRA") and the Financial Conduct Authority ("FCA") regulate the acquisition of "control" of any U.K. Insurance companies and Lloyd's managing agents which are authorized under the Financial Services and Markets Act 2000 ("FSMA"). Any legal entity or individual that (together with any person with whom it or he is "acting in concert") directly or indirectly acquires 10% or more of the shares in a U.K. authorized insurance company or Lloyd's managing agent, or their parent company, or is entitled to exercise or control the exercise of 10% or more of the voting power in such authorized insurance company or Lloyd's managing agent or their parent company, would be considered to have acquired "control" for the purposes of the relevant legislation, as would a person who had significant influence over the management of such authorized insurance company or their parent company by virtue of his shareholding or voting power in either. A purchase of 10% or more of the ordinary shares of the Company would therefore be considered to have acquired "control" of AXIS Managing Agency Ltd. Under FSMA, any person proposing to acquire "control" over a U.K. authorized insurance company must give prior notification to the PRA of his intention to do so. The PRA, which will consult with the FCA, would then have 60 working days to consider that person's application to acquire "control" (although this 60 working day period can be extended by up to 30 additional working days in certain circumstances where the regulators have questions relating to the application). Failure to make the relevant prior application could result in action being taken against AXIS Managing Agency Ltd. by the PRA.
A person who is already deemed to have "control" will require prior approval of the PRA if such person increases their level of "control" beyond certain percentages. These percentages are 20%, 30% and 50%. Similar requirements apply in relation to the acquisition of control of a U.K. authorized person which is an insurance intermediary (such as AXIS Underwriting Limited or Contessa Limited) except that the approval must be obtained from the FCA rather than the PRA and the threshold triggering the requirement for prior approval is 20% of the shares or voting power in the insurance intermediary or its parent company. The approval of the Council of Lloyd's is also required in relation to the change of control of a Lloyd's managing agent or member. Broadly, Lloyd's applies the same tests in relation to control as are set out in the FSMA (see above) and in practice coordinates its approval process with that of the PRA.
While our bye-laws limit the voting power of any shareholder to less than 9.5%, there can be no assurance that the applicable regulatory body would agree that a shareholder who owned 10% or more of our shares did not, because of the limitation on the voting power of such shares, control the applicable Insurance Subsidiary. These laws may discourage potential acquisition proposals and may delay, deter or prevent a change of control of the Company, including transactions that some or all of our shareholders might consider to be desirable.
Anti-takeover provisions in our bye-laws could impede an attempt to replace our directors or to effect a change in control, which could diminish the value of our common shares.
Our bye-laws contain provisions that may make it more difficult for shareholders to replace directors and could delay or prevent a change of control that a shareholder might consider favorable. These provisions include a staggered board of directors, limitations on the ability of shareholders to remove directors other than for cause, limitations on voting rights and restrictions on transfer of our common shares. These provisions may prevent a shareholder from receiving the benefit from any premium over the market price of our shares offered by a bidder in a potential takeover. Even in the absence of an
attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our shares if they are viewed as discouraging takeover attempts in the future.
Risks Related to Taxation
We may become subject to taxes in Bermuda after March 31, 2035, which may have a materialan adverse effect on our results of operations.
The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966 of Bermuda, as amended, has given each of our Bermuda resident companies an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to our Bermuda resident companies or any of their respective operations, shares, debentures or other obligations until March 31, 2035. Given the limited duration of the Minister of Finance’s assurance, we cannot be certain that we will not be subject to any Bermuda tax after March 31, 2035.
Our non-U.S. companies may be subject to U.S. tax that may have a materialan adverse effect on our results of operations.
We intend to manage our business so that each of our non-U.S. companies, apart from our Lloyd's operations with U.S. effectively connected income, will operate in such a manner that none of these companies should be subject to U.S. tax (other than U.S. excise tax on insurance or reinsurance premiums attributable to insuring or reinsuring U.S. risks and U.S. withholding tax on some types of U.S. source investment income), because none of these companies should be treated as engaged in a trade or business within the U.S. However, because there is considerable uncertainty as to the activities that constitute being engaged in a trade or business within the U.S., we cannot be certain that the U.S. Internal Revenue Service will not contend successfully that any of our non-U.S. companies is/are engaged in a trade or business in the U.S. If any of our non-U.S. companies were considered to be engaged in a trade or business in the U.S., it could be subject to U.S. corporate income and additional branch profits taxes on the portion of its earnings effectively connected to such U.S. business. If this were to be the case, our results of operations could be materially adversely affected.
Changes in U.S. tax law could adversely affect us.
Our non-U.K. companies may be subject to U.K. tax that may have a materialan adverse effect on our results of operations.
We intend to operate in such a manner so that none of our non-U.K. companies are resident in the U.K. for tax purposes and that none of our non-U.K. resident companies, other than AXIS Specialty Europe and AXIS Specialty U.S. Services, Inc., should have a permanent establishment in the U.K. Accordingly, we expect that none of our non-U.K. resident companies, other than AXIS Specialty Europe and AXIS Specialty U.S. Services, Inc., shouldwill be subject to U.K. tax. Nevertheless, because neither case law nor U.K. statutes conclusively define the activities that constitute trading in the U.K. through a permanent establishment, the U.K. tax authority might contend successfully that anyone or more of our non-U.K. companies, in addition to AXIS Specialty Europe and AXIS Specialty U.S. Services, Inc., is/areis trading in the U.K. through a permanent establishment in the U.K. and therefore subject to U.K. tax.
In addition, there are circumstances in which companies that are neither resident in the U.K., nor entitled to the protection afforded by a double tax treaty between the U.K. and the jurisdiction in which they are resident, may be exposed to income tax in the U.K. (other than by deduction or withholding) on the profits of a trade carried on there even if that trade is not carried on through a permanent establishment. We intend to operate in such a manner that none of our companies will be subject to U.K. income tax in this respect.
If any of our non-U.K. resident companies were treated as being resident in the U.K. for U.K. corporation tax purposes, or if any of our non-U.K. companies, other than AXIS Specialty Europe or AXIS Specialty U.S. Services, Inc., were to be treated
as carrying on a trade in the U.K., whether or not through a permanent establishment, our results of operations could be materially adversely affected.
The U.K. diverted profits tax ("DPT") is separate from U.K. corporation tax and is charged at a higher rate. It is an anti-avoidance measure aimed at protecting the U.K. tax base against the artificial diversion of profits that are being earned by activities carried out in the U.K. but which are not otherwise being taxed in the U.K., in particular as a result of arrangements between companies in the same multinational group. The U.K. network of double tax treaties does not offer protection from a DPT charge. In the event that the rules apply to certain arrangements, upfront payment of the U.K. tax authority’s estimate of the deemed tax liability may be required. If any of our non-U.K. companies is liable to DPT, thisour results could have a material adverse effect on our results.be materially adversely affected.
Our U.K. operations may be affected by future changesChanges in U.K. tax law.law could adversely affect us.
AXIS Specialty Europe, AXIS Specialty U.S. Services, Inc. and our U.K. resident companies should beare treated as taxable in the U.K. Any change in the basis or rate of U.K. corporation tax could materially adversely affect the operations of these companies.
Our operations may be adversely affected by a transfer pricing adjustment in computing taxable profits.
Any affiliated arrangements between contracting parties established in different jurisdictions are subject to transfer pricing regimes. Consequently, if any arrangement (including any reinsurance or financing arrangements) is found not to be on arm’s length terms, an adjustment will be required to compute taxable profits as if the arrangement were on arm’s length terms. Any transfer pricing adjustment could adversely impact the tax charge suffered by the relevant tax-paying company.
With effect from January 1, 2016, Bermuda has implemented country by country reporting ("CBCR") whereby multinational groups are required to report details of their operations and intra-group transactions in each jurisdiction. It is possible that our approach to transfer pricing may become subject to greater scrutiny from the tax authorities in the jurisdictions in which we operate, which may lead to transfer pricing audits in the future.
Our non-Irish companies may be subject to Irish tax that may have a materialan adverse effect on our results of operations.
We intend to operate our non-Irish resident companies in such a manner so that none of our non-Irish resident companies should beare resident in Ireland for tax purposes and that they shouldare not be treated as carrying on a trade through a branch or agency in Ireland.
Accordingly, we expect that none of our non-Irish resident companies shouldwill be subject to Irish corporation tax. Nevertheless, since the determination as to whether a company is resident in Ireland is a question of fact to be determined based on a number of different factors and since neither case law nor Irish legislation conclusively defines the activities that constitute trading in Ireland through a branch or agency, the Irish Revenue Commissioners might contend successfully that anyone or more of our non-Irish companies is resident in or otherwise trading through a branch or agency in Ireland and therefore subject to Irish corporation tax. If this were the case, our results of operations could be materially adversely affected.
If corporateChanges in Irish tax rates in Ireland increase, our results of operationslaw could be materially adversely affected.affect us.
Trading income derived from the insurance and reinsurance business carried on in Ireland by AXIS Specialty Europe and AXIS Re SE is generally taxed in Ireland at a rate of 12.5%. Over the past number of years, various E.U. member states have, from time to time, called for harmonization of the corporate tax base within the E.U. Ireland, along with other member states, has consistently resisted any movement towards standardized corporate tax rates or tax base in the E.U. The Government of Ireland has also made clear its commitment to retain the 12.5% rate of corporation tax. If, however, tax laws in Ireland change so as to increase the general corporation tax rate, in Ireland, our results of operations could be materially adversely affected.
If investments held by AXIS Specialty Europe SE or AXIS Re SE are determined not to be integral to the insurance and reinsurance business carried on by those companies, additional Irish tax could be imposed and our business and financial results could be materially adversely affected.
Based on administrative practice, taxable income derived from investments made by AXIS Specialty Europe and AXIS Re SE is generally taxed in Ireland at the rate of 12.5% on the grounds that such investments either form part of the permanent capital required by regulatory authorities, or are otherwise integral to the insurance and reinsurance business carried on by those companies. AXIS Specialty Europe and AXIS Re SE intend to operate in such a manner so that the level of investments held by such companies does not exceed the amount that is integral to the insurance and reinsurance business carried on by AXIS Specialty Europe and AXIS Re SE. If, however, investment income earned by AXIS Specialty Europe or AXIS Re SE is deemed to be non-trading income, Irish corporation tax could apply to such investment income at a rate higher rate (currently 25%) instead ofthan the general 12.5% rate, and our results of operations could be materially adversely affected.
ChangesOur operations may be adversely affected by a transfer pricing adjustment in U.S. federal income tax lawcomputing taxable profits.
Any affiliated arrangements between contracting parties established in different jurisdictions are subject to transfer pricing regimes. Consequently, if any arrangement (including any reinsurance or financing arrangements) is found not to be on arm’s length terms, an adjustment will be required to compute taxable profits as if the arrangement were on arm’s length terms. Any transfer pricing adjustment could materially adversely affect us.impact the tax charge suffered by the relevant tax-paying company.
The 2017 Tax Cuts and Jobs ActEffective January 1, 2016, Bermuda implemented country by country reporting ("U.S. Tax Reform"CBCR"), which included certain provisions that were intended to eliminate some perceived tax advantages of companies (including insurance and reinsurance companies) that have legal domiciles outside the U.S., but have certain U.S. connections, significantly altered existing U.S. federal domestic and international income tax law. Among other things, the U.S. Tax Reform reduced the U.S. corporate tax rate, made extensive changes to the international tax system, eliminated the corporate alternative minimum tax system, modified the loss reserve discounting methodology, and changed the proration percentage on tax-favored investments. Furthermore, under the U.S. Tax Reform, certain U.S. corporations that make deductible payments, including reinsurance premiums, to foreign affiliates in excess of certain amounts will now be whereby multinational groups are required to pay a base erosion minimum tax. Currently, there are only proposed regulations regardingreport details of their operations and intra-group transactions in each jurisdiction. It is possible that our approach
to transfer pricing may become subject to greater scrutiny from the application oftax authorities in the base erosion minimum tax, and new regulations or pronouncements interpreting or clarifying U.S. federal income tax laws relatingjurisdictions in which we operate, which may lead to insurance and reinsurance companies may be forthcoming. We cannot be certain if, when, ortransfer pricing audits in what form, such regulations or pronouncements may be provided, and whether such guidance will have a retroactive effect.
Changes in tax laws resulting from the recommendations of the Organization for Economic Corporation and Development ("OECD") could materially adversely affect us.
The OECD has launched a global initiative among member and non-member countries on measures to limit harmful tax competition, known as the "Base Erosion and Profit Shifting" ("BEPS") project and, in 2015, published reports containing a suite of recommended actions. These measures are largely directed at counteracting the effects of low-tax and preferential tax regimes in countries around the world, including expanding the definition of permanent establishment and updating the rules for attributing profits to permanent establishments, tightening transfer pricing rules to ensure that outcomes are in line with value creation, neutralizing the effect of hybrid financial instruments and limiting the deductibility of interest costs for tax purposes and preventing double tax treaty abuse. We expect manyMany countries have changed or announced future changes to change their tax laws in response to the BEPS project, and several countries have already changed or proposed changes to their tax laws.project. In particular, the E.U. has sought to harmonize the response of member states to the BEPS reports via the Anti-Tax Avoidance DirectiveDirectives ("the ATAD"ATAD and the ATAD II"). The ATAD requiresand the ATAD II require all E.U. member states to apply certain specified anti-avoidance measures, including a controlled foreign companies regime, and limitations on interest deductions.deduction and anti-hybrid rules. Changes to tax laws and additional reporting requirements could increase the tax burden and the complexity and cost of tax compliance.
On May 31, 2019, the OECD published a "Programme of Work", designed to address the tax challenges created by an increasingly digitalized economy. This was divided into two pillars. Pillar One addresses the broader challenge of a digitalized economy and focuses on the allocation of group profits among taxing jurisdictions, based on a market-based concept rather than the historical "permanent establishment" concept. Pillar Two addresses the remaining BEPS risk of profit shifting to entities in low tax jurisdictions, by introducing a global minimum tax and a proposed tax on base eroding payments, which would operate through a denial of a deduction or the imposition of source-based taxation (including withholding tax) on certain payments. The OECD would like for this proposal to be agreed by the participating members by the endpublished detailed blueprints of its proposals on October 14, 2020 and forpublic consultations were held virtually in January 2021. The OECD's stated aim is to bring the process to a successful conclusion by mid-2021. However, at this stage, it tois not known what the outcome will be incorporated into local jurisdiction tax laws and treaties shortly thereafter.from the consultations or when any legislative changes resulting from the OECD's recommendations would be implemented. To date, the proposal has been drawn broadly and could have a material adverse impact on our operations and results.
Legislation enactedGeneral Risk Factors
Future changes in Bermudacurrent accounting practices may adversely impact our reported financial results.
Future changes in responseaccounting practices may result in significant additional expenses and may affect the calculation of financial statement line items. For example, this could occur if we are required to the European Union’s review of harmful tax competition could adversely affect our operations and financial condition.
During 2017, the Economic and Financial Affairs Council released a list of non-cooperative jurisdictions for tax purposes. The stated aim of this list, and accompanying report, was to promote good governance worldwide in order to maximize efforts to prevent tax fraud and tax evasion. Bermuda was not on the list of non-cooperative jurisdictions, but did feature in the report (along with approximately 40 other jurisdictions) as having committed to address concernsprepare information relating to economic substance by December 31, 2018. In accordance with that commitment, Bermuda has enacted legislation that requires certain entities in Bermuda engaged in "relevant activities"prior periods or if we are required to maintain a substantial economic presence in Bermuda and to satisfy economic substance requirements. The list of "relevant activities" includes carrying on as a business any one or more of: banking, insurance, fund management, financing, leasing, headquarters, shipping, distribution and service center, intellectual property and holding entities. Any entity that must satisfy economic substanceapply new requirements but fails to do so could face automatic disclosure to competent authorities, in each jurisdiction in which its owners or beneficial owners is incorporated, formed, registered or resident, of the information filed by the entity with the Bermuda Registrar of Companies in connection with the economic substance requirements and may also face financial penalties, restriction or regulation of its business activities and/or may be struck off as a registered entity in Bermuda.retroactively.
At present, the impact of these new economic substance requirements is unclear, and it is not possible to accurately predict the effect of these requirements on us and our business. The requirements may increase the complexity and costs of carrying on our business and could adversely affect our operations and financial condition.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
ITEM 1B. UNRESOLVED STAFF COMMENTSAt December 31, 2019,2020, we had no outstanding, unresolved comments from the SEC staff.
ITEM 2. PROPERTIESWe maintain office facilities in Bermuda, the U.S., Europe, Singapore, Canada, and the Middle East.Canada. We own the propertybuilding in which our office is located in Dublin, Ireland, and we lease office space in the other countries. We renew and enter into new leases in the ordinary course of business as required. Our global headquarters is located at 92 Pitts Bay Road, AXIS House, Pembroke HM 08, Bermuda. We believe that our office space is sufficient for us to conduct our operations for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGSFrom time to time, the Company iswe are subject to routine legal proceedings, including arbitrations, arising in the ordinary course of business. These legal proceedings generally relate to claims asserted by or against the Companyus in the ordinary course of its insurance or reinsurance operations. Estimated amounts payable related to these proceedings are included in reserve for losses and loss expenses in the Company'sour consolidated balance sheets.
The Company isWe are not party to any material legal proceedings arising outside the ordinary course of business.
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ITEM 4. | MINE SAFETY DISCLOSURES |
Not Applicable.
Our common shares are listed on the New York Stock Exchange under the symbol "AXS".
The following table shows information regarding the number of common shares repurchased:
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(2) | During 2017, the Company recognized a tax expense of $42 million due to the revaluation of net deferred tax assets pursuant to the U.S. Tax Reform. |
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(3) | During 2019, 2018 and 2017, the Company recognized amortization of value of business acquired ("VOBA") of $27 million, $172 million and $50 million, respectively, related to the acquisition of Novae. Refer to Item 8, Note 4 to the Consolidated Financial Statements 'Goodwill and Intangible Assets' for further details.
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(4) | During 2015, the Company accepted a request from PartnerRe Ltd., a Bermuda exempted company ("PartnerRe") to terminate the Agreement and Plan of Amalgamation (the "Amalgamation Agreement") with the Company. PartnerRe paid the Company a termination fee of $280 million. |
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(5) | During 2015, the Company early adopted the Accounting Standard Update ("ASU") 2015-02 "Consolidation (Topic 810) Amendments to the Consolidation Analysis", issued by the Financial Accounting Standards Board. The adoption of this accounting guidance resulted in the Company concluding that it was no longer required to consolidate the results of operations and the financial position of AXIS Ventures Reinsurance Limited ("Ventures Re"). The Company adopted this accounting guidance using the modified retrospective approach and ceased to consolidate Ventures Re effective January 1, 2015.
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(6) | Operating ratios are calculated by dividing the respective operating expenses by net premiums earned. |
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(7) | Book value per common share and book value per diluted common share are calculated by dividing total common shareholders’ equity by the number of common shares and diluted common share outstanding, respectively. |
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(8) | Calculations and share amounts at December 31, 2015 include 1,358,380 additional shares delivered to the Company in January 2016 under the Company's Accelerated Share Repurchase ("ASR") agreement entered into on August 17, 2015. |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following is a discussion and analysis of our results of operations for the years ended December 31, 20192020 and 20182019, and our financial condition at December 31, 20192020 and 2018.2019. This should be read in conjunction with Item 8 'Consolidated Financial Statements and Supplementary Data' of this report. TabularUnless otherwise noted, tabular dollars are in thousands, except per share amounts. Amounts in tables may not reconcile due to rounding differences.
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| 2020 Financial Highlights | |
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| Overview | |
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| Consolidated Results of Operations | |
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| Results by Segment: | |
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2019 Financial Highlightsi) Insurance Segment | |
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Executive Summaryii) Reinsurance Segment | |
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Underwriting Results – Consolidated | |
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Results by Segment: Years ended December 31, 2019, 2018 and 2017 | |
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i) Insurance Segment | |
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ii) Reinsurance Segment | |
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Other Expenses (Revenues), Net | |
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| Net Investment Income and Net Investment Gains (Losses) | |
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| Other Expenses (Revenues), Net | |
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| Financial Measures | |
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| Non-GAAP Financial Measures Reconciliation | |
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| Cash and Investments | |
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| Liquidity and Capital Resources | |
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| Critical Accounting Estimates | |
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| i) Reserve for Losses and Loss Expenses | |
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| ii) Reinsurance Recoverable on Unpaid Losses and Loss Expenses | |
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| iii) Gross Premiums Written and Net Premiums Earned | |
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| iv) Fair Value Measurements of Financial Assets and Liabilities | |
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v) Other-Than-Temporary ImpairmentsImpairment Losses and the Allowance for Expected Credit Losses - Fixed Maturities Available for Sale | |
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| Recent Accounting Pronouncements | |
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| Off-Balance Sheet and Special Purpose Entity Arrangements | |
2019
2020 FINANCIAL HIGHLIGHTS
2019
2020 Consolidated Results of Operations
•Net income availableloss attributable to common shareholders of $282.4$150.7 million, or $3.37$(1.79) per common share and $3.34diluted common share
•Operating loss(1) of $174 million, or $(2.08) per diluted common share(1)
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• | Operating income(1) of $213 million, or $2.52 per diluted common share(1)
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• | Gross premiums written of $6.9 billion
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• | Net premiums written of $4.5 billion
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• | Net premiums earned of $4.6 billion
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Estimated pre-tax•Gross premiums written of $6.8 billion
•Net premiums written of $4.3 billion
•Net premiums earned of $4.4 billion
•Pre-tax catastrophe and weather-related losses, net of reinsurance and reinstatement premiums, of $336$774 million (Insurance: $84 million;$443 million; Reinsurance: $252 million) $330 million), or 7.5 17.7 points, including $360 million, or 8.2 points, onattributable to the current accident year loss ratio, primarily related to Japanese Typhoons Hagibis, FaxaiCOVID-19 pandemic. Other catastrophe and Tapah, Hurricane Dorian, Australian Wildfires,weather-related losses were $414 million, or 9.4 points, associated with Hurricanes Laura, Sally, Zeta and Delta, the Midwest derecho, wildfires across the West Coast of the United States and other weather-related events
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• | •Net favorable prior year reserve development of $79 million |
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• | Underwriting income(2) of $29 million and combined ratio of 102.6%
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• | Net investment income of $479 million
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• | Net investment gains of $91 million
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Amortization of value$16 million
•Underwriting loss(2) of business acquired ("VOBA")$326 million and combined ratio of $27109.6%
•Net investment income of $350 million
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• | Reorganization expenses of $37 million
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• | Foreign exchange gains of $12 million
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2019•Net investment gains of $129 million
•Foreign exchange losses of $81 million
2020 Consolidated Financial Condition
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• | Total cash and investments of $15.9 billion; fixed maturities, cash and short-term securities comprise 89%•Total cash and investments of $15.8 billion; fixed maturities, cash and short-term securities comprise 87% of total cash and investments and have an average credit rating of AA- •Total assets of $25.9 billion •Reserve for losses and loss expenses of $13.9 billion and reinsurance recoverable on unpaid and paid losses and loss expenses of $4.9 billion •Debt of $1.3 billion and a debt to total capital ratio(3) of 19.8% •AA- |
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• | Total assets of $25.6 billion
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• | Reserve for losses and loss expenses of $12.8 billion and reinsurance recoverable on unpaid and paid losses and loss expenses of $4.2 billion
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• | Debt of $1.8 billion and a debt to total capital ratio(3) of 24.6%
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• | Common shares repurchased were 0.2 million for $10 million
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Common shareholders’ equity of $4.8$4.7 billion; book value per diluted common share of $55.79$55.09
(1) Operating income (loss) and operating income (loss) per diluted common share are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. The reconciliations to the most comparable GAAP financial measures, net income (loss) available (attributable) to common shareholders and earnings (loss) per diluted common share, respectively, and a discussion of the rationale for the presentation of these items are provided in 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures Reconciliation'.
(2)Consolidated underwriting income (loss) is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to the most comparable GAAP financial measures, net income (loss), is presented in 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Results of Operations', and a discussion of the rationale for its presentation is provided in'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures Reconciliation'.
(3)The debt to total capital ratio is calculated by dividing debt by total capital. Total capital represents the sum of total shareholders’ equity and debt.
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(1) | Operating income (loss) and operating income (loss) per diluted common share are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. The reconciliations to the most comparable GAAP financial measures, net income (loss) and earnings (loss) per diluted common share, respectively, are provided in 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations' and a discussion of the rationale for the presentation of these items is provided in'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Non GAAP Financial Measures'.
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OVERVIEW
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(2) | Consolidated underwriting income (loss) is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to net income (loss), the most comparable GAAP financial measure, is provided in 'Management's Discussion and Analysis of Financial Condition – Executive Summary – Results of Operations' and a discussion of the rationale for its presentation is provided in'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Non GAAP Financial Measures'.
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(3) | The debt to total capital ratio is calculated by dividing debt by total capital. Total capital represents the sum of total shareholders’ equity and debt. |
EXECUTIVE SUMMARY
Business Overview
AXIS Capital, through its operating subsidiaries, is a global provider of specialty lines insurance and treaty reinsurance with operations in Bermuda, the U.S., Europe, Singapore Canada and the Middle East.Canada. Our underwriting operations are organized around our global underwriting platforms, AXIS Insurance and AXIS Re.
We provide our clients and distribution partners with a broad range of risk transfer products and services, and meaningful capacity, backed by significantexcellent financial strength. We manage our portfolio holistically, aiming to construct the optimum portfolio of risks, consistent with our risk appetite and the development of our franchise. We nurture an ethical, entrepreneurial, disciplined and disciplineddiverse culture that promotes outstanding client service, intelligent risk taking and the achievement of superior risk-adjusted returns for our shareholders. We believe that the achievement of our objectives will position us as a global leader in specialty risks. The execution of our business strategy in 20192020 included the following:
•implementing a global response strategy to help manage and mitigate the impact of the COVID-19 pandemic, spanning underwriting, investments, capital and liquidity, operations and employee welfare;
•increasing our relevance in a select number of attractive specialty lines insurance and treaty reinsurance markets, and continuing the implementation of a more focused distribution strategy;
•continuing to grow a leadership position in the areas of our business with strong potential for profitable growth including U.S. excess and surplus lines, North America professional lines and Lloyd's specialty insurance business;
continuing to re-balance•re-balancing our portfolio towards less volatile lines of business that carry attractive rates;
continuing to improve•improving the effectiveness and efficiency of our operating platforms and processes;
•investing in data and technology capabilities, and tools to empower our underwriters and enhance the service we provide to our customers;
•broadening risk-funding sources and the development of vehicles that utilize third-party capital; and
•growing our corporate citizenship program to give back to our communities and help contribute to a more sustainable future.
We continue to closely monitor developments related to the coronavirus (COVID-19) outbreak to assess any potential impact on our business. We currently do not anticipate that this outbreak will have a material impact on our results of operations, financial condition or liquidity, however, due to the evolving and highly uncertain nature of this event, it currently is not possible to provide an estimate of potential insurance or reinsurance exposure or the indirect effects the outbreak may have on our results of operations, financial condition or liquidity.
Outlook
We are committed to being a leaderleadership in specialty insurance and global reinsurance, markets; areas where we have depth of talent and expertise. As a mid-sized player that is both sophisticated and agile, weWe believe we are well-positioned to succeed in athe rapidly evolving industry. Acrossmarketplace. Through our hybrid strategy, we have developed substantial platforms, providing us with both balance and diversification, enabling us to take advantage of positive opportunities in either market to generate the most attractive risk-return portfolio for our shareholders. We believe our market positioning, underwriting expertise, best-in-class claims management capabilities and strong relationships with our distributors and clients will provide opportunities for increased profitability, with differences among our lines driven by our tactical response to market conditions.
Rates, terms and conditions across virtually all insurance lines and geographies continued to see accelerating improvement through the fourth quarter of 2020. We expect many specialty segments will experience further pricing improvements as carriers assess pricing, portfolio construction and account preferences through the course of 2021. The insurance market continues to improve capacity and capital remains available and willing to support business we continue to emphasize underwriting discipline to actively manage our portfolio.with a broad range of return hurdles in certain pockets. In 2020,this market environment, we are focusedfocusing on further growing our most attractivethose lines to driveof business and market segments that are adequately priced, and we are trading off growth for profitability in other areas.
The reinsurance market is also experiencing an improved risk-adjusted return for our shareholders.
In the insurance market,improvement in rates and terms and conditionsconditions. These improvements are due to a combination of pressures on the industry including near-term drivers such as the failure of the industry to meet cost of capital in the last four years, the increased frequency of natural catastrophe events and the increased cost of retro protection together with long term drivers such as the pressure on reserve adequacy levels, low interest rates and the looming uncertainty related to social inflation. Balanced with the case for change is the strong industry capitalization. We believe the improvements will translate to a healthier and more profitable market. This environment requires a combination of strong underwriting and portfolio management mixed with smart incremental growth where returns are attractive. We have repositioned our portfolio during the last several years and believe our business is well-positioned for the current market environment.
We are encouraged by the pricing improvements that we are seeing across both the insurance and reinsurance segments. While there is positive rate momentum across most lines generally continuedand markets, not all lines are at adequate levels and, in multiple cases, more rate is needed to see accelerating improvement. We are well-positioneddeliver adequate returns, particularly given recent high loss experience in the marketsmarket, the COVID-19 pandemic and lower interest rates. Where prices appropriately reflect these trends to deliver adequate profitability we will look to grow within our risk and volatility guidelines. With the most balanced book in the history of our company, we believe AXIS is well positioned to drive profitable growth within the current market environment.
Recent Developments Related to COVID-19
On March 11, 2020, COVID-19, a novel coronavirus outbreak, was declared a pandemic by the World Health Organization. The COVID-19 crisis upended the marketplace and society on a global scale, and its impact is still being felt within the insurance and reinsurance industry and at AXIS.
COVID-19, and its related impacts, are an emerging and evolving risk to which we are exposed from an underwriting, investments, capital and liquidity, operations and employee welfare perspective. We have implemented a global response strategy to help manage and mitigate these risks.
Our team continues to track the situation closely, including stress and scenario testing on existing underwriting and investment exposures, taking into consideration among other assumptions, the possible severity and duration of the outbreak.
Reserving
We reported an estimate of $360 million for ultimate losses related to the direct impacts of the COVID-19 pandemic incurred at December 31, 2020. We also analyzed loss potential from indirect exposures, especially in casualty lines, professional lines, and credit lines. We recognize that while emerging losses in these lines of business may be more difficult to directly attribute to COVID-19, the pandemic has caused an economic and legal environment which will likely lead to an increased frequency of losses in some of these areas. With the addition of the $360 million recognized in 2020, we believe our estimate of reserve for losses and loss expenses ("loss reserves") established at December 31, 2020 adequately reflects our estimate of ultimate losses related to the COVID-19 pandemic, considering the direct and indirect impacts, for all lines of business incurred at December 31, 2020. We expect that it may take several quarters, or potentially several years, for the full impact of COVID-19 and its economic repercussions on these lines of business to fully emerge.
The estimate of ultimate losses related to the COVID-19 pandemic is subject to significant uncertainty. This uncertainty is driven by the inherent difficulty in making assumptions around the impact of the COVID-19 pandemic due to the lack of comparable events, the ongoing nature of the event, and its far-reaching impacts to world-wide economies and the health of the global population.
While we believe our estimate of loss reserves is adequate for losses and loss expenses that have been incurred at December 31, 2020, based on current facts and circumstances, we continue to monitor the appropriateness of our assumptions as new information comes to light and adjustments are made to the estimate of ultimate losses related to the COVID-19 pandemic, if there are developments that are seeingdifferent from previous expectations (refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results by Segment' and Item 8, Note 8 to the strongest pricing actions, including Lloyd’s, U.S. E&SConsolidated Financial Statements 'Reserve for losses and Professional Lines,loss expenses' for further details).
Actual losses for this event may ultimately differ materially from current estimates.
Underwriting
As our industry and we expect more business will meet our return adequacy hurdles in the coming year. Wesociety continue to pursue opportunitiesnavigate the challenges brought on by COVID-19, we are closely monitoring cash receipts from our customers and reinsurers, giving due consideration to related directives issued by certain government agencies. At December 31, 2020, we considered the potential financial impact of COVID-19 when determining allowances for profitable growthexpected credit losses for insurance and reinsurance premium balances receivable and reinsurance recoverable balances on unpaid losses. Based on facts and circumstances at that time, we did not adjust allowances for expected credit losses at December 31, 2020. We will continue to monitor the appropriateness of allowances for expected credit losses as new information comes to light. Adjustments to allowances for expected credit losses in subsequent periods could be material.
We review claims on an individual basis and where our policies provide coverage, we are making payments to help our insureds overcome financial setbacks.
Our underwriters have reassessed risk appetite in light of the businesses where weCOVID-19 pandemic, in particular as it relates to exposure to communicable diseases, viruses, pathogens and other similar risks. We have expertisetaken appropriate steps to mitigate exposure to these types of risks, including increasing pricing and existing leadership positions.adding policy terms and conditions, including exclusions. During 2020, premium volume was adversely impacted due to the disruption to society and the insurance and reinsurance marketplace on a global scale. We anticipate this trend will continue in 2021. Adjustments to premiums in subsequent periods could be material.
Capital and Liquidity
We expect cash flows generated from operations, combined with liquidity provided by our investment portfolio, to be sufficient to cover cash outflows and other contractual commitments that become due through the foreseeable future (refer to 'Capital and Liquidity' for further details).
Expense Management
In the reinsurance market,first quarter, we are seeing variabilityreduced our 2020 expense budget by approximately $50 million based on the specific impacts of the COVID-19 pandemic on our business. These temporary expense savings were realized by reducing performance-related compensation, travel and entertainment costs, and other savings due to the pandemic and the remote working environment.
CONSOLIDATED RESULTS OF OPERATIONS
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| Years ended December 31, | | 2020 | | % Change | | 2019 | | % Change | | 2018 | | |
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| Underwriting revenues: | | | | | | | | | | | | |
| Gross premiums written | | $ | 6,826,938 | | | (1%) | | $ | 6,898,858 | | | —% | | $ | 6,910,065 | | | |
| Net premiums written | | 4,336,409 | | | (3%) | | 4,489,615 | | | (4%) | | 4,658,962 | | | |
| Net premiums earned | | 4,371,309 | | | (5%) | | 4,587,178 | | | (4%) | | 4,791,495 | | | |
| Other insurance related income (loss) | | (8,089) | | | nm | | 16,444 | | | 55% | | 10,622 | | | |
| Underwriting expenses: | | | | | | | | | | | | |
| Net losses and loss expenses | | (3,281,252) | | | 8% | | (3,044,798) | | | (5%) | | (3,190,287) | | | |
| Acquisition costs | | (929,517) | | | (9%) | | (1,024,582) | | | 6% | | (968,835) | | | |
| Underwriting-related general and administrative expenses(1) | | (477,968) | | | (5%) | | (505,735) | | | (3%) | | (519,168) | | | |
| Underwriting income (loss) | | $ | (325,517) | | | | | $ | 28,507 | | | | | $ | 123,827 | | | |
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| Net investment income | | 349,601 | | | (27%) | | 478,572 | | | 9% | | 438,507 | | | |
| Net investment gains (losses) | | 129,133 | | | 42% | | 91,233 | | | nm | | (150,218) | | | |
| Corporate expenses(1) | | (101,822) | | | (21%) | | (129,096) | | | 19% | | (108,221) | | | |
| Foreign exchange (losses) gains | | (81,069) | | | nm | | 12,041 | | | (59%) | | 29,165 | | | |
| Interest expense and financing costs | | (75,049) | | | 10% | | (68,107) | | | 1% | | (67,432) | | | |
| Reorganization expenses | | (7,881) | | | (79%) | | (37,384) | | | (44%) | | (66,940) | | | |
| Amortization of value of business acquired | | (5,139) | | | (81%) | | (26,722) | | | (84%) | | (172,332) | | | |
| Amortization of intangible assets | | (11,390) | | | (2%) | | (11,597) | | | (16%) | | (13,814) | | | |
| Income (loss) before income taxes and interest in income (loss) of equity method investments | | $ | (129,133) | | | | | $ | 337,447 | | | | | $ | 12,542 | | | |
| Income tax (expense) benefit | | 12,321 | | | nm | | (23,692) | | | nm | | 29,486 | | | |
| Interest in income (loss) of equity method investments | | (3,612) | | | nm | | 9,718 | | | nm | | 993 | | | |
| Net income (loss) | | $ | (120,424) | | | | | $ | 323,473 | | | | | $ | 43,021 | | | |
| Preferred share dividends | | $ | (30,250) | | | (26%) | | $ | (41,112) | | | (4%) | | $ | (42,625) | | | |
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| Net income (loss) available (attributable) to common shareholders | | $ | (150,674) | | | | | $ | 282,361 | | | | | $ | 396 | | | |
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nm – not meaningful
(1)Underwriting-related general and administrative expenses is a non-GAAP financial measure as defined in pricing across specificItem 10(e) of SEC Regulation S-K. The reconciliation to general and administrative expenses, the most comparable GAAP financial measure, also included corporate expenses of $102 million, $129 million, and $108 million for 2020, 2019, and 2018, respectively. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Expenses (Revenues), Net'' for additional information on corporate expenses. Refer also to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures Reconciliation' for further details.
Underwriting Revenues
Underwriting revenues by segment were as follows:
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| Years ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
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| Gross premiums written: | | | | | | | | | | |
| Insurance | $ | 4,018,399 | | 9% | | $ | 3,675,931 | | (3%) | | $ | 3,797,592 | |
| Reinsurance | 2,808,539 | | (13%) | | 3,222,927 | | 4% | | 3,112,473 | |
| Total gross premiums written | $ | 6,826,938 | | (1%) | | $ | 6,898,858 | | nm | | $ | 6,910,065 | |
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| Percent of gross premiums written ceded: | | | | | | | | | | |
| Insurance | 41% | | 1 pt | | 40% | | 1 pt | | 39% | |
| Reinsurance | 30% | | 1 pt | | 29% | | 4 pts | | 25% | |
| Total percent of gross premiums ceded | 36% | | 1 pt | | 35% | | 2 pts | | 33% | |
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| Net premiums written: | | | | | | | | | | |
| Insurance | $ | 2,357,501 | | 7% | | $ | 2,209,155 | | (5%) | | $ | 2,324,747 | |
| Reinsurance | 1,978,908 | | (13%) | | 2,280,460 | | (2%) | | 2,334,215 | |
| Total net premiums written | $ | 4,336,409 | | (3%) | | $ | 4,489,615 | | (4%) | | $ | 4,658,962 | |
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| Net premiums earned: | | | | | | | | | | |
| Insurance | $ | 2,299,038 | | 5% | | $ | 2,190,084 | | (7%) | | $ | 2,362,606 | |
| Reinsurance | 2,072,271 | | (14%) | | 2,397,094 | | (1%) | | 2,428,889 | |
| Total net premiums earned | $ | 4,371,309 | | (5%) | | $ | 4,587,178 | | (4%) | | $ | 4,791,495 | |
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Refer to 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Results by Segment' for further details on underwriting revenues.
Underwriting Expenses
The components of the combined ratio were as follows:
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| Years ended December 31, | 2020 | | % Point
Change | | 2019 | | % Point
Change | | 2018 | |
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| Current accident year loss ratio excluding catastrophe and weather-related losses | 57.7 | % | | (2.9) | | | 60.6 | % | | (1.1) | | | 61.7 | % | |
| Catastrophe and weather-related losses ratio | 17.7 | % | | 10.2 | | | 7.5 | % | | (1.5) | | | 9.0 | % | |
| Current accident year loss ratio | 75.4 | % | | 7.3 | | | 68.1 | % | | (2.6) | | | 70.7 | % | |
| Prior year reserve development ratio | (0.3 | %) | | 1.4 | | | (1.7 | %) | | 2.4 | | | (4.1 | %) | |
| Net losses and loss expenses ratio | 75.1 | % | | 8.7 | | | 66.4 | % | | (0.2) | | | 66.6 | % | |
| Acquisition cost ratio | 21.3 | % | | (1.0) | | | 22.3 | % | | 2.1 | | | 20.2 | % | |
| General and administrative expense ratio(1) | 13.2 | % | | (0.7) | | | 13.9 | % | | 0.8 | | | 13.1 | % | |
| Combined ratio | 109.6 | % | | 7.0 | | | 102.6 | % | | 2.7 | | | 99.9 | % | |
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(1)The general and administration expense ratio included corporate expenses not allocated to underwriting segments of 2.3%, 2.8% and 2.3% for 2020, 2019 and 2018, respectively. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Expenses (Revenues), Net' for additional information.
Refer to 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Results by Segment' for further details on underwriting expenses.
RESULTS BY SEGMENT
Insurance Segment
Results for the insurance segment were as follows:
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| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
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| Revenues: | | | | | | | | | | |
| Gross premiums written | $ | 4,018,399 | | | 9% | | $ | 3,675,931 | | | (3%) | | $ | 3,797,592 | | |
| Net premiums written | 2,357,501 | | | 7% | | 2,209,155 | | | (5%) | | 2,324,747 | | |
| Net premiums earned | 2,299,038 | | | 5% | | 2,190,084 | | | (7%) | | 2,362,606 | | |
| Other insurance related income | 2,647 | | | (7%) | | 2,858 | | | (17%) | | 3,460 | | |
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| Expenses: | | | | | | | | | | |
| Current accident year net losses and loss expenses | (1,705,951) | | | | | (1,331,981) | | | | | (1,587,129) | | |
| Prior year reserve development | 8,937 | | | | | 53,302 | | | | | 92,806 | | |
| Acquisition costs | (461,533) | | | | | (468,281) | | | | | (399,193) | | |
| Underwriting-related general and administrative expenses | (378,839) | | | | | (401,963) | | | | | (395,252) | | |
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| Underwriting income (loss) | $ | (235,701) | | | | | $ | 44,019 | | | | | $ | 77,298 | | |
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| Ratios: | | | % Point
Change | | | | % Point
Change | | | |
| Current accident year loss ratio excluding catastrophe and weather-related losses | 55.1 | % | | (1.9) | | 57.0 | % | | (1.5) | | 58.5 | % | |
| Catastrophe and weather-related losses ratio | 19.1 | % | | 15.3 | | 3.8 | % | | (4.9) | | 8.7 | % | |
| Current accident year loss ratio | 74.2 | % | | 13.4 | | 60.8 | % | | (6.4) | | 67.2 | % | |
| Prior year reserve development ratio | (0.4 | %) | | 2.0 | | (2.4 | %) | | 1.6 | | (4.0 | %) | |
| Net losses and loss expenses ratio | 73.8 | % | | 15.4 | | 58.4 | % | | (4.8) | | 63.2 | % | |
| Acquisition cost ratio | 20.1 | % | | (1.3) | | 21.4 | % | | 4.5 | | 16.9 | % | |
| Underwriting-related general and administrative expense ratio | 16.5 | % | | (1.8) | | 18.3 | % | | 1.5 | | 16.8 | % | |
| Combined ratio | 110.4 | % | | 12.3 | | 98.1 | % | | 1.2 | | 96.9 | % | |
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Gross Premiums Written
Gross premiums written by line of business were as follows:
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| | | | | | | | % Change | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | | 2019 to 2020 | | 2018 to 2019 | |
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| Property | $ | 996,650 | | | 26 | % | | $ | 943,760 | | | 26 | % | | $ | 1,192,807 | | | 31 | % | | 6 | % | | (21 | %) | |
| Marine | 419,405 | | | 10 | % | | 411,309 | | | 11 | % | | 367,047 | | | 10 | % | | 2 | % | | 12 | % | |
| Terrorism | 55,781 | | | 1 | % | | 60,120 | | | 2 | % | | 61,663 | | | 2 | % | | (7 | %) | | (3 | %) | |
| Aviation | 87,671 | | | 2 | % | | 74,670 | | | 2 | % | | 89,673 | | | 2 | % | | 17 | % | | (17 | %) | |
| Credit and political risk | 156,414 | | | 4 | % | | 154,999 | | | 4 | % | | 190,433 | | | 5 | % | | 1 | % | | (19 | %) | |
| Professional lines | 1,378,503 | | | 34 | % | | 1,177,274 | | | 32 | % | | 1,115,213 | | | 29 | % | | 17 | % | | 6 | % | |
| Liability | 763,155 | | | 19 | % | | 699,876 | | | 19 | % | | 553,461 | | | 15 | % | | 9 | % | | 26 | % | |
| Accident and health | 158,585 | | | 4 | % | | 144,103 | | | 4 | % | | 210,502 | | | 6 | % | | 10 | % | | (32 | %) | |
| Discontinued lines - Novae | 2,235 | | | — | % | | 9,820 | | | — | % | | 16,793 | | | — | % | | nm | | (42 | %) | |
| Total | $ | 4,018,399 | | | 100 | % | | $ | 3,675,931 | | | 100 | % | | $ | 3,797,592 | | | 100 | % | | 9 | % | | (3 | %) | |
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nm – not meaningful
Gross premiums written in 2020 increased by $342 million, or 9%, compared to 2019. The increase was primarily attributable to professional lines, liability, property, accident and health, and aviation lines.
The increases in professional lines, liability, and property lines were due to new business and favorable rate changes. The increase in accident and health lines was due to new business. The increase in aviation lines was due to timing differences.
Ceded Premiums Written
Ceded premiums written in 2020 was $1,661 million, or 41% of gross premiums written, compared to $1,467 million, or 40% in 2019. The increase in ceded premiums written of $194 million, or 13% was primarily driven by increases in professional lines, property, liability, and marine lines, partially offset by decreases in credit and political risk, and aviation lines.
Net Premiums Earned
Net premiums earned by line of business were as follows:
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| | | | | | | | % Change | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | | 2019 to 2020 | | 2018 to 2019 | |
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| Property | $ | 605,650 | | | 26 | % | | $ | 633,550 | | | 29 | % | | $ | 796,945 | | | 34 | % | | (4 | %) | | (21 | %) | |
| Marine | 293,746 | | | 13 | % | | 281,764 | | | 13 | % | | 300,944 | | | 13 | % | | 4 | % | | (6 | %) | |
| Terrorism | 47,378 | | | 2 | % | | 47,345 | | | 2 | % | | 49,150 | | | 2 | % | | — | % | | (4 | %) | |
| Aviation | 70,910 | | | 3 | % | | 55,028 | | | 3 | % | | 74,203 | | | 3 | % | | 29 | % | | (26 | %) | |
| Credit and political risk | 105,869 | | | 5 | % | | 91,698 | | | 4 | % | | 102,825 | | | 4 | % | | 15 | % | | (11 | %) | |
| Professional lines | 715,276 | | | 31 | % | | 661,250 | | | 30 | % | | 570,241 | | | 24 | % | | 8 | % | | 16 | % | |
| Liability | 313,291 | | | 14 | % | | 264,667 | | | 12 | % | | 229,373 | | | 10 | % | | 18 | % | | 15 | % | |
| Accident and health | 143,723 | | | 6 | % | | 144,499 | | | 7 | % | | 207,777 | | | 9 | % | | (1 | %) | | (30 | %) | |
| Discontinued lines - Novae | 3,195 | | | — | % | | 10,283 | | | — | % | | 31,148 | | | 1 | % | | (69 | %) | | (67 | %) | |
| Total | $ | 2,299,038 | | | 100 | % | | $ | 2,190,084 | | | 100 | % | | $ | 2,362,606 | | | 100 | % | | 5 | % | | (7 | %) | |
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Net premiums earned in 2020 increased by $109 million, or 5%, compared to 2019. The increase was primarily driven by increases in gross premiums earned in professional lines, liability, marine, and credit and political risk lines, together with decreases in ceded premiums earned in property and aviation lines, partially offset by increases in ceded premiums earned in professional lines and geographies. Inliability lines, and a decrease in gross premiums earned in property lines.
Loss Ratio
The components of the loss ratio were as follows:
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| Year ended December 31, | 2020 | | % Point
Change | | 2019 | | % Point
Change | | 2018 | |
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| Current accident year loss ratio | 74.2 | % | | 13.4 | | | 60.8 | % | | (6.4) | | | 67.2 | % | |
| Prior year reserve development ratio | (0.4 | %) | | 2.0 | | | (2.4 | %) | | 1.6 | | | (4.0 | %) | |
| Loss ratio | 73.8 | % | | 15.4 | | | 58.4 | % | | (4.8) | | | 63.2 | % | |
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Current Accident Year Loss Ratio
The current accident year loss ratio increased to 74.2% in 2020 from 60.8% in 2019. The increase in the current accident year loss ratio was impacted by a higher level of catastrophe and weather-related losses. During 2020, catastrophe and weather-related losses, net of reinstatement premiums, were $443 million, or 19.1 points, primarily attributable to the COVID-19 pandemic, Hurricanes Laura, Sally, Zeta and Delta, and other weather-related events. During 2020, catastrophe and weather-related losses included $204 million, or 8.8 points, attributable to the COVID-19 pandemic largely associated with property-related coverages, but also included event cancellation coverages. Comparatively, in 2019, catastrophe and weather-related losses were $84 million, or 3.8 points, primarily attributable to Hurricanes Dorian, and other weather-related events.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 55.1% in 2020 from 57.0% in 2019. The decrease was principally due to improved loss experience in property, aviation, marine, and credit and political risk lines, and the impact of favorable pricing over loss trends, partially offset by changes in business mix.
Prior Year Reserve Development
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for details on the reserve classes, the expected claim tails, and prior year development.
Acquisition Cost Ratio
The acquisition cost ratio decreased to 20.1% in 2020 from 21.4% in 2019, associated with the acquisition of Novae. At the acquisition date, the allocation of the purchase price to the assets acquired and liabilities assumed based on estimated fair values at that date, resulted in the write-off of the deferred acquisition cost asset on Novae's balance sheet as the value of policies in-force on that date are considered within VOBA. Consequently, the absence of $1 million and $12 million of acquisition expense in 2020 and 2019, respectively, did not significantly benefit the acquisition cost ratio in 2020 and benefited the acquisition cost ratio by 0.6 points in 2019. Adjusting the acquisition cost ratio for these amounts, the acquisition cost ratio decreased by 1.9 points in 2020, compared to 2019, principally related to changes in business mix in property lines and reflecting the increase in professional lines and liability lines written in recent periods.
Underwriting-Related General and Administrative Expense Ratio
The underwriting-related general and administrative expense ratio decreased to 16.5% in 2020 from 18.3% in 2019, mainly driven by decreases in the allocation of corporate costs to the segment, travel and entertainment expenses, and professional fees, together with an increase in net premiums earned, partially offset by an increase in personnel costs.
Reinsurance Segment
Results for the reinsurance segment were as follows:
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| | | | | | | | | | | |
| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
| | | | | | | | | | | |
| Revenues: | | | | | | | | | | |
| Gross premiums written | $ | 2,808,539 | | | (13%) | | $ | 3,222,927 | | | 4% | | $ | 3,112,473 | | |
| Net premiums written | 1,978,908 | | | (13%) | | 2,280,460 | | | (2%) | | 2,334,215 | | |
| Net premiums earned | 2,072,271 | | | (14%) | | 2,397,094 | | | (1%) | | 2,428,889 | | |
| Other insurance related income (loss) | (10,736) | | | nm | | 13,586 | | | nm | | 7,162 | | |
| | | | | | | | | | | |
| Expenses: | | | | | | | | | | |
| Current accident year net losses and loss expenses | (1,591,210) | | | | | (1,791,717) | | | | | (1,802,820) | | |
| Prior year reserve development | 6,972 | | | | | 25,598 | | | | | 106,856 | | |
| Acquisition costs | (467,984) | | | | | (556,301) | | | | | (569,642) | | |
| Underwriting-related general and administrative expenses | (99,129) | | | | | (103,772) | | | | | (123,916) | | |
| | | | | | | | | | | |
| Underwriting income (loss) | $ | (89,816) | | | | | $ | (15,512) | | | | | $ | 46,529 | | |
| | | | | | | | | | | |
| Ratios: | | | % Point
Change | | | | % Point
Change | | | |
| Current accident year loss ratio excluding catastrophe and weather-related losses | 60.6 | % | | (3.4) | | 64.0 | % | | (0.8) | | 64.8 | % | |
| Catastrophe and weather-related losses ratio | 16.2 | % | | 5.5 | | 10.7 | % | | 1.3 | | 9.4 | % | |
| Current accident year loss ratio | 76.8 | % | | 2.1 | | 74.7 | % | | 0.5 | | 74.2 | % | |
| Prior year reserve development ratio | (0.4 | %) | | 0.6 | | (1.0 | %) | | 3.4 | | (4.4 | %) | |
| Net losses and loss expenses ratio | 76.4 | % | | 2.7 | | 73.7 | % | | 3.9 | | 69.8 | % | |
| Acquisition cost ratio | 22.6 | % | | (0.6) | | 23.2 | % | | (0.3) | | 23.5 | % | |
| Underwriting-related general and administrative expense ratio | 4.8 | % | | 0.5 | | 4.3 | % | | (0.8) | | 5.1 | % | |
| Combined ratio | 103.8 | % | | 2.6 | | 101.2 | % | | 2.8 | | 98.4 | % | |
| | | | | | | | | | | |
nm – not meaningful
Gross Premiums Written:
Gross premiums written by line of business were as follows:
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| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | % Change | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | | 2019 to 2020 | | 2018 to 2019 | |
| | | | | | | | | | | | | | | | | |
| Catastrophe | $ | 551,143 | | | 19 | % | | $ | 718,514 | | | 24 | % | | $ | 536,243 | | | 17 | % | | (23 | %) | | 34 | % | |
| Property | 245,744 | | | 9 | % | | 304,166 | | | 9 | % | | 342,789 | | | 11 | % | | (19 | %) | | (11 | %) | |
| Credit and surety | 232,699 | | | 8 | % | | 269,733 | | | 8 | % | | 329,126 | | | 11 | % | | (14 | %) | | (18 | %) | |
| Professional lines | 312,935 | | | 11 | % | | 261,072 | | | 8 | % | | 268,181 | | | 9 | % | | 20 | % | | (3 | %) | |
| Motor | 304,439 | | | 11 | % | | 334,887 | | | 10 | % | | 499,727 | | | 16 | % | | (9 | %) | | (33 | %) | |
| Liability | 618,913 | | | 22 | % | | 546,479 | | | 17 | % | | 438,767 | | | 14 | % | | 13 | % | | 25 | % | |
| Engineering | 25,886 | | | 1 | % | | 57,028 | | | 2 | % | | 60,358 | | | 2 | % | | (55 | %) | | (6 | %) | |
| Agriculture | 70,500 | | | 3 | % | | 224,961 | | | 7 | % | | 226,246 | | | 7 | % | | (69 | %) | | (1 | %) | |
| Marine and aviation | 73,103 | | | 3 | % | | 74,781 | | | 2 | % | | 44,741 | | | 1 | % | | (2 | %) | | 67 | % | |
| Accident and health | 371,828 | | | 13 | % | | 432,670 | | | 13 | % | | 365,660 | | | 12 | % | | (14 | %) | | 18 | % | |
| Discontinued lines - Novae | 1,349 | | | — | % | | (1,364) | | | — | % | | 635 | | | — | % | | nm | | nm | |
| Total | $ | 2,808,539 | | | 100 | % | | $ | 3,222,927 | | | 100 | % | | $ | 3,112,473 | | | 100 | % | | (13 | %) | | 4 | % | |
| | | | | | | | | | | | | | | | | |
nm – not meaningful
Gross premiums written in 2020 decreased by $414 million, or 13%,($401 million, or 12% on a constant currency basis), compared to 2019. The decrease was primarily attributable to catastrophe, agriculture, accident and health, property, credit and surety, engineering, and motor lines, partially offset by increases in liability and professional lines.
The decreases in catastrophe, agriculture, and property lines were driven by non-renewals and decreased line sizes associated with the repositioning of the portfolio. The decrease in accident and health lines was due to non-renewals following the decision to exit the Middle East business. The decrease in credit and surety lines was attributable to reduced business opportunities due to the COVID-19 pandemic. The decrease in engineering lines was due to non-renewals following the decision to exit this line of business. The decrease in motor lines was largely attributable to premium adjustments. The increases in liability and professional lines were driven by premium adjustments, and favorable market conditions associated with renewals and new business.
Ceded Premiums Written
Ceded premiums written in 2020 was $830 million, or 30%, of gross premiums written, compared to $942 million, or 29%, in 2019. The decrease in ceded premiums written of $113 million, or 12%, was primarily driven by decreases in catastrophe, accident and health, credit and surety, and agriculture lines, partially offset by increases in liability, professional lines, and motor lines.
The decrease in catastrophe lines was attributable to decreases in premiums ceded to strategic partners and a non-renewal of a catastrophe bond. The decrease in accident and health lines was attributable to the restructuring of an existing quota share retrocessional treaty. The decrease in credit and surety lines was attributable to a decrease in premiums ceded to a quota share retrocessional treaty and the restructuring of existing quota share retrocessional treaties. The decrease in agriculture lines was attributable to a non-renewal of a large quota share retrocessional treaty.
The increases in liability and professional lines were attributable to an increase in premiums ceded to a new quota share retrocessional treaty, partially offset by the restructuring of an existing quota share retrocessional treaty. The increase in motor lines was attributable to an increase in premiums ceded to a new quota share retrocessional treaty.
Net Premiums Earned
Net premiums earned by line of business we benefitwere as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | % Change | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | | 2019 to 2020 | | 2018 to 2019 | |
| | | | | | | | | | | | | | | | | |
| Catastrophe | $ | 244,934 | | | 12 | % | | $ | 267,591 | | | 10 | % | | $ | 250,016 | | | 12 | % | | (8 | %) | | 7 | % | |
| Property | 256,244 | | | 12 | % | | 311,625 | | | 13 | % | | 317,038 | | | 13 | % | | (18 | %) | | (2 | %) | |
| Credit and surety | 187,721 | | | 9 | % | | 208,717 | | | 9 | % | | 250,276 | | | 10 | % | | (10 | %) | | (17 | %) | |
| Professional lines | 207,605 | | | 10 | % | | 206,328 | | | 9 | % | | 220,687 | | | 9 | % | | 1 | % | | (7 | %) | |
| Motor | 255,916 | | | 12 | % | | 398,565 | | | 17 | % | | 438,693 | | | 18 | % | | (36 | %) | | (9 | %) | |
| Liability | 396,906 | | | 19 | % | | 373,664 | | | 16 | % | | 363,292 | | | 15 | % | | 6 | % | | 3 | % | |
| Engineering | 60,521 | | | 3 | % | | 63,899 | | | 3 | % | | 67,932 | | | 3 | % | | (5 | %) | | (6 | %) | |
| Agriculture | 73,696 | | | 4 | % | | 188,925 | | | 8 | % | | 176,435 | | | 7 | % | | (61 | %) | | 7 | % | |
| Marine and aviation | 53,516 | | | 3 | % | | 59,209 | | | 2 | % | | 35,570 | | | 1 | % | | (10 | %) | | 66 | % | |
| Accident and health | 333,996 | | | 16 | % | | 319,619 | | | 13 | % | | 299,813 | | | 12 | % | | 4 | % | | 7 | % | |
| Discontinued lines - Novae | 1,216 | | | — | % | | (1,048) | | | — | % | | 9,137 | | | — | % | | nm | | nm | |
| Total | $ | 2,072,271 | | | 100 | % | | $ | 2,397,094 | | | 100 | % | | $ | 2,428,889 | | | 100 | % | | (14 | %) | | (1 | %) | |
| | | | | | | | | | | | | | | | | |
nm – not meaningful
Net premiums earned in 2020 decreased by $325 million, or 14%, ($294 million or 12% on a constant currency basis), compared to 2019. The decrease was primarily driven by decreases in gross premiums earned in agriculture, motor, catastrophe, property, and credit and surety lines, together with an increase in ceded premiums earned in liability lines, partially offset by decreases in ceded premiums earned in catastrophe and agriculture lines, and an increase in gross premiums earned in liability lines.
Other Insurance Related Income (Loss)
Other insurance related loss was $11 million in 2020, compared to other insurance related income of $14 million in 2019. The decrease of $24 million was primarily due to the recognition of a full limit loss of $10 million associated with the WHO pandemic risk-linked swap and a decrease in fees associated with arrangements with strategic capital partners.
Loss Ratio
The components of the loss ratio were as follows:
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| | | | | | | | | | | | |
| Year ended December 31, | | 2020 | | % Point
Change | | 2019 | | % Point
Change | | 2018 | |
| | | | | | | | | | | | |
| Current accident year loss ratio | | 76.8 | % | | 2.1 | | | 74.7 | % | | 0.5 | | | 74.2 | % | |
| Prior year reserve development ratio | | (0.4 | %) | | 0.6 | | | (1.0 | %) | | 3.4 | | | (4.4 | %) | |
| Loss ratio | | 76.4 | % | | 2.7 | | | 73.7 | % | | 3.9 | | | 69.8 | % | |
| | | | | | | | | | | | |
Current Accident Year Loss Ratio
The current accident year loss ratio increased to 76.8% in 2020 from improvements74.7% in 2019. The increase in the primarycurrent accident year loss ratio was impacted by a higher level of catastrophe and weather-related losses. During 2020, catastrophe and weather-related losses, net of reinstatement premiums, were $330 million, or 16.2 points, primarily attributable to the COVID-19 pandemic, the Midwest derecho, Hurricane Laura, wildfires across the West Coast of the United States, and other weather-related events. During 2020, catastrophe and weather-related losses included $156 million, or 7.6 points, attributable to the COVID-19 pandemic largely associated with property-related coverages, but also included accident and health, and mortgage-related coverages.
Comparatively, in 2019, catastrophe and weather-related losses, net of reinstatement premiums, were $252 million or 10.7 points, primarily attributable to Japanese Typhoons Hagibis, Faxai and Tapah, Hurricane Dorian, Australia Wildfires, and other weather-related events.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 60.6% in 2020 from 64.0% in 2019. The decrease was principally due to changes in business mix and improved loss experience in agriculture and aviation lines.
Prior Year Reserve Development
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for details on the reserve classes, the expected claim tails, and prior year development.
Acquisition Cost Ratio:
The acquisition cost ratio decreased to 22.6% in 2020 from 23.2% in 2019, principally related to changes in business mix and the impact of retrocessional contracts.
Underwriting-Related General and Administrative Expense Ratio
The underwriting-related general and administrative expense ratio increased to 4.8% in 2020 from 4.3% in 2019, mainly driven by decreases in net premium earned and fees associated with arrangements with strategic capital partners, partially offset by a decrease in travel and entertainment expenses.
NET INVESTMENT INCOME AND NET INVESTMENT GAINS (LOSSES)
Net Investment Income
Net investment income from our cash and investment portfolio by major asset class was as follows:
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| | | | | | | | | | | |
| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
| | | | | | | | | | | |
| Fixed maturities | $ | 317,121 | | | (17%) | | $ | 384,053 | | | 8% | | $ | 356,273 | | |
| Other investments | 16,059 | | | (73%) | | 60,038 | | | 23% | | 48,959 | | |
| Equity securities | 9,328 | | | (11%) | | 10,434 | | | 4% | | 10,077 | | |
| Mortgage loans | 15,432 | | | 5% | | 14,712 | | | 8% | | 13,566 | | |
| Cash and cash equivalents | 13,582 | | | (49%) | | 26,882 | | | (2%) | | 27,566 | | |
| Short-term investments | 2,749 | | | (61%) | | 7,053 | | | (25%) | | 9,365 | | |
| Gross investment income | 374,271 | | | (26%) | | 503,172 | | | 8% | | 465,806 | | |
| Investment expense | (24,670) | | | —% | | (24,600) | | | (10%) | | (27,299) | | |
| Net investment income | $ | 349,601 | | | (27%) | | $ | 478,572 | | | 9% | | $ | 438,507 | | |
| | | | | | | | | | | |
| Pre-tax yield:(1) | | | | | | | | | | |
| Fixed maturities | 2.6 | % | | | | 3.2 | % | | | | 3.0 | % | |
| | | | | | | | | | | |
(1)Pre-tax yield is calculated by dividing net investment income by the average month-end amortized cost balances.
Fixed Maturities
2020 versus 2019: Net investment income in 2020 decreased by $67 million or 17%, compared to 2019 due to a decrease in yields and a smaller allocation of the portfolio to fixed maturities.
Other Investments
Other investments include hedge funds, direct lending funds, private equity funds, real estate funds, other privately held investments, an indirect investment in CLO-Equities and overseas deposits. These investments are recorded at fair value, with changes in fair value and income distributions reported in net investment income. Consequently, the pre-tax return on other investments may vary materially year over year, particularly during volatile equity and credit markets.
Net investment income from other investments was as follows:
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| | | | | | | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Hedge, direct lending, private equity and real estate funds | $ | 16,267 | | | $ | 42,186 | | | $ | 40,295 | | |
| Other privately held investments | 5,809 | | | 18,050 | | | 2,036 | | |
| CLO-Equities | (6,017) | | | (198) | | | 6,628 | | |
| Total net investment income from other investments(1) | $ | 16,059 | | | $ | 60,038 | | | $ | 48,959 | | |
| | | | | | | |
| Pre-tax return on other investments(2) | 2.2 | % | | 8.5 | % | | 6.4 | % | |
| | | | | | | |
(1)Excluding overseas deposits.
(2)The pre-tax return on other investments is calculated by dividing total net investment income from other investments by the average month-end fair value balances held for the periods indicated, excluding overseas deposits.
2020 versus 2019: Pre-tax return on other investments in 2020 decreased to 2.2% compared to 8.5% in 2019. The decrease was primarily attributable to lower returns from direct lending and real estate funds and a realized gain of $13 million associated with the sale of a privately held investment in 2019.
Net Investment Gains (Losses)
Fixed maturities classified as available for sale are reported at fair value. Realized gains (losses) on fixed maturities are reported in net investment gains (losses) when these securities are sold or impaired.
Equity securities are reported at fair value. Realized gains (losses) on equity securities are also reported in net investment gains (losses) when securities are sold or impaired. In excessaddition, changes in the fair values of loss treaties,equity securities are reported in net investment gains (losses).
Changes in the fair value of investment derivatives, mainly foreign exchange forward contracts and exchange traded interest rate swaps, are recorded in net investment gains (losses).
Net investment gains (losses) were as follows:
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| | | | | | | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| On sale of investments: | | | | | | |
| Fixed maturities and short-term investments | $ | 92,119 | | | $ | 36,645 | | | $ | (96,086) | | |
| Equity securities | 19,808 | | | 3,126 | | | 17,046 | | |
| | 111,927 | | | 39,771 | | | (79,040) | | |
| Allowance for expected credit losses | (323) | | | — | | | — | | |
| Impairment losses (1) | (1,486) | | | — | | | — | | |
| OTTI losses | — | | | (6,984) | | | (9,733) | | |
| Change in fair value of investment derivatives | (2,434) | | | (1,823) | | | 5,445 | | |
| Net unrealized gains (losses) on equity securities | 21,449 | | | 60,269 | | | (66,890) | | |
| Net investment gains (losses) | $ | 129,133 | | | $ | 91,233 | | | $ | (150,218) | | |
| | | | | | | |
(1) Related to instances where the Company intends to sell securities, or it is more likely than not that the Company will be required to sell securities before their anticipated recovery.
2020 versus 2019: Net investment gains in 2020 were $129 million compared to net investment gains of $91 million in 2019. Net investment gains reported in 2020 mainly reflected net realized gains on the sale of U.S Government, agency RMBS and exchange traded funds and net unrealized gains on equity securities. Net investment gains reported in 2019 mainly reflected net unrealized gains on equity securities and net realized gains on the sale of U.S. government and agency RMBS.
On Sale of Investments
Generally, sales of individual securities occur when there are changes in the relative value, credit quality, or duration of a particular issue. We may also sell securities to re-balance our investment portfolio in order to change exposure to particular asset classes or sectors.
Impairment and OTTI Losses
The impairment losses (refer to 'Critical Accounting Estimates – Impairment losses' for further details) recognized in net income by asset class were as follows:
2020 versus 2019: Impairment losses in 2020 were $1 million compared to OTTI losses of $7 million in 2019. The impairment losses in 2020 were principally due to impairments of non-investment grade corporate debt securities that we observe pricing generally respondingintend to recent loss trends. This remainssell or more likely than not will be required to sell. OTTI losses in 2019 included impairments on non-U.S. denominated securities due to foreign exchange losses associated with the strengthening of the U.S. dollar against the pound sterling and the euro and impairments on non-investment grade corporate debt securities that had declined significantly in value.
Change in Fair Value of Investment Derivatives
From time to time, we economically hedge foreign exchange exposure and interest rate risk with derivative contracts.
During 2020, foreign exchange hedges resulted in $2 million of net losses which primarily related to securities denominated in euro which experienced volatility during 2020.
During 2019, foreign exchange hedges resulted in $2 million of net gains which primarily related to securities denominated in euro which experienced volatility during 2019. We also recorded net losses of $4 million related to interest rate swaps.
Our derivative instruments are not designated as hedges under current accounting guidance, therefore, net unrealized gains (losses) on the hedged securities were recorded in accumulated other comprehensive income in the statement of changes in shareholders’ equity.
Total Return
Our investment strategy is to take a competitive market,long-term view by actively managing our investment portfolio to maximize total return within certain guidelines and constraints. In assessing returns under this approach, we include net investment income, net investment gains (losses), the change in unrealized gains (losses) on fixed maturities, and interest in income (loss) of equity method investments generated by our investment portfolio.
Total return on cash and investments was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Net investment income | $ | 349,601 | | | $ | 478,572 | | | $ | 438,507 | | |
| Net investments gains (losses) | 129,133 | | | 91,233 | | | (150,218) | | |
| Change in net unrealized gains (losses) on fixed maturities(1) | 269,937 | | | 385,364 | | | (191,529) | | |
| Interest in income (loss) of equity method investments | (3,612) | | | 9,718 | | | 993 | | |
| Total | $ | 745,059 | | | $ | 964,887 | | | $ | 97,753 | | |
| | | | | | | |
| Average cash and investments(2) | $ | 15,562,097 | | | $ | 15,322,688 | | | $ | 15,361,287 | | |
| | | | | | | |
| Total return on average cash and investments, pre-tax: | | | | | | |
| Including investment related foreign exchange movements | 4.8 | % | | 6.3 | % | | 0.6 | % | |
| Excluding investment related foreign exchange movements(3) | 4.4 | % | | 6.1 | % | | 0.9 | % | |
| | | | | | | |
(1)Change in net unrealized gains (losses) on fixed maturities is calculated by taking net unrealized gains (losses) at period end less net unrealized gains (losses) at the 1/1/20 renewals,prior period end.
(2)The average cash and investments balance is calculated by taking the average of the period end fair value balances.
(3)Pre-tax total return on cash and investments excluding foreign exchange rate movements is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to pre-tax total return on cash and investments, the most comparable GAAP financial measure, included foreign exchange gains (losses) of $55 million, $25 million and $(48) million for the years ended December 31, 2020, 2019 and 2018, respectively.
OTHER EXPENSES (REVENUES), NET
The following table provides a summary of other expenses (revenues), net:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
| | | | | | | | | | | |
| Corporate expenses | $ | 101,822 | | | (21%) | | $ | 129,096 | | | 19% | | $ | 108,221 | | |
| Foreign exchange losses (gains) | 81,069 | | | nm | | (12,041) | | | nm | | (29,165) | | |
| Interest expense and financing costs | 75,049 | | | 10% | | 68,107 | | | 1% | | 67,432 | | |
| Income tax expense (benefit) | (12,321) | | | nm | | 23,692 | | | nm | | (29,486) | | |
| Total | $ | 245,619 | | | | | $ | 208,854 | | | | | $ | 117,002 | | |
| | | | | | | | | | | |
nm – not meaningful
Corporate Expenses
Corporate expenses include holding company costs necessary to support our aggregate estimated premiumworldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As a percentage of net premiums earned, corporate expenses decreased to 2.3% in 2020 from 2.8% in 2019.
The decrease in corporate expenses in 2020 was primarily related to decreases in information technology costs, travel and entertainment costs, personnel costs, and professional fees, partially offset by a decrease in the allocation of corporate costs to the insurance segment.
Foreign Exchange Losses (Gains)
Some of our business is written in currencies other than the U.S. dollar. Foreign exchange losses in 2020 were mainly driven by the impact of the weakening of the U.S. dollar on renewed treatiesthe remeasurement of net insurance-related liabilities denominated in pound sterling and the euro.
Foreign exchange gains in 2019 were mainly driven by the impact of the strengthening of the U.S. dollar on the re-measurement of net insurance-related liabilities denominated in euro, partially offset by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling.
Interest Expense and Financing Costs
Interest expense and financing costs are related to interest due on the 5.875% senior unsecured notes ("5.875% Senior Notes") issued in 2010 and repaid in June 2020, the 5.150% senior unsecured notes ("5.150% Senior Notes") issued in 2014, the 4.000% senior unsecured notes ("4.000% Senior Notes") issued in 2017, the 3.900% senior unsecured notes ("3.900% Senior Notes"), and the 4.900% fixed-rate reset junior subordinated notes ("Junior Subordinated Notes") issued in 2019.
Interest expense and financing costs increased by $7 million in 2020, compared to 2019, due to the issuance of the 3.900% Senior Notes on June 19, 2019 and the issuance of the Junior Subordinated Notes on December 10, 2019, partially offset by the repayment of the 2.650% Senior Notes on April 1, 2019 and the repayment of the 5.875% Senior Notes on June 1, 2020.
Income Tax Expense (Benefit)
Income tax expense (benefit) primarily results from income (loss) generated by our foreign operations in the U.S. and Europe. Our effective tax rate, which is calculated as income tax expense (benefit), divided by income (loss) before tax including interest in income (loss) of equity method investments, was lower than aggregate premiums9.3%, 6.8%, and (217.9%) in 2020, 2019, and 2018, respectively. This effective rate can vary between years depending on expiring treaties. Looking forward,the distribution of net income (loss) among tax jurisdictions, as well as other factors
The tax benefit of $12 million in 2020 was principally due to the generation of pre-tax losses in our U.K. operations.
The tax expense of $24 million in 2019 was principally due to the geographic distribution of pre-tax income with the expense being driven by pre-tax income generated in our U.S. and European operations, partially offset by pre-tax losses in our U.K. operations.
FINANCIAL MEASURES
We believe that the following financial indicators are important in evaluating performance and measuring the overall growth in value generated for common shareholders:
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| Year ended and at December 31, | 2020 | | 2019 | | 2018 | |
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| Return on average common equity(1) | (3.2 | %) | | 6.3 | % | | — | % | |
| Operating return on average common equity(2) | (3.7 | %) | | 4.7 | % | | 3.6 | % | |
| Book value per diluted common share(3) | $ | 55.09 | | | $ | 55.79 | | | $ | 49.93 | | |
| Cash dividends declared per common share | $ | 1.65 | | | $ | 1.61 | | | $ | 1.57 | | |
| Increase (decrease) in book value per diluted common share adjusted for dividends | $ | 0.95 | | | $ | 7.47 | | | $ | (2.38) | | |
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(1) Return on average common equity ("ROACE") is calculated by dividing net income (loss) available (attributable) to common shareholders for the year by the average common shareholders' equity determined using the common shareholders' equity balances at the beginning and end of the year.
(2) Operating return on average common equity ("operating ROACE"), a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to the most comparable GAAP financial measure, ROACE, and a discussion of the rationale for its presentation is provided in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures Reconciliation'.
(3) Book value per diluted common share represents common shareholders’ equity divided by the number of diluted common share outstanding, determined using the treasury stock method. Cash-settled restricted stock units are excluded.
Return on Average Common Equity
Our objective is to generate superior returns on capital that appropriately reward common shareholders for the risks we assume and to grow revenue only when we expect meaningful rate increases at the Japanese Catastrophe renewal period (April)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 challenge the ability to achieve a profitability target in any specific period.
ROACE reflects the impact of net income (loss) available (attributable) to common shareholders, including net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
The decrease in ROACE in 2020 compared to 2019, was primarily driven by the underwriting loss, a decrease in net investment income, and the foreign exchange losses, partially offset by an increase in net investment gains, the income tax benefit, and decreases in corporate expenses, reorganization expenses, and the amortization of value of business acquired ("VOBA") associated with the acquisition of Novae.
Operating ROACE excludes the impact of net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
The decrease in operating ROACE in 2020, compared to 2019, was primarily driven by the underwriting loss and a decrease in investment income, partially offset by the income tax benefit, and decreases in corporate expenses and the amortization of VOBA associated with the acquisition of Novae.
Book Value per Diluted Common Share
We consider book value per diluted common share to be an appropriate measure of returns to common shareholders, as we believe growth in book value on a diluted basis will be pushingultimately translate into appreciation of our stock price.
In 2020, book value per diluted common share decreased by 1%, due to the net loss generated and common dividends declared, partially offset by net unrealized investment gains reported in other comprehensive income.
In 2019, book value per diluted common share increased by 12%, primarily driven by net income generated and net unrealized investment gains reported in other comprehensive income, partially offset by common dividends declared. The net unrealized investment gains in 2019 reflected a decrease in interest rates and a tightening of credit spreads which positively impacted the market values of fixed maturities.
Cash Dividends Declared per Common Share
We believe in returning excess capital to shareholders by way of dividends. Accordingly, dividend policy is an integral part of the value we create for shareholders. Our Board of Directors have approved seventeen successive annual increases in Florida Catastrophe (June)quarterly common share dividends.
Book Value per Diluted Common Share Adjusted for Dividends
Taken together, we believe that growth in book value per diluted common share and common share dividends declared represent the total value created for common shareholders. As companies in the insurance industry have differing dividend payout policies, we believe that investors use the book value per diluted common share adjusted for dividends metric to measure comparable performance across the industry.
In 2020, the increase in total value of $0.95, or 2%, was driven by net unrealized investment gains recognized in other comprehensive income, partially offset by the net loss generated for the year.
In 2019, the increase in total value of $7.47, or 15%, was driven by net income generated and US Casualty business (April-October)net unrealized investment gains reported in 2020. We expect our reinsurance premium volumeother comprehensive income.
NON-GAAP FINANCIAL MEASURES RECONCILIATION
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| Years ended December 31, | 2020 | | 2019 | | 2018 | | |
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| Net income (loss) available (attributable) to common shareholders | $ | (150,674) | | $ | 282,361 | | | $ | 396 | | | |
| Net investment (gains) losses(1) | (129,133) | | (91,233) | | | 150,218 | | | |
| Foreign exchange losses (gains)(2) | 81,069 | | (12,041) | | | (29,165) | | | |
| Reorganization expenses(3) | 7,881 | | 37,384 | | | 66,940 | | | |
| Interest in (income) loss of equity method investments(4) | 3,612 | | (9,718) | | | (993) | | | |
| Income tax expense (benefit) | 13,023 | | 6,656 | | | (26,697) | | | |
| Operating income (loss) | $ | (174,222) | | $ | 213,409 | | | $ | 160,699 | | | |
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| Earnings (loss) per diluted common share (5) | $ | (1.79) | | $ | 3.34 | | $ | — | | |
| Net investment (gains) losses | (1.53) | | (1.08) | | 1.79 | | |
| Foreign exchange losses (gains) | 0.96 | | (0.14) | | (0.35) | | |
| Reorganization expenses | 0.09 | | 0.44 | | 0.80 | | |
| Interest in (income) loss of equity method investments | 0.04 | | (0.12) | | (0.01) | | |
| Income tax expense (benefit) | 0.15 | | 0.08 | | (0.32) | | |
| Operating income (loss) per diluted common share(5) | $ | (2.08) | | $ | 2.52 | | $ | 1.91 | | |
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| Weighted average diluted common shares outstanding(6) | 84,262 | | 84,473 | | 84,007 | | |
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| Average common shareholders' equity | $ | 4,757,351 | | $ | 4,512,040 | | $ | 4,410,668 | | |
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| Return on average common equity | (3.2%) | | 6.3% | | —% | | |
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| Operating return on average common equity | (3.7%) | | 4.7% | | 3.6% | | |
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nm – not meaningful
(1)Tax cost (benefit) of $18 million, $12 million and $(12) million for the years ended December 31, 2020, 2019 and 2018, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize capital losses.
(2)Tax cost (benefit) of $(4) million, $1 million and $(4) million for the years ended December 31, 2020, 2019 and 2018, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the tax status of specific foreign exchange transactions.
(3)Tax (benefit) of $(1) million, $(7) million and $(11) million for the years ended December 31, 2020, 2019 and 2018, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
(4)Tax cost (benefit) of $nil for the years ended December 31, 2020, 2019, respectively and $0.3 million for the year ended December 31, 2018, Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
(5)Loss per diluted common share and operating loss per diluted common share for the year ended December 31, 2020, were calculated using weighted average common shares outstanding due to the net loss attributable to common shareholders and the operating loss recognized in these renewals will be dependent on our viewthe year.
(6)Refer to Item 8, Note 13 to the Consolidated Financial Statements 'Earnings Per Common Share' for further details.
Rationale for the Use of achievable rate adequacy.
Non-GAAP Financial Measures
We present our results of operations in the way we believe will be most meaningful and useful to investors, analysts, rating agencies and others who use our financial information to evaluate our performance. Some of the measurements we use are considered non-GAAP financial measures under SEC rules and regulations. In this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we present underwriting-related general and administrative expenses, consolidated underwriting income (loss), operating income (loss) (in total and on a per share basis), operating return on average common equity ("operating ROACE"), amounts presented on a constant currency basis, and pre-tax total return on cash and investments excluding foreign exchange movements ex-PGAAP operating income (loss) (in total and on a per share basis) and ex-PGAAP operating ROACE which are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. We believe that these non-GAAP financial measures, which may be defined and calculated differently by other companies, betterhelp explain and enhance the understanding of our results of operations. However, these measures should not be viewed as a substitute for those determined in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
Underwriting-Related General and Administrative Expenses
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.
Corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As these costs are not incremental and/or directly attributable to our individual underwriting operations, these costs are excluded from underwriting-related general and administrative expenses, and therefore, consolidated underwriting income (loss). General and administrative expenses, the most comparable GAAP financial measure to underwriting-related general and administrative expenses, also includes corporate expenses.
The reconciliation of underwriting-related general and administrative expenses to general and administrative expenses, the most comparable GAAP financial measure, is presented in 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Consolidated Results of Operations'.
Consolidated Underwriting Income (Loss)
Consolidated underwriting income (loss) is a pre-tax measure of underwriting profitability that takes into account net premiums earned and other insurance related income (losses)(loss) as revenues and net losses and loss expenses, acquisition costs and underwriting-related general and administrative expenses as expenses. 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.
We evaluate our underwriting results separately from the performance of our investment portfolio. As such,a result, we believe it is appropriate to exclude net investment income and net investment gains (losses) from our underwriting profitability measure.
Foreign exchange losses (gains) in our consolidated statements of operations primarily relate to the impact of foreign exchange rate movements on our net insurance-related liabilities. However, we manage our investment portfolio in such a way that unrealized and realized foreign exchange losses (gains) on our investment portfolio generally offset a large portion of the foreign exchange losses (gains) arising from our underwriting portfolio. As a result, we believe that foreign exchange losses (gains) are not a meaningful contributor to our underwriting performance, therefore, foreign exchange losses (gains) are excluded from consolidated underwriting income (loss).
Interest expense and financing costs primarily relate to interest payable on our debt. As these expenses are not incremental and/or directly attributable to our individual underwriting operations, these expenses are excluded from underwriting-related general and administrative expenses, and therefore, consolidated underwriting income (loss).
TransactionReorganization expenses are related to the transformation program which was launched in 2017. This program encompasses the integration of Novae, which commenced in the fourth quarter of 2017, the realignment of our accident and reorganizationhealth business, together with other initiatives designed to increase efficiency and enhance profitability, while delivering a customer-centric operating model. Reorganization expenses are primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from consolidated underwriting income (loss).
Amortization of intangible assets including VOBA arose from business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from consolidated underwriting income (loss).
Bargain purchase gain, recognized on the acquisition of Compagnie Belge d'Assurances Aviation NV/SA ("Aviabel"), reflects the excess of the fair value of the net identifiable assets acquired over the fair value of consideration transferred and is not indicative of future revenues, therefore, this revenue is excluded from consolidated underwriting income (loss).
We believe that the presentation of underwriting-related general and administrative expenses and consolidated underwriting income (loss) provides investors with an enhanced understanding of our results of operations, by highlighting the underlying pre-tax profitability of our underwriting activities. The reconciliation of consolidated underwriting income (loss) to net income (loss), the most comparable GAAP financial measure, is presented in 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Consolidated Results of Operations'.
Operating Income (Loss)
Operating income (loss) represents after-tax operational results exclusive of net investment gains (losses), foreign exchange losses (gains), transaction and reorganization expenses and interest in income (loss) of equity method investments, revaluation of net deferred tax asset and bargain purchase gain.investments.
Although the investment of premiums to generate income and investment gains (losses) is an integral part of our operations, the determination to realize investment gains (losses) is independent of the underwriting process and is heavily influenced by the availability of market opportunities. Furthermore, many users believe that the timing of the realization of investment gains (losses) is somewhat opportunistic for many companies.
Foreign exchange losses (gains) in our consolidated statements of operations primarily relate to the impact of foreign exchange rate movements on net insurance-related liabilities. In addition, we recognize unrealized foreign exchange losses (gains) on our equity securities and foreign exchange losses (gains) realized on the sale of our available for sale investments and equity securities in net investment gains (losses). We also recognize unrealized foreign exchange losses (gains) on our available for sale investments in other comprehensive income (loss). These unrealized foreign exchange losses (gains) generally offset a large portion of the foreign exchange losses (gains) reported in net income (loss) available (attributable) to common shareholders,, thereby minimizing the impact of foreign exchange rate movements on total shareholders’ equity. As a result, the foreign exchange losses (gains) in our consolidated statements of operations in isolation are not a fair representation ofmeaningful contributor to the performance of our business.
TransactionReorganization expenses are related to the transformation program which was launched in 2017. This program encompasses the integration of Novae, which commenced in the fourth quarter of 2017, the realignment of our accident and reorganizationhealth business, together with other initiatives designed to increase efficiency and enhance profitability, while delivering a customer-centric operating model. Reorganization expenses are primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from operating income (loss).
Interest in income (loss) of equity method investments is primarily driven by business decisions, the nature and timing
of which are not related to the underwriting process, therefore, this income (loss) is excluded from operating income
(loss).
The revaluation of net deferred tax asset represents a tax expense recognized in the fourth quarter of 2017 related to the revaluation of our net deferred tax asset, due to the reduction in the U.S. corporate income tax rate from 35% to 21% enacted as part of the Tax Cuts and Jobs Act of 2017 ("U.S. Tax Reform"). The nature and timing of the tax expense associated with the U.S. Tax Reform is not related to the underwriting process, therefore, this expense is excluded from operating income (loss).
Bargain purchase gain, recognized on the acquisition of Compagnie Belge d'Assurances Aviation NV/SA ("Aviabel"), reflects the excess of the fair value of the net identifiable assets acquired over the fair value of consideration transferred and is not indicative of future revenues, therefore, this revenue is excluded from operating income (loss).
Certain users of our financial statements evaluate performance exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), transaction and reorganization expenses and 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.
We believe that showing net income (loss) available (attributable) to common shareholders exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), transaction and reorganization expenses and interest in income (loss) of equity method investments revaluation of net deferred tax asset and bargain purchase gain reflects the underlying fundamentals of our business. In addition, we believe that this presentation enables investors and other users of our financial information to analyze performance in a manner similar to how our management analyzes the underlying business performance. We also believe this measure follows industry practice and, therefore, facilitates comparison of our performance with our peer group. We believe that equity analysts and certain rating agencies that follow us, and the insurance industry as a whole, generally exclude these items from their analyses for the same reasons. The reconciliation of operating income (loss) to net income (loss), available (attributable) to common shareholders, the most comparable GAAP financial measure, is presented in above.
'Management's Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations'.
We also present operating income (loss) per diluted common share and operating ROACE, which are derived from the operating income (loss) measure and are reconciled above to the most comparable GAAP financial measures, earnings (loss) per diluted common share and return on average common equity ("ROACE"), respectively, in respectively.
'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations'.
Constant Currency Basis
We present gross premiums written,
Net investment income from our cash and investment portfolio by major asset class was as follows:
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| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
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| Fixed maturities | $ | 317,121 | | | (17%) | | $ | 384,053 | | | 8% | | $ | 356,273 | | |
| Other investments | 16,059 | | | (73%) | | 60,038 | | | 23% | | 48,959 | | |
| Equity securities | 9,328 | | | (11%) | | 10,434 | | | 4% | | 10,077 | | |
| Mortgage loans | 15,432 | | | 5% | | 14,712 | | | 8% | | 13,566 | | |
| Cash and cash equivalents | 13,582 | | | (49%) | | 26,882 | | | (2%) | | 27,566 | | |
| Short-term investments | 2,749 | | | (61%) | | 7,053 | | | (25%) | | 9,365 | | |
| Gross investment income | 374,271 | | | (26%) | | 503,172 | | | 8% | | 465,806 | | |
| Investment expense | (24,670) | | | —% | | (24,600) | | | (10%) | | (27,299) | | |
| Net investment income | $ | 349,601 | | | (27%) | | $ | 478,572 | | | 9% | | $ | 438,507 | | |
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| Pre-tax yield:(1) | | | | | | | | | | |
| Fixed maturities | 2.6 | % | | | | 3.2 | % | | | | 3.0 | % | |
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(1)Pre-tax yield is calculated by dividing net premiums writteninvestment income by the average month-end amortized cost balances.
Fixed Maturities
2020 versus 2019: Net investment income in 2020 decreased by $67 million or 17%, compared to 2019 due to a decrease in yields and a smaller allocation of the portfolio to fixed maturities.
Other Investments
Other investments include hedge funds, direct lending funds, private equity funds, real estate funds, other privately held investments, an indirect investment in CLO-Equities and overseas deposits. These investments are recorded at fair value, with changes in fair value and income distributions reported in net investment income. Consequently, the pre-tax return on other investments may vary materially year over year, particularly during volatile equity and credit markets.
Net investment income from other investments was as follows:
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| Year ended December 31, | 2020 | | 2019 | | 2018 | |
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| Hedge, direct lending, private equity and real estate funds | $ | 16,267 | | | $ | 42,186 | | | $ | 40,295 | | |
| Other privately held investments | 5,809 | | | 18,050 | | | 2,036 | | |
| CLO-Equities | (6,017) | | | (198) | | | 6,628 | | |
| Total net investment income from other investments(1) | $ | 16,059 | | | $ | 60,038 | | | $ | 48,959 | | |
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| Pre-tax return on other investments(2) | 2.2 | % | | 8.5 | % | | 6.4 | % | |
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(1)Excluding overseas deposits.
(2)The pre-tax return on other investments is calculated by dividing total net investment income from other investments by the average month-end fair value balances held for the periods indicated, excluding overseas deposits.
2020 versus 2019: Pre-tax return on other investments in 2020 decreased to 2.2% compared to 8.5% in 2019. The decrease was primarily attributable to lower returns from direct lending and real estate funds and a realized gain of $13 million associated with the sale of a privately held investment in 2019.
Net Investment Gains (Losses)
Fixed maturities classified as available for sale are reported at fair value. Realized gains (losses) on fixed maturities are reported in net investment gains (losses) when these securities are sold or impaired.
Equity securities are reported at fair value. Realized gains (losses) on equity securities are also reported in net investment gains (losses) when securities are sold or impaired. In addition, changes in the fair values of equity securities are reported in net investment gains (losses).
Changes in the fair value of investment derivatives, mainly foreign exchange forward contracts and exchange traded interest rate swaps, are recorded in net investment gains (losses).
Net investment gains (losses) were as follows:
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| Year ended December 31, | 2020 | | 2019 | | 2018 | |
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| On sale of investments: | | | | | | |
| Fixed maturities and short-term investments | $ | 92,119 | | | $ | 36,645 | | | $ | (96,086) | | |
| Equity securities | 19,808 | | | 3,126 | | | 17,046 | | |
| | 111,927 | | | 39,771 | | | (79,040) | | |
| Allowance for expected credit losses | (323) | | | — | | | — | | |
| Impairment losses (1) | (1,486) | | | — | | | — | | |
| OTTI losses | — | | | (6,984) | | | (9,733) | | |
| Change in fair value of investment derivatives | (2,434) | | | (1,823) | | | 5,445 | | |
| Net unrealized gains (losses) on equity securities | 21,449 | | | 60,269 | | | (66,890) | | |
| Net investment gains (losses) | $ | 129,133 | | | $ | 91,233 | | | $ | (150,218) | | |
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(1) Related to instances where the Company intends to sell securities, or it is more likely than not that the Company will be required to sell securities before their anticipated recovery.
2020 versus 2019: Net investment gains in 2020 were $129 million compared to net investment gains of $91 million in 2019. Net investment gains reported in 2020 mainly reflected net realized gains on the sale of U.S Government, agency RMBS and exchange traded funds and net premiums earnedunrealized gains on equity securities. Net investment gains reported in 2019 mainly reflected net unrealized gains on equity securities and net realized gains on the sale of U.S. government and agency RMBS.
On Sale of Investments
Generally, sales of individual securities occur when there are changes in the relative value, credit quality, or duration of a constant currency basisparticular issue. We may also sell securities to re-balance our investment portfolio in order to change exposure to particular asset classes or sectors.
Impairment and OTTI Losses
The impairment losses (refer to 'Critical Accounting Estimates – Impairment losses' for further details) recognized in net income by asset class were as follows:
2020 versus 2019: Impairment losses in 2020 were $1 million compared to OTTI losses of $7 million in 2019. The impairment losses in 2020 were principally due to impairments of non-investment grade corporate debt securities that we intend to sell or more likely than not will be required to sell. OTTI losses in 2019 included impairments on non-U.S. denominated securities due to foreign exchange losses associated with the strengthening of the U.S. dollar against the pound sterling and the euro and impairments on non-investment grade corporate debt securities that had declined significantly in value.
Change in Fair Value of Investment Derivatives
From time to time, we economically hedge foreign exchange exposure and interest rate risk with derivative contracts.
During 2020, foreign exchange hedges resulted in $2 million of net losses which primarily related to securities denominated in euro which experienced volatility during 2020.
During 2019, foreign exchange hedges resulted in $2 million of net gains which primarily related to securities denominated in euro which experienced volatility during 2019. We also recorded net losses of $4 million related to interest rate swaps.
Our derivative instruments are not designated as hedges under current accounting guidance, therefore, net unrealized gains (losses) on the hedged securities were recorded in accumulated other comprehensive income in the statement of changes in shareholders’ equity.
Total Return
Our investment strategy is to take a long-term view by actively managing our investment portfolio to maximize total return within certain guidelines and constraints. In assessing returns under this MD&A. The amounts presentedapproach, we include net investment income, net investment gains (losses), the change in unrealized gains (losses) on a constant currency basis arefixed maturities, and interest in income (loss) of equity method investments generated by our investment portfolio.
Total return on cash and investments was as follows:
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| Year ended December 31, | 2020 | | 2019 | | 2018 | |
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| Net investment income | $ | 349,601 | | | $ | 478,572 | | | $ | 438,507 | | |
| Net investments gains (losses) | 129,133 | | | 91,233 | | | (150,218) | | |
| Change in net unrealized gains (losses) on fixed maturities(1) | 269,937 | | | 385,364 | | | (191,529) | | |
| Interest in income (loss) of equity method investments | (3,612) | | | 9,718 | | | 993 | | |
| Total | $ | 745,059 | | | $ | 964,887 | | | $ | 97,753 | | |
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| Average cash and investments(2) | $ | 15,562,097 | | | $ | 15,322,688 | | | $ | 15,361,287 | | |
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| Total return on average cash and investments, pre-tax: | | | | | | |
| Including investment related foreign exchange movements | 4.8 | % | | 6.3 | % | | 0.6 | % | |
| Excluding investment related foreign exchange movements(3) | 4.4 | % | | 6.1 | % | | 0.9 | % | |
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(1)Change in net unrealized gains (losses) on fixed maturities is calculated by applyingtaking net unrealized gains (losses) at period end less net unrealized gains (losses) at the prior period end.
(2)The average cash and investments balance is calculated by taking the average foreign exchange rate fromof the current year to the prior year amounts. We believe this presentation enables investors and other users of our financial information to analyze growth in gross premiums written, net premiums written and net premiums earned on a constant basis. The reconciliation to gross premiums written, net premiums written and net premiums earned on a GAAP basis is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Underwriting Results – Consolidated'.period end fair value balances.
Pre-Tax Total Return on Cash and Investments excluding Foreign Exchange Movements
(3)Pre-tax total return on cash and investments excluding foreign exchange rate movements measures net investment income (loss), net investments gains (losses), interestis a non-GAAP financial measure as defined in income (loss)Item 10(e) of equity method investments, and change in unrealized investment gains (losses) generated by average cash and investment balances.SEC Regulation S-K. The reconciliation of pre-tax total return on cash and investments excluding foreign exchange movements to pre-tax total return on cash and investments, the most comparable GAAP financial measure, included foreign exchange gains (losses) of $55 million, $25 million and $(48) million for the years ended December 31, 2020, 2019 and 2018, respectively.
OTHER EXPENSES (REVENUES), NET
The following table provides a summary of other expenses (revenues), net:
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| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
| | | | | | | | | | | |
| Corporate expenses | $ | 101,822 | | | (21%) | | $ | 129,096 | | | 19% | | $ | 108,221 | | |
| Foreign exchange losses (gains) | 81,069 | | | nm | | (12,041) | | | nm | | (29,165) | | |
| Interest expense and financing costs | 75,049 | | | 10% | | 68,107 | | | 1% | | 67,432 | | |
| Income tax expense (benefit) | (12,321) | | | nm | | 23,692 | | | nm | | (29,486) | | |
| Total | $ | 245,619 | | | | | $ | 208,854 | | | | | $ | 117,002 | | |
| | | | | | | | | | | |
nm – not meaningful
Corporate Expenses
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 decreased to 2.3% in 2020 from 2.8% in 2019.
The decrease in corporate expenses in 2020 was primarily related to decreases in information technology costs, travel and entertainment costs, personnel costs, and professional fees, partially offset by a decrease in the allocation of corporate costs to the insurance segment.
Foreign Exchange Losses (Gains)
Some of our business is presentedwritten in 'currencies other than the U.S. dollar. Foreign exchange losses in 2020 were mainly driven by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling and the euro.
Foreign exchange gains in 2019 were mainly driven by the impact of the strengthening of the U.S. dollar on the re-measurement of net insurance-related liabilities denominated in euro, partially offset by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling.
Interest Expense and Financing Costs
Interest expense and financing costs are related to interest due on the 5.875% senior unsecured notes ("5.875% Senior Notes") issued in 2010 Management’s Discussion and Analysisrepaid in June 2020, the 5.150% senior unsecured notes ("5.150% Senior Notes") issued in 2014, the 4.000% senior unsecured notes ("4.000% Senior Notes") issued in 2017, the 3.900% senior unsecured notes ("3.900% Senior Notes"), and the 4.900% fixed-rate reset junior subordinated notes ("Junior Subordinated Notes") issued in 2019.
Interest expense and financing costs increased by $7 million in 2020, compared to 2019, due to the issuance of Financial Conditionthe 3.900% Senior Notes on June 19, 2019 and Resultsthe issuance of Operations – Net Investment the Junior Subordinated Notes on December 10, 2019, partially offset by the repayment of the 2.650% Senior Notes on April 1, 2019 and the repayment of the 5.875% Senior Notes on June 1, 2020.
Income Tax Expense (Benefit)
Income tax expense (benefit) primarily results from income (loss) generated by our foreign operations in the U.S. and Net Investment Gains (Losses)'Europe. Our effective tax rate, which is calculated as income tax expense (benefit), divided by income (loss) before tax including interest in income (loss) of equity method investments, was . 9.3%, 6.8%, and (217.9%) in 2020, 2019, and 2018, respectively. This effective rate can vary between years depending on the distribution of net income (loss) among tax jurisdictions, as well as other factors
The tax benefit of $12 million in 2020 was principally due to the generation of pre-tax losses in our U.K. operations.
The tax expense of $24 million in 2019 was principally due to the geographic distribution of pre-tax income with the expense being driven by pre-tax income generated in our U.S. and European operations, partially offset by pre-tax losses in our U.K. operations.
FINANCIAL MEASURES
We believe this presentation enables investorsthat the following financial indicators are important in evaluating performance and other users of our financial information to analyzemeasuring the performance of our investment portfolio.overall growth in value generated for common shareholders:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Year ended and at December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Return on average common equity(1) | (3.2 | %) | | 6.3 | % | | — | % | |
| Operating return on average common equity(2) | (3.7 | %) | | 4.7 | % | | 3.6 | % | |
| Book value per diluted common share(3) | $ | 55.09 | | | $ | 55.79 | | | $ | 49.93 | | |
| Cash dividends declared per common share | $ | 1.65 | | | $ | 1.61 | | | $ | 1.57 | | |
| Increase (decrease) in book value per diluted common share adjusted for dividends | $ | 0.95 | | | $ | 7.47 | | | $ | (2.38) | | |
| | | | | | | |
Ex-PGAAP Operating Income (Loss)
Ex-PGAAP operating income (loss) represents operating income (loss) exclusive of amortization of VOBA and intangible assets, net of tax and amortization of acquisition costs, net of tax associated with Novae's balance sheet at October 2, 2017 (the "closing date" or "acquisition date"(1) Return on average common equity ("ROACE"). The reconciliation of ex-PGAAP operating income (loss) to is calculated by dividing net income (loss) available (attributable) to common shareholders for the year by the average common shareholders' equity determined using the common shareholders' equity balances at the beginning and end of the year.
(2) Operating return on average common equity ("operating ROACE"), a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to the most comparable GAAP financial measure, ROACE, and a discussion of the rationale for its presentation is presentedprovided in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations'Non-GAAP Financial Measures Reconciliation'.
(3) Book value per diluted common share represents common shareholders’ equity divided by the number of diluted common share outstanding, determined using the treasury stock method. Cash-settled restricted stock units are excluded.
Return on Average Common Equity
Our objective is to generate superior returns on capital that appropriately reward 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 challenge the ability to achieve a profitability target in any specific period.
ROACE reflects the impact of net income (loss) available (attributable) to common shareholders, including net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
The decrease in ROACE in 2020 compared to 2019, was primarily driven by the underwriting loss, a decrease in net investment income, and the foreign exchange losses, partially offset by an increase in net investment gains, the income tax benefit, and decreases in corporate expenses, reorganization expenses, and the amortization of value of business acquired ("VOBA") associated with the acquisition of Novae.
Operating ROACE excludes the impact of net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
The decrease in operating ROACE in 2020, compared to 2019, was primarily driven by the underwriting loss and a decrease in investment income, partially offset by the income tax benefit, and decreases in corporate expenses and the amortization of VOBA associated with the acquisition of Novae.
Book Value per Diluted Common Share
We consider book value per diluted common share to be an appropriate measure of returns to common shareholders, as we believe growth in book value on a diluted basis will ultimately translate into appreciation of our stock price.
In 2020, book value per diluted common share decreased by 1%, due to the net loss generated and common dividends declared, partially offset by net unrealized investment gains reported in other comprehensive income.
In 2019, book value per diluted common share increased by 12%, primarily driven by net income generated and net unrealized investment gains reported in other comprehensive income, partially offset by common dividends declared. The net unrealized investment gains in 2019 reflected a decrease in interest rates and a tightening of credit spreads which positively impacted the market values of fixed maturities.
Cash Dividends Declared per Common Share
We also present ex-PGAAP operating income (loss)believe in returning excess capital to shareholders by way of dividends. Accordingly, dividend policy is an integral part of the value we create for shareholders. Our Board of Directors have approved seventeen successive annual increases in quarterly common share dividends.
Book Value per Diluted Common Share Adjusted for Dividends
Taken together, we believe that growth in book value per diluted common share and ex-PGAAPcommon share dividends declared represent the total value created for common shareholders. As companies in the insurance industry have differing dividend payout policies, we believe that investors use the book value per diluted common share adjusted for dividends metric to measure comparable performance across the industry.
In 2020, the increase in total value of $0.95, or 2%, was driven by net unrealized investment gains recognized in other comprehensive income, partially offset by the net loss generated for the year.
In 2019, the increase in total value of $7.47, or 15%, was driven by net income generated and net unrealized investment gains reported in other comprehensive income.
NON-GAAP FINANCIAL MEASURES RECONCILIATION
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| Years ended December 31, | 2020 | | 2019 | | 2018 | | |
| | | | | | | | |
| Net income (loss) available (attributable) to common shareholders | $ | (150,674) | | $ | 282,361 | | | $ | 396 | | | |
| Net investment (gains) losses(1) | (129,133) | | (91,233) | | | 150,218 | | | |
| Foreign exchange losses (gains)(2) | 81,069 | | (12,041) | | | (29,165) | | | |
| Reorganization expenses(3) | 7,881 | | 37,384 | | | 66,940 | | | |
| Interest in (income) loss of equity method investments(4) | 3,612 | | (9,718) | | | (993) | | | |
| Income tax expense (benefit) | 13,023 | | 6,656 | | | (26,697) | | | |
| Operating income (loss) | $ | (174,222) | | $ | 213,409 | | | $ | 160,699 | | | |
| | | | | | | | |
| Earnings (loss) per diluted common share (5) | $ | (1.79) | | $ | 3.34 | | $ | — | | |
| Net investment (gains) losses | (1.53) | | (1.08) | | 1.79 | | |
| Foreign exchange losses (gains) | 0.96 | | (0.14) | | (0.35) | | |
| Reorganization expenses | 0.09 | | 0.44 | | 0.80 | | |
| Interest in (income) loss of equity method investments | 0.04 | | (0.12) | | (0.01) | | |
| Income tax expense (benefit) | 0.15 | | 0.08 | | (0.32) | | |
| Operating income (loss) per diluted common share(5) | $ | (2.08) | | $ | 2.52 | | $ | 1.91 | | |
| | | | | | | | |
| Weighted average diluted common shares outstanding(6) | 84,262 | | 84,473 | | 84,007 | | |
| | | | | | | | |
| Average common shareholders' equity | $ | 4,757,351 | | $ | 4,512,040 | | $ | 4,410,668 | | |
| | | | | | | | |
| Return on average common equity | (3.2%) | | 6.3% | | —% | | |
| | | | | | | | |
| Operating return on average common equity | (3.7%) | | 4.7% | | 3.6% | | |
| | | | | | | | |
nm – not meaningful
(1)Tax cost (benefit) of $18 million, $12 million and $(12) million for the years ended December 31, 2020, 2019 and 2018, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize capital losses.
(2)Tax cost (benefit) of $(4) million, $1 million and $(4) million for the years ended December 31, 2020, 2019 and 2018, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the tax status of specific foreign exchange transactions.
(3)Tax (benefit) of $(1) million, $(7) million and $(11) million for the years ended December 31, 2020, 2019 and 2018, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
(4)Tax cost (benefit) of $nil for the years ended December 31, 2020, 2019, respectively and $0.3 million for the year ended December 31, 2018, Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
(5)Loss per diluted common share and operating ROACE, whichloss per diluted common share for the year ended December 31, 2020, were calculated using weighted average common shares outstanding due to the net loss attributable to common shareholders and the operating loss recognized in the year.
(6)Refer to Item 8, Note 13 to the Consolidated Financial Statements 'Earnings Per Common Share' for further details.
Rationale for the Use of Non-GAAP Financial Measures
We present our results of operations in the way we believe will be meaningful and useful to investors, analysts, rating agencies and others who use our financial information to evaluate our performance. Some of the measurements we use are derived from the ex-PGAAPconsidered non-GAAP financial measures under SEC rules and regulations. In this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we present underwriting-related general and administrative expenses, consolidated underwriting income (loss), operating income (loss) (in total and on a per share basis), operating return on average common equity ("operating ROACE"), amounts presented on a constant currency basis, and pre-tax total return on cash and investments excluding foreign exchange movements which are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. We believe that these non-GAAP financial measures, which may be defined and calculated differently by other companies, help explain and enhance the understanding of our results of operations. However, these measures should not be viewed as a substitute for those determined in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
Underwriting-Related General and Administrative Expenses
Underwriting-related general and administrative expenses include those general and administrative expenses that are incremental and/or directly attributable to our underwriting operations. While this measure is presented in Item 8, Note 3 to the Consolidated Financial Statements 'Segment Information', it is considered a non-GAAP financial measure when presented elsewhere on a consolidated basis.
Corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As these costs are reconcilednot incremental and/or directly attributable to our underwriting operations, these costs are excluded from underwriting-related general and administrative expenses, and therefore, consolidated underwriting income (loss). General and administrative expenses, the most comparable GAAP financial measures, earnings (loss) per diluted common sharemeasure to underwriting-related general and ROACE, respectively,administrative expenses, also includes corporate expenses.
The reconciliation of underwriting-related general and administrative expenses to general and administrative expenses, the most comparable GAAP financial measure, is presented in 'Management’s'Management's Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Consolidated Results of OperationsOperations''.
We believe the presentation of ex-PGAAP operating income (loss), ex-PGAAP operating income (loss) per diluted common share and ex-PGAAP operating ROACE enables investors and other users of our financial information to better analyze the performance of our business.
Acquisition of Novae
On October 2, 2017, we acquired Novae. At the acquisition date, we identified VOBA, which represents the present value of the expected underwriting profit within policies that were in-force at the closing date of the transaction. In addition, the allocation of the acquisition price to the assets acquired and liabilities assumed based on estimated fair values at the acquisition date, resulted in the write-off of the deferred acquisition cost asset on Novae's balance sheet at the acquisition date as the value of policies in-force on that date are considered within VOBA. Consequently, underwriting income (loss) in 2019 and 2018 included the recognition of premiums attributable to Novae's balance sheet at the acquisition date without the recognition of the associated acquisition costs.
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Years ended December 31, | 2019 | | % Change | | 2018 | | % Change | | 2017 | |
| | | | | | | | | | | | |
| | Underwriting revenues: | | | | | | | | | | |
| | Net premiums earned | $ | 4,587,178 |
| | (4%) | | $ | 4,791,495 |
| | 15% | | $ | 4,148,760 |
| |
| | Other insurance related income (losses) | 16,444 |
| | 55% | | 10,622 |
| | nm | | (1,240 | ) | |
| | Underwriting expenses: | | |
| | | | | | | |
| | Net losses and loss expenses | (3,044,798 | ) | | (5%) | | (3,190,287 | ) | | (3%) | | (3,287,772 | ) | |
| | Acquisition costs | (1,024,582 | ) | | 6% | | (968,835 | ) | | 18% | | (823,591 | ) | |
| | Underwriting-related general and administrative expenses (1) | (505,735 | ) | | (3%) | | (519,168 | ) | | 16% | | (449,483 | ) | |
| | Underwriting income (loss) | $ | 28,507 |
| | | | $ | 123,827 |
| | | | $ | (413,326 | ) | |
| | | | | | | | | | | | |
| | Net investment income | 478,572 |
| | 9% | | 438,507 |
| | 9% | | 400,805 |
| |
| | Net investment gains (losses) | 91,233 |
| | nm | | (150,218 | ) | | nm | | 28,226 |
| |
| | Corporate expenses (1) | (129,096 | ) | | 19% | | (108,221 | ) | | (17%) | | (129,945 | ) | |
| | Other (expenses) revenues, net | (56,066 | ) | | 47% | | (38,267 | ) | | (80%) | | (189,548 | ) | |
| | Transaction and reorganization expenses | (37,384 | ) | | (44%) | | (66,940 | ) | | nm | | (26,718 | ) | |
| | Amortization of value of business acquired | (26,722 | ) | | (84%) | | (172,332 | ) | | nm | | (50,104 | ) | |
| | Amortization of intangible assets | (11,597 | ) | | (16%) | | (13,814 | ) | | nm | | (2,543 | ) | |
| | Bargain purchase gain | — |
| | —% | | — |
| | nm | | 15,044 |
| |
| | Income (loss) before income taxes and interest in income (loss) of equity method investments | 337,447 |
| | | | 12,542 |
| | | | (368,109 | ) | |
| | Income tax (expense) benefit | (23,692 | ) | | nm | | 29,486 |
| | nm | | 7,542 |
| |
| | Interest in income (loss) of equity method investments | 9,718 |
| | nm | | 993 |
| | nm | | (8,402 | ) | |
| | Net income (loss) | 323,473 |
| | | | 43,021 |
| | | | (368,969 | ) | |
| | Preferred share dividends | (41,112 | ) | | (4%) | | (42,625 | ) | | (9%) | | (46,810 | ) | |
| | Net income (loss) available (attributable) to common shareholders | $ | 282,361 |
| | nm | | $ | 396 |
| | nm | | $ | (415,779 | ) | |
| | | | | | | | | | | | |
| | Net investment (gains) losses(2) | (91,233 | ) | | nm | | 150,218 |
| | nm | | (28,226 | ) | |
| | Foreign exchange losses (gains)(3) | (12,041 | ) | | (59%) | | (29,165 | ) | | nm | | 134,737 |
| |
| | Transaction and reorganization expenses (4) | 37,384 |
| | (44%) | | 66,940 |
| | nm | | 26,718 |
| |
| | Interest in (income) loss of equity method investments(5) | (9,718 | ) | | nm | | (993 | ) | | nm | | 8,402 |
| |
| | Revaluation of net deferred tax asset(6) | — |
| | —% | | — |
| | nm | | 41,629 |
| |
| | Bargain purchase gain(6) | — |
| | —% | | — |
| | nm | | (15,044 | ) | |
| | Income tax expense (benefit) | 6,656 |
| | nm | | (26,697 | ) | | nm | | (8,594 | ) | |
| | Operating income (loss)(7) | $ | 213,409 |
| | 33% | | $ | 160,699 |
| | nm | | $ | (256,157 | ) | |
| | | | | | | | | | | | |
nm – not meaningful
| |
(1) | Underwriting-related general and administrative expenses is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to general and administrative expenses, the most comparable GAAP financial measure, also included corporate expenses of $129 million, $108 million and $130 million for the years ended December 31, 2019, 2018 and 2017, respectively. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other (Expenses) Revenues, Net' for further details. Refer also to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures' for further details.
|
| |
(2) | Tax cost (benefit) of $12 million, $(12) million and $2 million for the years ended December 31, 2019, 2018 and 2017, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize capital losses. |
| |
(3) | Tax cost (benefit) of $1 million, $(4) million and $(8) million for the years ended December 31, 2019, 2018 and 2017, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the tax status of specific foreign exchange transactions. |
| |
(4) | Tax (benefit) of $(7) million, $(11) million and $(3) million for the years ended December 31, 2019, 2018 and 2017, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions. |
| |
(5) | Tax cost (benefit) of $nil, $0.3 million and $nil for the years ended December 31, 2019, 2018 and 2017, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions. |
| |
(7) | Operating income (loss) is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliations to net income (loss), the most comparable GAAP financial measure is presented in the table above, and a discussion of the rationale for its presentation is provided in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures'.
|
Non-GAAP Financial Measures
We also present operating income (loss) per diluted common share and operating return on average common equity ("operating ROACE"), which are derived from the operating income (loss) measure and can be reconciled to the most comparable GAAP financial measures as follows: |
| | | | | | | | | | | | | |
| | | | | | | | |
| | Year ended December 31, | 2019 | | 2018 | | 2017 | |
| | | | | | | | |
| | Net income (loss) available (attributable) to common shareholders | $ | 282,361 |
| | $ | 396 |
| | $ | (415,779 | ) | |
| | Operating income (loss) | $ | 213,409 |
| | $ | 160,699 |
| | $ | (256,157 | ) | |
| | Weighted average diluted common shares outstanding(1) | 84,473 |
| | 84,007 |
| | 84,108 |
| |
| | | | | | | | |
| | Earnings (loss) per diluted common share | $ | 3.34 |
| | $ | — |
| | $ | (4.94 | ) | |
| | Operating income (loss) per diluted common share(2) | $ | 2.52 |
| | $ | 1.91 |
| | $ | (3.05 | ) | |
| | | | | | | | |
| | Average common shareholders’ equity | $ | 4,512,040 |
| | $ | 4,410,668 |
| | $ | 4,856,280 |
| |
| | | | | | | | |
| | Return on average common equity(3) | 6.3 | % | | — | % | | (8.6 | %) | |
| | Operating return on average common equity(4) | 4.7 | % | | 3.6 | % | | (5.3 | %) | |
| | | | | | | | |
| |
(1) | Refer to Item 8, Note 13 to the Consolidated Financial Statements 'Earnings Per Common Share' for further details.
|
| |
(2) | Operating income (loss) per diluted common share is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to earnings (loss) per diluted common share, the most comparable GAAP financial measure is presented in the table above, and a discussion of the rationale for its presentation is provided in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures'.
|
| |
(3) | Return on average common equity ("ROACE") is calculated by dividing net income (loss) available (attributable) to common shareholders for the year by the average common shareholders' equity determined using the common shareholders' equity balances at the beginning and end of the year. |
| |
(4) | Operating ROACE, a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K, is calculated by dividing operating income (loss) for the year by the average common shareholders' equity determined using the common shareholders’ equity balances at the beginning and end of the year. The reconciliation to ROACE, the most comparable GAAP financial measure is presented in the table above and a discussion of the rationale for its presentation is provided in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures'.
|
Ex-PGAAP OperatingConsolidated Underwriting Income
In addition, we present ex-PGAAP operating income (loss), ex-PGAAP operating income (loss) per diluted common share and ex-PGAAP operating ROACE which are derived from the operating income (loss) measure and can be reconciled to the most comparable GAAP financial measures as follows:
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Years ended December 31, | 2019 | | % Change | | 2018 | | % Change | | 2017 | |
| | | | | | | | | | | | |
| | Net income (loss) available (attributable) to common shareholders | $ | 282,361 |
| | nm | | $ | 396 |
| | nm | | $ | (415,779 | ) | |
| | Net investment (gains) losses | (91,233 | ) | | nm | | 150,218 |
| | nm | | (28,226 | ) | |
| | Foreign exchange losses (gains) | (12,041 | ) | | (59%) | | (29,165 | ) | | nm | | 134,737 |
| |
| | Transaction and reorganization expenses | 37,384 |
| | (44%) | | 66,940 |
| | nm | | 26,718 |
| |
| | Interest in (income) loss of equity method investments | (9,718 | ) | | nm | | (993 | ) | | nm | | 8,402 |
| |
| | Revaluation of net deferred tax asset | — |
| | —% | | — |
| | nm | | 41,629 |
| |
| | Bargain purchase gain | — |
| | —% | | — |
| | nm | | (15,044 | ) | |
| | Income tax expense (benefit) | $ | 6,656 |
| | nm | | (26,697 | ) | | nm | | (8,594 | ) | |
| | Operating income (loss) | $ | 213,409 |
| | 33% | | $ | 160,699 |
| | nm | | $ | (256,157 | ) | |
| | Amortization of VOBA and intangible assets (3) | 37,939 |
| | (79%) | | 184,531 |
| | nm | | 52,647 |
| |
| | Amortization of acquisition costs(4) | (12,207 | ) | | (90%) | | (125,467 | ) | | nm | | (32,646 | ) | |
| | Income tax (benefit) | $ | (4,888 | ) | | (56%) | | (11,222 | ) | | nm | | (3,800 | ) | |
| | Ex-PGAAP operating income (loss)(1) | $ | 234,253 |
| | 12% | | $ | 208,541 |
| | nm | | $ | (239,956 | ) | |
| | | | | | | | | | | | |
| | Earnings (loss) per diluted common share | $ | 3.34 |
| | | | $ | — |
| | | | $ | (4.94 | ) | |
| | Net investment (gains) losses | (1.08 | ) | | | | 1.79 |
| | | | (0.34 | ) | |
| | Foreign exchange losses (gains) | (0.14 | ) | | | | (0.35 | ) | | | | 1.60 |
| |
| | Transaction and reorganization expenses | 0.44 |
| | | | 0.80 |
| | | | 0.32 |
| |
| | Interest in (income) loss of equity method investments | (0.12 | ) | | | | (0.01 | ) | | | | 0.10 |
| |
| | Revaluation of net deferred tax asset | — |
| | | | — |
| | | | 0.49 |
| |
| | Bargain purchase gain | — |
| | | | — |
| | | | (0.18 | ) | |
| | Income tax expense (benefit) | 0.08 |
| | | | (0.32 | ) | | | | (0.10 | ) | |
| | Operating income (loss) per diluted common share | 2.52 |
| | | | 1.91 |
| | | | (3.05 | ) | |
| | Amortization of VOBA and intangible assets(3) | 0.45 |
| | | | 2.20 |
| | | | 0.63 |
| |
| | Amortization of acquisition cost(4) | (0.14 | ) | | | | (1.49 | ) | | | | (0.39 | ) | |
| | Income tax (benefit) | (0.06 | ) | | | | (0.14 | ) | | | | $ | (0.04 | ) | |
| | Ex-PGAAP operating income (loss) per diluted common share(1) | $ | 2.77 |
| | | | $ | 2.48 |
| | | | $ | (2.85 | ) | |
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| | Weighted average diluted common shares outstanding | 84,473 |
| | | | 84,007 |
| | | | 84,108 |
| |
| | | | | | | | | | | | |
| | Average common shareholders' equity | $ | 4,512,040 |
| | | | $ | 4,410,668 |
| | | | $ | 4,856,280 |
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| | Return on average common equity | 6.3 | % | | | | — | % | | | | (8.6 | %) | |
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| | Operating return on average common equity | 4.7 | % | | | | 3.6 | % | | | | (5.3 | %) | |
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| | Ex-PGAAP operating return on average common equity(1)(2) | 5.2 | % | | | | 4.7 | % | | | | (4.9 | %) | |
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nm – not meaningful
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(1) | Ex-PGAAP operating income (loss), ex-PGAAP operating income (loss) per diluted common share and ex-PGAAP operating ROACE are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. The reconciliations to the most comparable GAAP financial measures, net income (loss) available (attributable) to common shareholders, earnings (loss) per diluted common share, and ROACE, respectively, are presented in the table above, and a discussion of the rationale for the presentation of these items is provided in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures'.
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(2) | Ex-PGAAP operating ROACE is calculated by dividing ex-PGAAP operating income (loss) for the year by the average common shareholders' equity determined using the common shareholders’ equity balances at the beginning and end of the year. |
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(3) | Tax (benefit) of $(7) million, $(35) million and $(10) million for the years ended December 31, 2019, 2018, and 2017, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions. |
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(4) | Tax cost of $2 million, $24 million and $6 million for the years ended December 31, 2019, 2018, and 2017, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions. |
Underwriting Results (Loss)
Consolidated underwriting income(1) (loss) is a pre-tax measure of underwriting profitability that takes into account net premiums earned and other insurance related income (loss) as revenues and net losses and loss expenses, acquisition costs and underwriting-related general and administrative expenses as expenses. 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.
2019 versus 2018:
Underwriting
We evaluate our underwriting results separately from the performance of our investment portfolio. As a result, we believe it is appropriate to exclude net investment income and net investment gains (losses) from our underwriting profitability measure.
Foreign exchange losses (gains) in 2019 was $29 million,our consolidated statements of operations primarily relate to the impact of foreign exchange rate movements on our net insurance-related liabilities. However, we manage our investment portfolio in such a decreaseway that unrealized and realized foreign exchange losses (gains) on our investment portfolio generally offset a large portion of $95 million comparedthe foreign exchange losses (gains) arising from our underwriting portfolio. As a result, we believe that foreign exchange losses (gains) are not a meaningful contributor to our underwriting performance, therefore, foreign exchange losses (gains) are excluded from consolidated underwriting income of $124 million in 2018. The decrease in(loss).
Interest expense and financing costs primarily relate to interest payable on our debt. As these expenses are not incremental and/or directly attributable to our underwriting operations, these expenses are excluded from underwriting-related general and administrative expenses, and therefore, consolidated underwriting income (loss).
Reorganization expenses are related to the transformation program which was launched in 2017. This program encompasses the integration of Novae, which commenced in the fourth quarter of 2017, the realignment of our accident and health business, together with other initiatives designed to increase efficiency and enhance profitability, while delivering a customer-centric operating model. Reorganization expenses are primarily driven by a decrease in net premiums earnedbusiness decisions, the nature and a decrease in net favorable prior year reserve development, together with an increase intiming of which are not related to the acquisition cost ratiounderwriting process, therefore, these expenses are excluded from consolidated underwriting income (loss).
Amortization of intangible assets including VOBA arose from business decisions, the nature and an increase intiming of which are not related to the underwriting process, therefore, these expenses are excluded from consolidated underwriting income (loss).
We believe that the presentation of underwriting-related general and administrative expense ratio, partiallyexpenses and consolidated underwriting income (loss) provides investors with an enhanced understanding of our results of operations, by highlighting the underlying pre-tax profitability of our underwriting activities. The reconciliation of consolidated underwriting income (loss) to net income (loss), the most comparable GAAP financial measure, is presented in 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Consolidated Results of Operations'.
Operating Income (Loss)
Operating income (loss) represents after-tax operational results exclusive of net investment gains (losses), foreign exchange losses (gains), reorganization expenses and interest in income (loss) of equity method investments.
Although the investment of premiums to generate income and investment gains (losses) is an integral part of our operations, the determination to realize investment gains (losses) is independent of the underwriting process and is heavily influenced by the availability of market opportunities. Furthermore, many users believe that the timing of the realization of investment gains (losses) is somewhat opportunistic for many companies.
Foreign exchange losses (gains) in our consolidated statements of operations primarily relate to the impact of foreign exchange rate movements on net insurance-related liabilities. In addition, we recognize unrealized foreign exchange losses (gains) on our equity securities and foreign exchange losses (gains) realized on the sale of our available for sale investments and equity securities in net investment gains (losses). We also recognize unrealized foreign exchange losses (gains) on our available for sale investments in other comprehensive income (loss). These unrealized foreign exchange losses (gains) generally offset by a decreaselarge portion of the foreign exchange losses (gains) reported in catastrophe and weather-relatednet income (loss), thereby minimizing the impact of foreign exchange rate movements on total shareholders’ equity. As a result, foreign exchange losses and(gains) in our consolidated statements of operations in isolation are not a decreasemeaningful contributor to the performance of our business.
Reorganization expenses are related to the transformation program which was launched in 2017. This program encompasses the integration of Novae, which commenced in the currentfourth quarter of 2017, the realignment of our accident year loss ratio excluding catastrophe and weather-related losses.
The insurance segment underwriting income in 2019 was $44 million,health business, together with other initiatives designed to increase efficiency and enhance profitability, while delivering a decrease of $33 million compared to underwriting income of $77 million in 2018. The decrease in underwriting income wascustomer-centric operating model. Reorganization expenses are primarily driven by a decreasebusiness decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from operating income (loss).
Interest in net premiums earned and a decrease in net favorable prior year reserve development, together with an increase in the acquisition cost ratio and an increase in the general and administrative expense ratio, partially offset by a decrease in catastrophe and weather-related losses and a decrease in the current accident year loss ratio excluding catastrophe and weather-related losses.
The reinsurance segment underwriting loss in 2019 was $16 million compared to underwriting income (loss) of $47 million in 2018. The underwriting loss in 2019 wasequity method investments is primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, this income (loss) is excluded from operating income (loss).
Certain users of our financial statements evaluate performance exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), reorganization expenses and interest in income (loss) of equity method investments to understand the profitability of recurring sources of income.
We believe that showing net income (loss) available (attributable) to common shareholders exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), reorganization expenses and interest in income (loss) of equity method investments reflects the underlying fundamentals of our business. In addition, we believe that this presentation enables investors and other users of our financial information to analyze performance in a decrease inmanner similar to how our management analyzes the underlying business performance. We also believe this measure follows industry practice and, therefore, facilitates comparison of our performance with our peer group. We believe that equity analysts and certain rating agencies that follow us, and the insurance industry as a whole, generally exclude these items from their analyses for the same reasons. The reconciliation of operating income (loss) to net favorable prior year reserve developmentincome (loss) available (attributable) to common shareholders, the most comparable GAAP financial measure, is presented above.
We also present operating income (loss) per diluted common share and a decrease in net premiums earned, together with an increase in catastropheoperating ROACE, which are derived from the operating income (loss) measure and weather-related losses, partially offset by a decrease inare reconciled above to the current accident year loss ratio excluding catastrophemost comparable GAAP financial measures, earnings (loss) per diluted common share and weather-related losses and a decrease in the general and administrative expense ratio.return on average common equity ("ROACE"), respectively.
Net Investment Income
Net investment income from our cash and investment portfolio by major asset class was $479as follows:
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| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
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| Fixed maturities | $ | 317,121 | | | (17%) | | $ | 384,053 | | | 8% | | $ | 356,273 | | |
| Other investments | 16,059 | | | (73%) | | 60,038 | | | 23% | | 48,959 | | |
| Equity securities | 9,328 | | | (11%) | | 10,434 | | | 4% | | 10,077 | | |
| Mortgage loans | 15,432 | | | 5% | | 14,712 | | | 8% | | 13,566 | | |
| Cash and cash equivalents | 13,582 | | | (49%) | | 26,882 | | | (2%) | | 27,566 | | |
| Short-term investments | 2,749 | | | (61%) | | 7,053 | | | (25%) | | 9,365 | | |
| Gross investment income | 374,271 | | | (26%) | | 503,172 | | | 8% | | 465,806 | | |
| Investment expense | (24,670) | | | —% | | (24,600) | | | (10%) | | (27,299) | | |
| Net investment income | $ | 349,601 | | | (27%) | | $ | 478,572 | | | 9% | | $ | 438,507 | | |
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| Pre-tax yield:(1) | | | | | | | | | | |
| Fixed maturities | 2.6 | % | | | | 3.2 | % | | | | 3.0 | % | |
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(1)Pre-tax yield is calculated by dividing net investment income by the average month-end amortized cost balances.
Fixed Maturities
2020 versus 2019: Net investment income in 2020 decreased by $67 million in 2019or 17%, compared to $439 million in 2018, an increase of $40 million, primarily attributable to an increase in income from fixed maturities2019 due to the increasea decrease in yields and a largersmaller allocation of the portfolio to fixed maturities, togethermaturities.
Other Investments
Other investments include hedge funds, direct lending funds, private equity funds, real estate funds, other privately held investments, an indirect investment in CLO-Equities and overseas deposits. These investments are recorded at fair value, with changes in fair value and income distributions reported in net investment income. Consequently, the pre-tax return on other investments may vary materially year over year, particularly during volatile equity and credit markets.
Net investment income from other investments was as follows:
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| Year ended December 31, | 2020 | | 2019 | | 2018 | |
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| Hedge, direct lending, private equity and real estate funds | $ | 16,267 | | | $ | 42,186 | | | $ | 40,295 | | |
| Other privately held investments | 5,809 | | | 18,050 | | | 2,036 | | |
| CLO-Equities | (6,017) | | | (198) | | | 6,628 | | |
| Total net investment income from other investments(1) | $ | 16,059 | | | $ | 60,038 | | | $ | 48,959 | | |
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| Pre-tax return on other investments(2) | 2.2 | % | | 8.5 | % | | 6.4 | % | |
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(1)Excluding overseas deposits.
(2)The pre-tax return on other investments is calculated by dividing total net investment income from other investments by the average month-end fair value balances held for the periods indicated, excluding overseas deposits.
2020 versus 2019: Pre-tax return on other investments in 2020 decreased to 2.2% compared to 8.5% in 2019. The decrease was primarily attributable to lower returns from direct lending and real estate funds and a realized gain of $13 million associated with the sale of a privately held investment partially offset by lower returns from CLO-equities.in 2019.
Net Investment Gains (Losses)
Fixed maturities classified as available for sale are reported at fair value. Realized gains (losses) on fixed maturities are reported in net investment gains (losses) when these securities are sold or impaired.
Equity securities are reported at fair value. Realized gains (losses) on equity securities are also reported in net investment gains (losses) when securities are sold or impaired. In addition, changes in the fair values of equity securities are reported in net investment gains (losses).
Changes in the fair value of investment derivatives, mainly foreign exchange forward contracts and exchange traded interest rate swaps, are recorded in net investment gains (losses).
Net investment gains (losses) were $91as follows:
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| Year ended December 31, | 2020 | | 2019 | | 2018 | |
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| On sale of investments: | | | | | | |
| Fixed maturities and short-term investments | $ | 92,119 | | | $ | 36,645 | | | $ | (96,086) | | |
| Equity securities | 19,808 | | | 3,126 | | | 17,046 | | |
| | 111,927 | | | 39,771 | | | (79,040) | | |
| Allowance for expected credit losses | (323) | | | — | | | — | | |
| Impairment losses (1) | (1,486) | | | — | | | — | | |
| OTTI losses | — | | | (6,984) | | | (9,733) | | |
| Change in fair value of investment derivatives | (2,434) | | | (1,823) | | | 5,445 | | |
| Net unrealized gains (losses) on equity securities | 21,449 | | | 60,269 | | | (66,890) | | |
| Net investment gains (losses) | $ | 129,133 | | | $ | 91,233 | | | $ | (150,218) | | |
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(1) Related to instances where the Company intends to sell securities, or it is more likely than not that the Company will be required to sell securities before their anticipated recovery.
2020 versus 2019: Net investment gains in 2020 were $129 million in 2019 compared to net investment lossesgains of $150$91 million in 2018.
2019. Net investment gains reported in 2020 mainly reflected net realized gains on the sale of U.S Government, agency RMBS and exchange traded funds and net unrealized gains on equity securities. Net investment gains reported in 2019 mainly reflected net unrealized gains on equity securities and net realized gains on the sale of U.S. government and agency RMBS securities.RMBS.
On Sale of Investments
Generally, sales of individual securities occur when there are changes in the relative value, credit quality, or duration of a particular issue. We may also sell securities to re-balance our investment portfolio in order to change exposure to particular asset classes or sectors.
Impairment and OTTI Losses
The impairment losses (refer to 'Critical Accounting Estimates – Impairment losses' for further details) recognized in net income by asset class were as follows:
2020 versus 2019: Impairment losses in 2018 mainly reflected net realized2020 were $1 million compared to OTTI losses on the sale of agency RMBS, U.S. government and$7 million in 2019. The impairment losses in 2020 were principally due to impairments of non-investment grade corporate debt securities that we intend to sell or more likely than not will be required to sell. OTTI losses in 2019 included impairments on non-U.S. denominated securities due to foreign exchange losses associated with the strengthening of the U.S. dollar against the pound sterling and the euro and impairments on non-investment grade corporate debt securities that had declined significantly in value.
Change in Fair Value of Investment Derivatives
From time to time, we economically hedge foreign exchange exposure and interest rate risk with derivative contracts.
During 2020, foreign exchange hedges resulted in $2 million of net losses which primarily related to securities denominated in euro which experienced volatility during 2020.
During 2019, foreign exchange hedges resulted in $2 million of net gains which primarily related to securities denominated in euro which experienced volatility during 2019. We also recorded net losses of $4 million related to interest rate swaps.
Our derivative instruments are not designated as hedges under current accounting guidance, therefore, net unrealized lossesgains (losses) on the hedged securities were recorded in accumulated other comprehensive income in the statement of changes in shareholders’ equity.
Total Return
Our investment strategy is to take a long-term view by actively managing our investment portfolio to maximize total return within certain guidelines and constraints. In assessing returns under this approach, we include net investment income, net investment gains (losses), the change in unrealized gains (losses) on fixed maturities, and interest in income (loss) of equity securities.method investments generated by our investment portfolio.
Other than temporary impairment ("OTTI") charges were $7Total return on cash and investments was as follows:
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| Year ended December 31, | 2020 | | 2019 | | 2018 | |
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| Net investment income | $ | 349,601 | | | $ | 478,572 | | | $ | 438,507 | | |
| Net investments gains (losses) | 129,133 | | | 91,233 | | | (150,218) | | |
| Change in net unrealized gains (losses) on fixed maturities(1) | 269,937 | | | 385,364 | | | (191,529) | | |
| Interest in income (loss) of equity method investments | (3,612) | | | 9,718 | | | 993 | | |
| Total | $ | 745,059 | | | $ | 964,887 | | | $ | 97,753 | | |
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| Average cash and investments(2) | $ | 15,562,097 | | | $ | 15,322,688 | | | $ | 15,361,287 | | |
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| Total return on average cash and investments, pre-tax: | | | | | | |
| Including investment related foreign exchange movements | 4.8 | % | | 6.3 | % | | 0.6 | % | |
| Excluding investment related foreign exchange movements(3) | 4.4 | % | | 6.1 | % | | 0.9 | % | |
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(1)Change in net unrealized gains (losses) on fixed maturities is calculated by taking net unrealized gains (losses) at period end less net unrealized gains (losses) at the prior period end.
(2)The average cash and investments balance is calculated by taking the average of the period end fair value balances.
(3)Pre-tax total return on cash and investments excluding foreign exchange rate movements is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to pre-tax total return on cash and investments, the most comparable GAAP financial measure, included foreign exchange gains (losses) of $55 million, $25 million and $10$(48) million infor the years ended December 31, 2020, 2019 and 2018, respectively.
OTHER EXPENSES (REVENUES), NET
The following table provides a summary of other expenses (revenues), net:
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| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
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| Corporate expenses | $ | 101,822 | | | (21%) | | $ | 129,096 | | | 19% | | $ | 108,221 | | |
| Foreign exchange losses (gains) | 81,069 | | | nm | | (12,041) | | | nm | | (29,165) | | |
| Interest expense and financing costs | 75,049 | | | 10% | | 68,107 | | | 1% | | 67,432 | | |
| Income tax expense (benefit) | (12,321) | | | nm | | 23,692 | | | nm | | (29,486) | | |
| Total | $ | 245,619 | | | | | $ | 208,854 | | | | | $ | 117,002 | | |
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nm – not meaningful
Corporate Expenses (Revenues), Net
Corporate expenses were $129 millioninclude 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 decreased to 2.3% in 2019 compared to $108 million2020 from 2.8% in 2018. 2019.
The increasedecrease in corporate expenses in 2020 was primarily related to ongoing investmentsdecreases in information technology costs, travel and digital capabilities,entertainment costs, personnel costs, and professional fees, partially offset by an increasea decrease in the allocation of corporate costs to the insurance segment.
Foreign Exchange Losses (Gains)
Some of our business is written in currencies other than the U.S. dollar. Foreign exchange losses in 2020 were mainly driven by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling and reinsurance segments.the euro.
The foreignForeign exchange gains of $12 million in 2019 were mainly driven by the impact of the strengthening of the U.S. dollar on the re-measurement of net insurance-related liabilities denominated in euro, partially offset by the impact of the weakening of the U.S. dollar on the re-measurementremeasurement of net insurance-related liabilities denominated in pound sterling.
The foreign exchange gains of $29 million in 2018 were mainly driven by the impact of the strengthening of the U.S. dollar on the re-measurement of net insurance-related liabilities mainly denominated in pound sterlingInterest Expense and euro.
(1) Consolidated underwriting income (loss) is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to net income (loss), the most comparable GAAP financial measure, is provided in 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operation'.
Interest expense and financing costs were $68 millionare related to interest due on the 5.875% senior unsecured notes ("5.875% Senior Notes") issued in 2019 compared to $67 million2010 and repaid in 2018. The increase of $1 million was due toJune 2020, the issuance of5.150% senior unsecured notes ("5.150% Senior Notes") issued in 2014, the 4.000% senior unsecured notes ("4.000% Senior Notes") issued in 2017, the 3.900% senior unsecured notes ("3.900% Senior Notes") on June 19, 2019,, and the issuance of 4.900% fixed-rate reset junior subordinated notes ("Junior Subordinated Notes") issued in 2019.
Interest expense and financing costs increased by $7 million in 2020, compared to 2019, due to the issuance of the 3.900% Senior Notes on June 19, 2019 and the issuance of the Junior Subordinated Notes on December 10, 2019, partially offset by the repayment of the 2.65% senior unsecured notes ("2.65%2.650% Senior Notes")Notes on April 1, 2019 and the repayment of the Dekania5.875% Senior Notes on November 15, 2018.June 1, 2020.
The financial results for 2019 resulted in a
Income Tax Expense (Benefit)
Income tax expense (benefit) primarily results from income (loss) generated by our foreign operations in the U.S. and Europe. Our effective tax rate, which is calculated as income tax expense (benefit), divided by income (loss) before tax including interest in income (loss) of $24 million compared to aequity method investments, was 9.3%, 6.8%, and (217.9%) in 2020, 2019, and 2018, respectively. This effective rate can vary between years depending on the distribution of net income (loss) among tax jurisdictions, as well as other factors
The tax benefit of $29$12 million in 2018.2020 was principally due to the generation of pre-tax losses in our U.K. operations.
The tax expense of $24 million in 2019 was principally due to the generationgeographic distribution of pre-tax income with the expense being driven by pre-tax income generated in our U.S. and European operations, partially offset by pre-tax losses in our U.K. operations.
The tax benefit of $29 million in 2018 was principally due to the generation of pre-tax losses in our U.K. and European operations, partially offset by income in our U.S. operations.
Reorganization expenses were $37 million in 2019 compared to $67 million in 2018, related to the transformation program which was launched in 2017. This program encompasses the integration of Novae which commenced in the fourth quarter of 2017, the realignment of our accident and health business, together with other initiatives designed to increase efficiency and enhance profitability, while delivering a customer-centric operating model. These expenses were not included in operating income.
Amortization of Value of Business AcquiredFINANCIAL MEASURES
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.
VOBA is amortized over its economic useful life and this expense is included in amortization of value of business acquired in the consolidated statement of operations.Interest in Income (Loss) of Equity Method Investments
Interest in income (loss) of equity method investments represents our share of income (loss) related to investments where we have significant influence over the operating and financial policies of the investee.
Interest in income of equity method investments was $10 million in 2019 compared to $1 million in 2018.
Financial Measures
We believe that the following financial indicators are important in evaluating performance and measuring the overall growth in value generated for common shareholders:
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| | Year ended and at December 31, | 2019 |
| | 2018 |
| | 2017 |
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| | Return on average common equity
| 6.3 | % | | — | % | | (8.6 | %) | |
| | Operating return on average common equity | 4.7 | % | | 3.6 | % | | (5.3 | %) | |
| | Ex-PGAAP operating return on average common equity | 5.2 | % | | 4.7 | % | | (4.9 | %) | |
| | Book value per diluted common share(1) | $ | 55.79 |
| | $ | 49.93 |
| | $ | 53.88 |
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| | Cash dividends declared per common share | $ | 1.61 |
| | $ | 1.57 |
| | $ | 1.53 |
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| | Increase (decrease) in book value per diluted common share adjusted for dividends | $ | 7.47 |
| | $ | (2.38 | ) | | $ | (2.86 | ) | |
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| Year ended and at December 31, | 2020 | | 2019 | | 2018 | |
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| Return on average common equity(1) | (3.2 | %) | | 6.3 | % | | — | % | |
| Operating return on average common equity(2) | (3.7 | %) | | 4.7 | % | | 3.6 | % | |
| Book value per diluted common share(3) | $ | 55.09 | | | $ | 55.79 | | | $ | 49.93 | | |
| Cash dividends declared per common share | $ | 1.65 | | | $ | 1.61 | | | $ | 1.57 | | |
| Increase (decrease) in book value per diluted common share adjusted for dividends | $ | 0.95 | | | $ | 7.47 | | | $ | (2.38) | | |
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(1) Return on average common equity ("ROACE") is calculated by dividing net income (loss) available (attributable) to common shareholders for the year by the average common shareholders' equity determined using the common shareholders' equity balances at the beginning and end of the year.
(1)(2) Operating return on average common equity ("operating ROACE"), a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to the most comparable GAAP financial measure, ROACE, and a discussion of the rationale for its presentation is provided in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures Reconciliation'.
(3) Book value per diluted common share represents common shareholders’ equity divided by the number of diluted common share outstanding, determined using the treasury stock method. Cash settledCash-settled restricted stock units are excludedexcluded.
Return on Average Common Equity
Our objective is to generate superior returns on capital that appropriately reward 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 challenge the ability to achieve a profitability target in any specific period.
ROACE reflects the impact of net income (loss) available (attributable) to common shareholders, including net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
The decrease inROACE increased in 20192020 compared to 2018,2019, was primarily attributable todriven by the investment gains in the year, andunderwriting loss, a decrease in net investment income, and the foreign exchange losses, partially offset by an increase in net investment gains, the income tax benefit, and decreases in corporate expenses, reorganization expenses, and the amortization of VOBAvalue of business acquired ("VOBA") associated with the acquisition of Novae, together with an increase in net investment income and a decrease in reorganization expenses, partially offset by a decrease in underwriting income, an increase in income tax expense, an increase in corporate expenses, and a decrease in foreign exchange gains.Novae.
Operating ROACE excludes the impact of net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
Operating
The decrease in operating ROACE increased in 20192020, compared to 2018,2019, was primarily attributable todriven by the underwriting loss and a decrease in investment income, partially offset by the income tax benefit, and decreases in corporate expenses and the amortization of VOBA associated with the acquisition of Novae, together with an increase in net investment income, partially offset by a decrease in underwriting income, an increase in in income tax expense, and an increase in corporate expenses.Novae.
Ex-PGAAP operating ROACE excludes the impact of amortization of VOBA and intangible assets, net of tax, and amortization of acquisition costs, net of tax, associated with Novae's balance sheet at October 2, 2017. Ex-PGAAP operating ROACE for the years ending 2019 and 2018 was 5.2% and 4.7%, respectively.
Book Value per Diluted Common ShareUnderwriting Expenses
We consider book value per diluted common share to be an appropriate measure of returns to common shareholders, as we believe growth in book value on a diluted basis will ultimately translate into appreciation of our stock price.
In 2019, book value per diluted common share increased by 12%, primarily driven by net income generated and net unrealized investment gains reported in other comprehensive income, partially offset by common dividends declared. The net unrealized investment gains in 2019 reflected a decrease in interest rates and a tightening of credit spreads which positively impacted the market values of fixed maturities.
In 2018, book value per diluted common share decreased by 7%, primarily driven by an increase in net unrealized investment losses reported in other comprehensive income and common dividends declared. The net unrealized investment losses in 2018 reflected a widening of credit spreads which negatively impacted the market values of fixed maturities.
Cash Dividends Declared per Common Share
We believe in returning excess capital to shareholders by way of dividends. Accordingly, dividend policy is an integral partcomponents of the value we create for shareholders. Cumulatively, strong earnings have permitted our Board of Directors to approve sixteen successive annual increases in quarterly common share dividends.
Book Value per Diluted Common Share Adjusted for Dividends
Taken together, we believe that growth in book value per diluted common share and common share dividends declared represent the total value created for common shareholders. As companies in the insurance industry have differing dividend payout policies, we believe that investors use the book value per diluted common share adjusted for dividends metric to measure comparable performance across the industry.
In 2019, book value per diluted common share adjusted for dividends increased by $7.47 or 15%, due to net income generated and net unrealized investment gains reported in other comprehensive income.
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.
UNDERWRITING RESULTS – CONSOLIDATED
Underwriting income is a pre-tax measure of underwriting profitability that takes into account net premiums earned and other insurance related income (loss) as revenues and net losses and loss expenses, acquisition costs and underwriting-related general and administrative expenses as expenses. Underwriting resultscombined ratio were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Years ended December 31, | 2020 | | % Point
Change | | 2019 | | % Point
Change | | 2018 | |
| | | | | | | | | | | |
| Current accident year loss ratio excluding catastrophe and weather-related losses | 57.7 | % | | (2.9) | | | 60.6 | % | | (1.1) | | | 61.7 | % | |
| Catastrophe and weather-related losses ratio | 17.7 | % | | 10.2 | | | 7.5 | % | | (1.5) | | | 9.0 | % | |
| Current accident year loss ratio | 75.4 | % | | 7.3 | | | 68.1 | % | | (2.6) | | | 70.7 | % | |
| Prior year reserve development ratio | (0.3 | %) | | 1.4 | | | (1.7 | %) | | 2.4 | | | (4.1 | %) | |
| Net losses and loss expenses ratio | 75.1 | % | | 8.7 | | | 66.4 | % | | (0.2) | | | 66.6 | % | |
| Acquisition cost ratio | 21.3 | % | | (1.0) | | | 22.3 | % | | 2.1 | | | 20.2 | % | |
| General and administrative expense ratio(1) | 13.2 | % | | (0.7) | | | 13.9 | % | | 0.8 | | | 13.1 | % | |
| Combined ratio | 109.6 | % | | 7.0 | | | 102.6 | % | | 2.7 | | | 99.9 | % | |
| | | | | | | | | | | |
(1)The general and administration expense ratio included corporate expenses not allocated to underwriting segments of 2.3%, 2.8% and 2.3% for 2020, 2019 and 2018, respectively. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Expenses (Revenues), Net' for additional information.
Refer to 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Results by Segment' for further details on underwriting expenses.
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Years ended December 31, | | 2019 | | % Change | | 2018 | | % Change | | 2017 | |
| | | | | | | | | | | | | |
| | Revenues: | | | | | | | | | | | |
| | Gross premiums written | | $ | 6,898,858 |
| | —% | | $ | 6,910,065 |
| | 24% | | $ | 5,556,273 |
| |
| | Net premiums written | | 4,489,615 |
| | (4%) | | 4,658,962 |
| | 16% | | 4,027,143 |
| |
| | Net premiums earned | | 4,587,178 |
| | (4%) | | 4,791,495 |
| | 15% | | 4,148,760 |
| |
| | Other insurance related income (losses) | | 16,444 |
| | 55% | | 10,622 |
| | nm | | (1,240 | ) | |
| | | | | | | | | | | | | |
| | Expenses: | | | | | | | | | | | |
| | Current accident year net losses and loss expenses | | (3,123,698 | ) | | | | (3,389,949 | ) | | | | (3,487,826 | ) | |
| | Prior year reserve development | | 78,900 |
| | | | 199,662 |
| | | | 200,054 |
| |
| | Acquisition costs | | (1,024,582 | ) | | | | (968,835 | ) | | | | (823,591 | ) | |
| | Underwriting-related general and administrative expenses(1) | | (505,735 | ) | | | | (519,168 | ) | | | | (449,483 | ) | |
| | Underwriting income (loss)(2) | | $ | 28,507 |
| | nm | | $ | 123,827 |
| | nm | | $ | (413,326 | ) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | General and administrative expenses(1) | | $ | 634,831 |
| | | | $ | 627,389 |
| | | | $ | 579,428 |
| |
| | Income (loss) before income taxes and interest in income (loss) of equity method investments(2) | | $ | 337,447 |
| | | | $ | 12,542 |
| | | | $ | (368,109 | ) | |
| | | | | | | | | | | | | |
RESULTS BY SEGMENT
Insurance Segment
Results for the insurance segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
| | | | | | | | | | | |
| Revenues: | | | | | | | | | | |
| Gross premiums written | $ | 4,018,399 | | | 9% | | $ | 3,675,931 | | | (3%) | | $ | 3,797,592 | | |
| Net premiums written | 2,357,501 | | | 7% | | 2,209,155 | | | (5%) | | 2,324,747 | | |
| Net premiums earned | 2,299,038 | | | 5% | | 2,190,084 | | | (7%) | | 2,362,606 | | |
| Other insurance related income | 2,647 | | | (7%) | | 2,858 | | | (17%) | | 3,460 | | |
| | | | | | | | | | | |
| Expenses: | | | | | | | | | | |
| Current accident year net losses and loss expenses | (1,705,951) | | | | | (1,331,981) | | | | | (1,587,129) | | |
| Prior year reserve development | 8,937 | | | | | 53,302 | | | | | 92,806 | | |
| Acquisition costs | (461,533) | | | | | (468,281) | | | | | (399,193) | | |
| Underwriting-related general and administrative expenses | (378,839) | | | | | (401,963) | | | | | (395,252) | | |
| | | | | | | | | | | |
| Underwriting income (loss) | $ | (235,701) | | | | | $ | 44,019 | | | | | $ | 77,298 | | |
| | | | | | | | | | | |
| Ratios: | | | % Point
Change | | | | % Point
Change | | | |
| Current accident year loss ratio excluding catastrophe and weather-related losses | 55.1 | % | | (1.9) | | 57.0 | % | | (1.5) | | 58.5 | % | |
| Catastrophe and weather-related losses ratio | 19.1 | % | | 15.3 | | 3.8 | % | | (4.9) | | 8.7 | % | |
| Current accident year loss ratio | 74.2 | % | | 13.4 | | 60.8 | % | | (6.4) | | 67.2 | % | |
| Prior year reserve development ratio | (0.4 | %) | | 2.0 | | (2.4 | %) | | 1.6 | | (4.0 | %) | |
| Net losses and loss expenses ratio | 73.8 | % | | 15.4 | | 58.4 | % | | (4.8) | | 63.2 | % | |
| Acquisition cost ratio | 20.1 | % | | (1.3) | | 21.4 | % | | 4.5 | | 16.9 | % | |
| Underwriting-related general and administrative expense ratio | 16.5 | % | | (1.8) | | 18.3 | % | | 1.5 | | 16.8 | % | |
| Combined ratio | 110.4 | % | | 12.3 | | 98.1 | % | | 1.2 | | 96.9 | % | |
| | | | | | | | | | | |
Gross Premiums Written
Gross premiums written by line of business were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | % Change | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | | 2019 to 2020 | | 2018 to 2019 | |
| | | | | | | | | | | | | | | | | |
| Property | $ | 996,650 | | | 26 | % | | $ | 943,760 | | | 26 | % | | $ | 1,192,807 | | | 31 | % | | 6 | % | | (21 | %) | |
| Marine | 419,405 | | | 10 | % | | 411,309 | | | 11 | % | | 367,047 | | | 10 | % | | 2 | % | | 12 | % | |
| Terrorism | 55,781 | | | 1 | % | | 60,120 | | | 2 | % | | 61,663 | | | 2 | % | | (7 | %) | | (3 | %) | |
| Aviation | 87,671 | | | 2 | % | | 74,670 | | | 2 | % | | 89,673 | | | 2 | % | | 17 | % | | (17 | %) | |
| Credit and political risk | 156,414 | | | 4 | % | | 154,999 | | | 4 | % | | 190,433 | | | 5 | % | | 1 | % | | (19 | %) | |
| Professional lines | 1,378,503 | | | 34 | % | | 1,177,274 | | | 32 | % | | 1,115,213 | | | 29 | % | | 17 | % | | 6 | % | |
| Liability | 763,155 | | | 19 | % | | 699,876 | | | 19 | % | | 553,461 | | | 15 | % | | 9 | % | | 26 | % | |
| Accident and health | 158,585 | | | 4 | % | | 144,103 | | | 4 | % | | 210,502 | | | 6 | % | | 10 | % | | (32 | %) | |
| Discontinued lines - Novae | 2,235 | | | — | % | | 9,820 | | | — | % | | 16,793 | | | — | % | | nm | | (42 | %) | |
| Total | $ | 4,018,399 | | | 100 | % | | $ | 3,675,931 | | | 100 | % | | $ | 3,797,592 | | | 100 | % | | 9 | % | | (3 | %) | |
| | | | | | | | | | | | | | | | | |
nm – not meaningful
| |
(1) | Underwriting-related general and administrative expenses is a non-GAAP financial measure as defined
Gross premiums written in 2020 increased by $342 million, or 9%, compared to 2019. The increase was primarily attributable to professional lines, liability, property, accident and health, and aviation lines.
The increases in professional lines, liability, and property lines were due to new business and favorable rate changes. The increase in accident and health lines was due to new business. The increase in aviation lines was due to timing differences.
Ceded Premiums Written
Ceded premiums written in 2020 was $1,661 million, or 41% of gross premiums written, compared to $1,467 million, or 40% in 2019. The increase in ceded premiums written of $194 million, or 13% was primarily driven by increases in professional lines, property, liability, and marine lines, partially offset by decreases in credit and political risk, and aviation lines.
Net Premiums Earned Net premiums earned by line of business were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % Change | | | Year ended December 31, | 2020 | | 2019 | | 2018 | | 2019 to 2020 | | 2018 to 2019 | | | | | | | | | | | | | | | | | | | | | Property | $ | 605,650 | | | 26 | % | | $ | 633,550 | | | 29 | % | | $ | 796,945 | | | 34 | % | | (4 | %) | | (21 | %) | | | Marine | 293,746 | | | 13 | % | | 281,764 | | | 13 | % | | 300,944 | | | 13 | % | | 4 | % | | (6 | %) | | | Terrorism | 47,378 | | | 2 | % | | 47,345 | | | 2 | % | | 49,150 | | | 2 | % | | — | % | | (4 | %) | | | Aviation | 70,910 | | | 3 | % | | 55,028 | | | 3 | % | | 74,203 | | | 3 | % | | 29 | % | | (26 | %) | | | Credit and political risk | 105,869 | | | 5 | % | | 91,698 | | | 4 | % | | 102,825 | | | 4 | % | | 15 | % | | (11 | %) | | | Professional lines | 715,276 | | | 31 | % | | 661,250 | | | 30 | % | | 570,241 | | | 24 | % | | 8 | % | | 16 | % | | | Liability | 313,291 | | | 14 | % | | 264,667 | | | 12 | % | | 229,373 | | | 10 | % | | 18 | % | | 15 | % | | | Accident and health | 143,723 | | | 6 | % | | 144,499 | | | 7 | % | | 207,777 | | | 9 | % | | (1 | %) | | (30 | %) | | | Discontinued lines - Novae | 3,195 | | | — | % | | 10,283 | | | — | % | | 31,148 | | | 1 | % | | (69 | %) | | (67 | %) | | | Total | $ | 2,299,038 | | | 100 | % | | $ | 2,190,084 | | | 100 | % | | $ | 2,362,606 | | | 100 | % | | 5 | % | | (7 | %) | | | | | | | | | | | | | | | | | | | |
Net premiums earned in 2020 increased by $109 million, or 5%, compared to 2019. The increase was primarily driven by increases in gross premiums earned in professional lines, liability, marine, and credit and political risk lines, together with decreases in ceded premiums earned in property and aviation lines, partially offset by increases in ceded premiums earned in professional lines and liability lines, and a decrease in gross premiums earned in property lines.
Loss Ratio The components of the loss ratio were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year ended December 31, | 2020 | | % Point
Change | | 2019 | | % Point
Change | | 2018 | | | | | | | | | | | | | | | Current accident year loss ratio | 74.2 | % | | 13.4 | | | 60.8 | % | | (6.4) | | | 67.2 | % | | | Prior year reserve development ratio | (0.4 | %) | | 2.0 | | | (2.4 | %) | | 1.6 | | | (4.0 | %) | | | Loss ratio | 73.8 | % | | 15.4 | | | 58.4 | % | | (4.8) | | | 63.2 | % | | | | | | | | | | | | | |
Current Accident Year Loss Ratio
The current accident year loss ratio increased to 74.2% in 2020 from 60.8% in 2019. The increase in the current accident year loss ratio was impacted by a higher level of catastrophe and weather-related losses. During 2020, catastrophe and weather-related losses, net of reinstatement premiums, were $443 million, or 19.1 points, primarily attributable to the COVID-19 pandemic, Hurricanes Laura, Sally, Zeta and Delta, and other weather-related events. During 2020, catastrophe and weather-related losses included $204 million, or 8.8 points, attributable to the COVID-19 pandemic largely associated with property-related coverages, but also included event cancellation coverages. Comparatively, in 2019, catastrophe and weather-related losses were $84 million, or 3.8 points, primarily attributable to Hurricanes Dorian, and other weather-related events.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 55.1% in 2020 from 57.0% in 2019. The decrease was principally due to improved loss experience in property, aviation, marine, and credit and political risk lines, and the impact of favorable pricing over loss trends, partially offset by changes in business mix.
Prior Year Reserve Development
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for details on the reserve classes, the expected claim tails, and prior year development.
Acquisition Cost Ratio
The acquisition cost ratio decreased to 20.1% in 2020 from 21.4% in 2019, associated with the acquisition of Novae. At the acquisition date, the allocation of the purchase price to the assets acquired and liabilities assumed based on estimated fair values at that date, resulted in the write-off of the deferred acquisition cost asset on Novae's balance sheet as the value of policies in-force on that date are considered within VOBA. Consequently, the absence of $1 million and $12 million of acquisition expense in 2020 and 2019, respectively, did not significantly benefit the acquisition cost ratio in 2020 and benefited the acquisition cost ratio by 0.6 points in 2019. Adjusting the acquisition cost ratio for these amounts, the acquisition cost ratio decreased by 1.9 points in 2020, compared to 2019, principally related to changes in business mix in property lines and reflecting the increase in professional lines and liability lines written in recent periods.
Underwriting-Related General and Administrative Expense Ratio
The underwriting-related general and administrative expense ratio decreased to 16.5% in 2020 from 18.3% in 2019, mainly driven by decreases in the allocation of corporate costs to the segment, travel and entertainment expenses, and professional fees, together with an increase in Item 10(e) of SEC Regulation S-K. The reconciliation to general and administrative expenses, the most comparable GAAP financial measure, is provided in 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations'. |
| |
(2) | Consolidated underwriting income (loss) is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to net income (loss), the most comparable GAAP financial measure, is provided in 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operation'.
|
Underwriting Revenues
Gross and net premiums writtenearned, partially offset by an increase in personnel costs.
Reinsurance Segment
Results for the reinsurance segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
| | | | | | | | | | | |
| Revenues: | | | | | | | | | | |
| Gross premiums written | $ | 2,808,539 | | | (13%) | | $ | 3,222,927 | | | 4% | | $ | 3,112,473 | | |
| Net premiums written | 1,978,908 | | | (13%) | | 2,280,460 | | | (2%) | | 2,334,215 | | |
| Net premiums earned | 2,072,271 | | | (14%) | | 2,397,094 | | | (1%) | | 2,428,889 | | |
| Other insurance related income (loss) | (10,736) | | | nm | | 13,586 | | | nm | | 7,162 | | |
| | | | | | | | | | | |
| Expenses: | | | | | | | | | | |
| Current accident year net losses and loss expenses | (1,591,210) | | | | | (1,791,717) | | | | | (1,802,820) | | |
| Prior year reserve development | 6,972 | | | | | 25,598 | | | | | 106,856 | | |
| Acquisition costs | (467,984) | | | | | (556,301) | | | | | (569,642) | | |
| Underwriting-related general and administrative expenses | (99,129) | | | | | (103,772) | | | | | (123,916) | | |
| | | | | | | | | | | |
| Underwriting income (loss) | $ | (89,816) | | | | | $ | (15,512) | | | | | $ | 46,529 | | |
| | | | | | | | | | | |
| Ratios: | | | % Point
Change | | | | % Point
Change | | | |
| Current accident year loss ratio excluding catastrophe and weather-related losses | 60.6 | % | | (3.4) | | 64.0 | % | | (0.8) | | 64.8 | % | |
| Catastrophe and weather-related losses ratio | 16.2 | % | | 5.5 | | 10.7 | % | | 1.3 | | 9.4 | % | |
| Current accident year loss ratio | 76.8 | % | | 2.1 | | 74.7 | % | | 0.5 | | 74.2 | % | |
| Prior year reserve development ratio | (0.4 | %) | | 0.6 | | (1.0 | %) | | 3.4 | | (4.4 | %) | |
| Net losses and loss expenses ratio | 76.4 | % | | 2.7 | | 73.7 | % | | 3.9 | | 69.8 | % | |
| Acquisition cost ratio | 22.6 | % | | (0.6) | | 23.2 | % | | (0.3) | | 23.5 | % | |
| Underwriting-related general and administrative expense ratio | 4.8 | % | | 0.5 | | 4.3 | % | | (0.8) | | 5.1 | % | |
| Combined ratio | 103.8 | % | | 2.6 | | 101.2 | % | | 2.8 | | 98.4 | % | |
| | | | | | | | | | | |
nm – not meaningful
|
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | Gross premiums written | |
| | Years ended December 31, | 2019 | | % Change | | 2018 | | % Change | | 2017 | |
| | | | | | | | | | | | |
| | Insurance | $ | 3,675,931 |
| | (3%) | | $ | 3,797,592 |
| | 35% | | $ | 2,814,918 |
| |
| | Reinsurance | 3,222,927 |
| | 4% | | 3,112,473 |
| | 14% | | 2,741,355 |
| |
| | Total | $ | 6,898,858 |
| | nm | | $ | 6,910,065 |
| | 24% | | $ | 5,556,273 |
| |
| | | | | | | | | | | | | | |
| | % ceded | | | | | | | | | | | | |
| | Insurance | 40 | % | | 1 |
| pts | | 39 | % | | 2 |
| pts | | 37 | % | |
| | Reinsurance | 29 | % | | 4 |
| pts | | 25 | % | | 7 |
| pts | | 18 | % | |
| | Total | 35 | % | | 2 |
| pts | | 33 | % | | 5 |
| pts | | 28 | % | |
| | | | | | | | | | | | | | |
| | | Net premiums written | |
| | | 2019 | | % Change | | 2018 | | % Change | | 2017 | |
| | | | | | | | | | | | |
| | Insurance | $ | 2,209,155 |
| | (5%) | | $ | 2,324,747 |
| | 31% | | $ | 1,775,825 |
| |
| | Reinsurance | 2,280,460 |
| | (2%) | | 2,334,215 |
| | 4% | | 2,251,318 |
| |
| | Total | $ | 4,489,615 |
| | (4%) | | $ | 4,658,962 |
| | 16% | | $ | 4,027,143 |
| |
| | | | | | | | | | | | |
Gross Premiums Written:
Gross premiums written by line of business were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | % Change | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | | 2019 to 2020 | | 2018 to 2019 | |
| | | | | | | | | | | | | | | | | |
| Catastrophe | $ | 551,143 | | | 19 | % | | $ | 718,514 | | | 24 | % | | $ | 536,243 | | | 17 | % | | (23 | %) | | 34 | % | |
| Property | 245,744 | | | 9 | % | | 304,166 | | | 9 | % | | 342,789 | | | 11 | % | | (19 | %) | | (11 | %) | |
| Credit and surety | 232,699 | | | 8 | % | | 269,733 | | | 8 | % | | 329,126 | | | 11 | % | | (14 | %) | | (18 | %) | |
| Professional lines | 312,935 | | | 11 | % | | 261,072 | | | 8 | % | | 268,181 | | | 9 | % | | 20 | % | | (3 | %) | |
| Motor | 304,439 | | | 11 | % | | 334,887 | | | 10 | % | | 499,727 | | | 16 | % | | (9 | %) | | (33 | %) | |
| Liability | 618,913 | | | 22 | % | | 546,479 | | | 17 | % | | 438,767 | | | 14 | % | | 13 | % | | 25 | % | |
| Engineering | 25,886 | | | 1 | % | | 57,028 | | | 2 | % | | 60,358 | | | 2 | % | | (55 | %) | | (6 | %) | |
| Agriculture | 70,500 | | | 3 | % | | 224,961 | | | 7 | % | | 226,246 | | | 7 | % | | (69 | %) | | (1 | %) | |
| Marine and aviation | 73,103 | | | 3 | % | | 74,781 | | | 2 | % | | 44,741 | | | 1 | % | | (2 | %) | | 67 | % | |
| Accident and health | 371,828 | | | 13 | % | | 432,670 | | | 13 | % | | 365,660 | | | 12 | % | | (14 | %) | | 18 | % | |
| Discontinued lines - Novae | 1,349 | | | — | % | | (1,364) | | | — | % | | 635 | | | — | % | | nm | | nm | |
| Total | $ | 2,808,539 | | | 100 | % | | $ | 3,222,927 | | | 100 | % | | $ | 3,112,473 | | | 100 | % | | (13 | %) | | 4 | % | |
| | | | | | | | | | | | | | | | | |
nm – not meaningful
2019 versus 2018:
Gross premiums written in 2019 2020 decreased by $11$414 million, or 0.2% (increased $8813%,($401 million, or 1%12% on a constant currency basis(1))basis), compared to 2018 due2019. The decrease was primarily attributable to a decrease in the insurance segment, catastrophe, agriculture, accident and health, property, credit and surety, engineering, and motor lines, partially offset by an increaseincreases in the reinsurance segment.liability and professional lines.
The decreases in catastrophe, agriculture, and property lines were driven by non-renewals and decreased line sizes associated with the repositioning of the portfolio. The decrease in accident and health lines was due to non-renewals following the insurance segment'sdecision to exit the Middle East business. The decrease in credit and surety lines was attributable to reduced business opportunities due to the COVID-19 pandemic. The decrease in engineering lines was due to non-renewals following the decision to exit this line of business. The decrease in motor lines was largely attributable to premium adjustments. The increases in liability and professional lines were driven by premium adjustments, and favorable market conditions associated with renewals and new business.
Ceded Premiums Written
Ceded premiums written in 2020 was $830 million, or 30%, of gross premiums written, of $122compared to $942 million, or 3% ($7529%, in 2019. The decrease in ceded premiums written of $113 million, or 2% on a constant currency basis)12%, was primarily attributable to driven by decreases in property,catastrophe, accident and health, and credit and political risksurety, and agriculture lines, partially offset by increases in liability, professional lines, and marinemotor lines.
The decrease in catastrophe lines was attributable to decreases in premiums ceded to strategic partners and a non-renewal of a catastrophe bond. The decrease in accident and health lines was attributable to the restructuring of an existing quota share retrocessional treaty. The decrease in credit and surety lines was attributable to a decrease in premiums ceded to a quota share retrocessional treaty and the restructuring of existing quota share retrocessional treaties. The decrease in agriculture lines was attributable to a non-renewal of a large quota share retrocessional treaty.
The increases in liability and professional lines were attributable to an increase in premiums ceded to a new quota share retrocessional treaty, partially offset by the restructuring of an existing quota share retrocessional treaty. The increase in the reinsurance segment's grossmotor lines was attributable to an increase in premiums writtenceded to a new quota share retrocessional treaty.
Net Premiums Earned
Net premiums earned by line of $110business were as follows:
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| | | | | | | | | | | | | | % Change | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | | 2019 to 2020 | | 2018 to 2019 | |
| | | | | | | | | | | | | | | | | |
| Catastrophe | $ | 244,934 | | | 12 | % | | $ | 267,591 | | | 10 | % | | $ | 250,016 | | | 12 | % | | (8 | %) | | 7 | % | |
| Property | 256,244 | | | 12 | % | | 311,625 | | | 13 | % | | 317,038 | | | 13 | % | | (18 | %) | | (2 | %) | |
| Credit and surety | 187,721 | | | 9 | % | | 208,717 | | | 9 | % | | 250,276 | | | 10 | % | | (10 | %) | | (17 | %) | |
| Professional lines | 207,605 | | | 10 | % | | 206,328 | | | 9 | % | | 220,687 | | | 9 | % | | 1 | % | | (7 | %) | |
| Motor | 255,916 | | | 12 | % | | 398,565 | | | 17 | % | | 438,693 | | | 18 | % | | (36 | %) | | (9 | %) | |
| Liability | 396,906 | | | 19 | % | | 373,664 | | | 16 | % | | 363,292 | | | 15 | % | | 6 | % | | 3 | % | |
| Engineering | 60,521 | | | 3 | % | | 63,899 | | | 3 | % | | 67,932 | | | 3 | % | | (5 | %) | | (6 | %) | |
| Agriculture | 73,696 | | | 4 | % | | 188,925 | | | 8 | % | | 176,435 | | | 7 | % | | (61 | %) | | 7 | % | |
| Marine and aviation | 53,516 | | | 3 | % | | 59,209 | | | 2 | % | | 35,570 | | | 1 | % | | (10 | %) | | 66 | % | |
| Accident and health | 333,996 | | | 16 | % | | 319,619 | | | 13 | % | | 299,813 | | | 12 | % | | 4 | % | | 7 | % | |
| Discontinued lines - Novae | 1,216 | | | — | % | | (1,048) | | | — | % | | 9,137 | | | — | % | | nm | | nm | |
| Total | $ | 2,072,271 | | | 100 | % | | $ | 2,397,094 | | | 100 | % | | $ | 2,428,889 | | | 100 | % | | (14 | %) | | (1 | %) | |
| | | | | | | | | | | | | | | | | |
nm – not meaningful
Net premiums earned in 2020 decreased by $325 million, or 4%14%, ($163294 million or 5%12% on a constant currency basis), compared to 2019. The decrease was primarily attributable to increasesdriven by decreases in gross premiums earned in agriculture, motor, catastrophe, liability, accidentproperty, and health,credit and marine and othersurety lines, together with an increase in ceded premiums earned in liability lines, partially offset by decreases in motor, credit & surety,ceded premiums earned in catastrophe and propertyagriculture lines, and an increase in gross premiums earned in liability lines.
Other Insurance Related Income (Loss)
Other insurance related loss was $11 million in 2020, compared to other insurance related income of $14 million in 2019. The decrease of $24 million was primarily due to the recognition of a full limit loss of $10 million associated with the WHO pandemic risk-linked swap and a decrease in fees associated with arrangements with strategic capital partners.
Loss Ratio
The components of the loss ratio were as follows:
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| Year ended December 31, | | 2020 | | % Point
Change | | 2019 | | % Point
Change | | 2018 | |
| | | | | | | | | | | | |
| Current accident year loss ratio | | 76.8 | % | | 2.1 | | | 74.7 | % | | 0.5 | | | 74.2 | % | |
| Prior year reserve development ratio | | (0.4 | %) | | 0.6 | | | (1.0 | %) | | 3.4 | | | (4.4 | %) | |
| Loss ratio | | 76.4 | % | | 2.7 | | | 73.7 | % | | 3.9 | | | 69.8 | % | |
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Current Accident Year Loss Ratio
The current accident year loss ratio increased to 76.8% in 2020 from 74.7% in 2019. The increase in the current accident year loss ratio was impacted by a higher level of catastrophe and weather-related losses. During 2020, catastrophe and weather-related losses, net of reinstatement premiums, were $330 million, or 16.2 points, primarily attributable to the COVID-19 pandemic, the Midwest derecho, Hurricane Laura, wildfires across the West Coast of the United States, and other weather-related events. During 2020, catastrophe and weather-related losses included $156 million, or 7.6 points, attributable to the COVID-19 pandemic largely associated with property-related coverages, but also included accident and health, and mortgage-related coverages.
Comparatively, in 2019, catastrophe and weather-related losses, net of reinstatement premiums, were $252 million or 10.7 points, primarily attributable to Japanese Typhoons Hagibis, Faxai and Tapah, Hurricane Dorian, Australia Wildfires, and other weather-related events.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 60.6% in 2020 from 64.0% in 2019. The decrease was principally due to changes in business mix and improved loss experience in agriculture and aviation lines.
Ceded Premiums Written
Prior Year Reserve Development
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for details on the reserve classes, the expected claim tails, and prior year development.
Acquisition Cost Ratio:
Ceded premiums written
The acquisition cost ratio decreased to 22.6% in 2020 from 23.2% in 2019, were $2.4 billion, or 35%principally related to changes in business mix and the impact of gross premiums written, comparedretrocessional contracts.
Underwriting-Related General and Administrative Expense Ratio
The underwriting-related general and administrative expense ratio increased to $2.3 billion, or 33%,4.8% in 2018 due to an increase2020 from 4.3% in the reinsurance segment,2019, mainly driven by decreases in net premium earned and fees associated with arrangements with strategic capital partners, partially offset by a decrease in travel and entertainment expenses.
NET INVESTMENT INCOME AND NET INVESTMENT GAINS (LOSSES)
Net Investment Income
Net investment income from our cash and investment portfolio by major asset class was as follows:
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| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
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| Fixed maturities | $ | 317,121 | | | (17%) | | $ | 384,053 | | | 8% | | $ | 356,273 | | |
| Other investments | 16,059 | | | (73%) | | 60,038 | | | 23% | | 48,959 | | |
| Equity securities | 9,328 | | | (11%) | | 10,434 | | | 4% | | 10,077 | | |
| Mortgage loans | 15,432 | | | 5% | | 14,712 | | | 8% | | 13,566 | | |
| Cash and cash equivalents | 13,582 | | | (49%) | | 26,882 | | | (2%) | | 27,566 | | |
| Short-term investments | 2,749 | | | (61%) | | 7,053 | | | (25%) | | 9,365 | | |
| Gross investment income | 374,271 | | | (26%) | | 503,172 | | | 8% | | 465,806 | | |
| Investment expense | (24,670) | | | —% | | (24,600) | | | (10%) | | (27,299) | | |
| Net investment income | $ | 349,601 | | | (27%) | | $ | 478,572 | | | 9% | | $ | 438,507 | | |
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| Pre-tax yield:(1) | | | | | | | | | | |
| Fixed maturities | 2.6 | % | | | | 3.2 | % | | | | 3.0 | % | |
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(1)Pre-tax yield is calculated by dividing net investment income by the insurance segment.average month-end amortized cost balances.
2020 versus 2019: Net investment income in 2020 decreased by $67 million or 17%, compared to 2019 due to a decrease in yields and a smaller allocation of the portfolio to fixed maturities.
Other Investments
Other investments include hedge funds, direct lending funds, private equity funds, real estate funds, other privately held investments, an indirect investment in CLO-Equities and overseas deposits. These investments are recorded at fair value, with changes in fair value and income distributions reported in net investment income. Consequently, the pre-tax return on other investments may vary materially year over year, particularly during volatile equity and credit markets.
Net investment income from other investments was as follows:
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| Year ended December 31, | 2020 | | 2019 | | 2018 | |
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| Hedge, direct lending, private equity and real estate funds | $ | 16,267 | | | $ | 42,186 | | | $ | 40,295 | | |
| Other privately held investments | 5,809 | | | 18,050 | | | 2,036 | | |
| CLO-Equities | (6,017) | | | (198) | | | 6,628 | | |
| Total net investment income from other investments(1) | $ | 16,059 | | | $ | 60,038 | | | $ | 48,959 | | |
| | | | | | | |
| Pre-tax return on other investments(2) | 2.2 | % | | 8.5 | % | | 6.4 | % | |
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(1)Excluding overseas deposits.
(2)The increasepre-tax return on other investments is calculated by dividing total net investment income from other investments by the average month-end fair value balances held for the periods indicated, excluding overseas deposits.
2020 versus 2019: Pre-tax return on other investments in 2020 decreased to 2.2% compared to 8.5% in 2019. The decrease was primarily attributable to lower returns from direct lending and real estate funds and a realized gain of $13 million associated with the sale of a privately held investment in 2019.
Net Investment Gains (Losses)
Fixed maturities classified as available for sale are reported at fair value. Realized gains (losses) on fixed maturities are reported in net investment gains (losses) when these securities are sold or impaired.
Equity securities are reported at fair value. Realized gains (losses) on equity securities are also reported in net investment gains (losses) when securities are sold or impaired. In addition, changes in the reinsurance segment ceded premiums writtenfair values of $164 million or 21% was primarily driven by increasesequity securities are reported in catastrophe, liability, credit and surety, and accident and health lines, partially offset by decreases in property, and agriculture lines.net investment gains (losses).
The decreaseChanges in the insurance segment ceded premiums writtenfair value of $6investment derivatives, mainly foreign exchange forward contracts and exchange traded interest rate swaps, are recorded in net investment gains (losses).
Net investment gains (losses) were as follows:
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| Year ended December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| On sale of investments: | | | | | | |
| Fixed maturities and short-term investments | $ | 92,119 | | | $ | 36,645 | | | $ | (96,086) | | |
| Equity securities | 19,808 | | | 3,126 | | | 17,046 | | |
| | 111,927 | | | 39,771 | | | (79,040) | | |
| Allowance for expected credit losses | (323) | | | — | | | — | | |
| Impairment losses (1) | (1,486) | | | — | | | — | | |
| OTTI losses | — | | | (6,984) | | | (9,733) | | |
| Change in fair value of investment derivatives | (2,434) | | | (1,823) | | | 5,445 | | |
| Net unrealized gains (losses) on equity securities | 21,449 | | | 60,269 | | | (66,890) | | |
| Net investment gains (losses) | $ | 129,133 | | | $ | 91,233 | | | $ | (150,218) | | |
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(1) Related to instances where the Company intends to sell securities, or it is more likely than not that the Company will be required to sell securities before their anticipated recovery.
2020 versus 2019: Net investment gains in 2020 were $129 million compared to net investment gains of $91 million in 2019. Net investment gains reported in 2020 mainly reflected net realized gains on the sale of U.S Government, agency RMBS and exchange traded funds and net unrealized gains on equity securities. Net investment gains reported in 2019 mainly reflected net unrealized gains on equity securities and net realized gains on the sale of U.S. government and agency RMBS.
On Sale of Investments
Generally, sales of individual securities occur when there are changes in the relative value, credit quality, or 0.4%duration of a particular issue. We may also sell securities to re-balance our investment portfolio in order to change exposure to particular asset classes or sectors.
Impairment and OTTI Losses
The impairment losses (refer to 'Critical Accounting Estimates – Impairment losses' for further details) recognized in net income by asset class were as follows:
2020 versus 2019: Impairment losses in 2020 were $1 million compared to OTTI losses of $7 million in 2019. The impairment losses in 2020 were principally due to impairments of non-investment grade corporate debt securities that we intend to sell or more likely than not will be required to sell. OTTI losses in 2019 included impairments on non-U.S. denominated securities due to foreign exchange losses associated with the strengthening of the U.S. dollar against the pound sterling and the euro and impairments on non-investment grade corporate debt securities that had declined significantly in value.
Change in Fair Value of Investment Derivatives
From time to time, we economically hedge foreign exchange exposure and interest rate risk with derivative contracts.
During 2020, foreign exchange hedges resulted in $2 million of net losses which primarily related to securities denominated in euro which experienced volatility during 2020.
During 2019, foreign exchange hedges resulted in $2 million of net gains which primarily related to securities denominated in euro which experienced volatility during 2019. We also recorded net losses of $4 million related to interest rate swaps.
Our derivative instruments are not designated as hedges under current accounting guidance, therefore, net unrealized gains (losses) on the hedged securities were recorded in accumulated other comprehensive income in the statement of changes in shareholders’ equity.
Total Return
Our investment strategy is to take a long-term view by actively managing our investment portfolio to maximize total return within certain guidelines and constraints. In assessing returns under this approach, we include net investment income, net investment gains (losses), the change in unrealized gains (losses) on fixed maturities, and interest in income (loss) of equity method investments generated by our investment portfolio.
Total return on cash and investments was attributable to property lines, partially offset by an increase in liability lines.as follows:
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| | | | | | | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Net investment income | $ | 349,601 | | | $ | 478,572 | | | $ | 438,507 | | |
| Net investments gains (losses) | 129,133 | | | 91,233 | | | (150,218) | | |
| Change in net unrealized gains (losses) on fixed maturities(1) | 269,937 | | | 385,364 | | | (191,529) | | |
| Interest in income (loss) of equity method investments | (3,612) | | | 9,718 | | | 993 | | |
| Total | $ | 745,059 | | | $ | 964,887 | | | $ | 97,753 | | |
| | | | | | | |
| Average cash and investments(2) | $ | 15,562,097 | | | $ | 15,322,688 | | | $ | 15,361,287 | | |
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| Total return on average cash and investments, pre-tax: | | | | | | |
| Including investment related foreign exchange movements | 4.8 | % | | 6.3 | % | | 0.6 | % | |
| Excluding investment related foreign exchange movements(3) | 4.4 | % | | 6.1 | % | | 0.9 | % | |
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(1) Amounts presentedChange in net unrealized gains (losses) on fixed maturities is calculated by taking net unrealized gains (losses) at period end less net unrealized gains (losses) at the prior period end.
(2)The average cash and investments balance is calculated by taking the average of the period end fair value balances.
(3)Pre-tax total return on cash and investments excluding foreign exchange rate movements is a constant currency basis are non-GAAP financial measuresmeasure as defined in Item 10(e) of SEC Regulation S-K. The constant currency basisreconciliation to pre-tax total return on cash and investments, the most comparable GAAP financial measure, included foreign exchange gains (losses) of $55 million, $25 million and $(48) million for the years ended December 31, 2020, 2019 and 2018, respectively.
OTHER EXPENSES (REVENUES), NET
The following table provides a summary of other expenses (revenues), net:
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| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
| | | | | | | | | | | |
| Corporate expenses | $ | 101,822 | | | (21%) | | $ | 129,096 | | | 19% | | $ | 108,221 | | |
| Foreign exchange losses (gains) | 81,069 | | | nm | | (12,041) | | | nm | | (29,165) | | |
| Interest expense and financing costs | 75,049 | | | 10% | | 68,107 | | | 1% | | 67,432 | | |
| Income tax expense (benefit) | (12,321) | | | nm | | 23,692 | | | nm | | (29,486) | | |
| Total | $ | 245,619 | | | | | $ | 208,854 | | | | | $ | 117,002 | | |
| | | | | | | | | | | |
nm – not meaningful
Corporate Expenses
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 decreased to 2.3% in 2020 from 2.8% in 2019.
The decrease in corporate expenses in 2020 was primarily related to decreases in information technology costs, travel and entertainment costs, personnel costs, and professional fees, partially offset by a decrease in the allocation of corporate costs to the insurance segment.
Foreign Exchange Losses (Gains)
Some of our business is written in currencies other than the U.S. dollar. Foreign exchange losses in 2020 were mainly driven by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling and the euro.
Foreign exchange gains in 2019 were mainly driven by the impact of the strengthening of the U.S. dollar on the re-measurement of net insurance-related liabilities denominated in euro, partially offset by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling.
Interest Expense and Financing Costs
Interest expense and financing costs are related to interest due on the 5.875% senior unsecured notes ("5.875% Senior Notes") issued in 2010 and repaid in June 2020, the 5.150% senior unsecured notes ("5.150% Senior Notes") issued in 2014, the 4.000% senior unsecured notes ("4.000% Senior Notes") issued in 2017, the 3.900% senior unsecured notes ("3.900% Senior Notes"), and the 4.900% fixed-rate reset junior subordinated notes ("Junior Subordinated Notes") issued in 2019.
Interest expense and financing costs increased by $7 million in 2020, compared to 2019, due to the issuance of the 3.900% Senior Notes on June 19, 2019 and the issuance of the Junior Subordinated Notes on December 10, 2019, partially offset by the repayment of the 2.650% Senior Notes on April 1, 2019 and the repayment of the 5.875% Senior Notes on June 1, 2020.
Income Tax Expense (Benefit)
Income tax expense (benefit) primarily results from income (loss) generated by our foreign operations in the U.S. and Europe. Our effective tax rate, which is calculated as income tax expense (benefit), divided by income (loss) before tax including interest in income (loss) of equity method investments, was 9.3%, 6.8%, and (217.9%) in 2020, 2019, and 2018, respectively. This effective rate can vary between years depending on the distribution of net income (loss) among tax jurisdictions, as well as other factors
The tax benefit of $12 million in 2020 was principally due to the generation of pre-tax losses in our U.K. operations.
The tax expense of $24 million in 2019 was principally due to the geographic distribution of pre-tax income with the expense being driven by pre-tax income generated in our U.S. and European operations, partially offset by pre-tax losses in our U.K. operations.
FINANCIAL MEASURES
We believe that the following financial indicators are important in evaluating performance and measuring the overall growth in value generated for common shareholders:
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| Year ended and at December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Return on average common equity(1) | (3.2 | %) | | 6.3 | % | | — | % | |
| Operating return on average common equity(2) | (3.7 | %) | | 4.7 | % | | 3.6 | % | |
| Book value per diluted common share(3) | $ | 55.09 | | | $ | 55.79 | | | $ | 49.93 | | |
| Cash dividends declared per common share | $ | 1.65 | | | $ | 1.61 | | | $ | 1.57 | | |
| Increase (decrease) in book value per diluted common share adjusted for dividends | $ | 0.95 | | | $ | 7.47 | | | $ | (2.38) | | |
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(1) Return on average common equity ("ROACE") is calculated by applyingdividing net income (loss) available (attributable) to common shareholders for the year by the average foreign exchange rate fromcommon shareholders' equity determined using the current year to prior year amounts.common shareholders' equity balances at the beginning and end of the year.
(2) Operating return on average common equity ("operating ROACE"), a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliationsreconciliation to the most comparable GAAP financial measures aremeasure, ROACE, and a discussion of the rationale for its presentation is provided in 'Management's'Management’s Discussion and Analysis of Financial Condition – Executive Summary –and Results of Operations – Non-GAAP Financial Measures Reconciliation'.
(3) Book value per diluted common share represents common shareholders’ equity divided by the number of diluted common share outstanding, determined using the treasury stock method. Cash-settled restricted stock units are excluded.
Reinsurance Agreement with Alturas Re Ltd ("Alturas")Return on Average Common Equity
In January 2019, we obtained protectionOur objective is to generate superior returns on capital that appropriately reward common shareholders for the insurancerisks we assume and reinsurance segments throughto 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 challenge the ability to achieve a reinsurance agreement with Alturas. In connection withprofitability target in any specific period.
ROACE reflects the reinsurance agreement, Alturas issued notes on December 19, 2018impact of net income (loss) available (attributable) to unrelated investors in an amount equal to the full $130 million of coverage provided under the reinsurance agreement covering a one-year period. At the time of the agreement, we concluded that we do not have a variablecommon shareholders, including net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in Alturas as the variabilityincome (loss) of equity method investments.
The decrease in results is expected ROACE in 2020 compared to be absorbed entirely2019, was primarily driven by the investors in Alturas. Accordingly, the results of Alturas are not included in the consolidated financial statements. The premium ceded to Alturas for the year ended December 31, 2019 was $78 million.
Reinsurance Agreement with Alturas
In July 2019, we obtained protection for the reinsurance segment throughunderwriting loss, a reinsurance agreement with Alturas. In connection with the reinsurance agreement, Alturas issued notes on June 28, 2019 to unrelated investors in an amount equal to the full $39 million of coverage provided under the reinsurance agreement covering a one-year period. At the time of the agreement, we concluded that we do not have a variable interest in Alturas as the variability in results is expected to be absorbed entirely by the investors in Alturas. Accordingly, the results of Alturas are not included in the consolidated financial statements. The premium ceded to Alturas for the year ended December 31, 2019 was $10 million.
2019 Reinsurance Agreement with Northshore Limited ("Northshore")
In June 2019, we obtained catastrophe protection for the insurance and reinsurance segments through a reinsurance agreement with Northshore. In connection with the reinsurance agreement, Northshore issued notes to unrelated investors in an amount equal to the full $165 million of coverage provided under the reinsurance agreement covering a four-year period. At the time of the agreement, we concluded that we do not have a variable interest in the entity, as the variability in results is expected to be absorbed entirely by the investors in Northshore. Accordingly, the results of Northshore are not included in the consolidated financial statements. The premium ceded to Northshore for the year ended December 31, 2019 was $13 million.
2018 Reinsurance Agreement with Northshore Limited
In July 2018, we obtained catastrophe protection for the insurance and reinsurance segments through a reinsurance agreement with Northshore. In connection with the reinsurance agreement, Northshore issued notes to unrelated investors in an amount equal to the full $200 million of coverage provided under the reinsurance agreement covering a three-year period. At the time of the agreement, we concluded that we do not have a variable interest in the entity, as the variability in results is expected to be absorbed entirely by the investors in Northshore. Accordingly, the results of Northshore are not included in the consolidated financial statements. The premium ceded to Northshore for the year ended December 31, 2019 was $16 million. The premium ceded to Northshore for the year ended December 31, 2018 was $17 million.
Net Premiums Earned:
Net premiums earned by segment were as follows:
|
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| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | % Change | |
| | Years ended December 31, | 2019 | | 2018 | | 2017 | | 2018 to 2019 | | 2017 to 2018 | |
| | | | | | | | | | | | | | | | | | |
| | Insurance | $ | 2,190,084 |
| | 48 | % | | $ | 2,362,606 |
| | 49 | % | | $ | 1,816,438 |
| | 44 | % | | (7 | %) | | 30 | % | |
| | Reinsurance | 2,397,094 |
| | 52 | % | | 2,428,889 |
| | 51 | % | | 2,332,322 |
| | 56 | % | | (1 | %) | | 4 | % | |
| | Total | $ | 4,587,178 |
| | 100 | % | | $ | 4,791,495 |
| | 100 | % | | $ | 4,148,760 |
| | 100 | % | | (4 | %) | | 15 | % | |
| | | | | | | | | | | | | | | | | | |
Changesdecrease in net premiums earned reflect period to period changes in net premiums writteninvestment income, and business mix, together with normal variability in premium earning patterns.
2019 versus 2018: Net premiums earned in 2019 decreased by $204 million or 4% ($156 million or 3% on a constant currency basis) compared to 2018 due to decreases in the insurance and reinsurance segments.
Net premiums earned in the insurance segment in 2019 decreased by $173 million or 7% ($138 million or 6% on a constant currency basis) compared to 2018 primarily attributable to decreases in property, accident and health, discontinued lines - Novae, marine, and aviation lines,foreign exchange losses, partially offset by increasesan increase in professional lines,net investment gains, the income tax benefit, and liability lines.decreases in corporate expenses, reorganization expenses, and the amortization of value of business acquired ("VOBA") associated with the acquisition of Novae.
Net premiums earned
The decrease in the reinsurance segmentoperating ROACE in 2019 decreased by $32 million or 1% ($18 million or 1% on a constant currency basis)2020, compared to 2018 attributable to decreases2019, was primarily driven by the underwriting loss and a decrease in credit & surety, motor lines,investment income, partially offset by increasesthe income tax benefit, and decreases in marinecorporate expenses and other, accident and health lines.the amortization of VOBA associated with the acquisition of Novae.
Other Insurance Related Income (Loss):
Other insurance related income in 2019 was $16 million compared to other insurance related income in 2018 of $11 million, an increase of $6 million, primarily related to the reinsurance segment.
Underwriting Expenses
The components of the combined ratio were as follows:
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Years ended December 31, | 2019 | | % Point Change | | 2018 | | % Point Change | | 2017 | |
| | | | | | | | | | | | |
| | Current accident year loss ratio excluding catastrophe and weather-related losses | 60.6 | % | | (1.1 | ) | | 61.7 | % | | (2.0 | ) | | 63.7 | % | |
| | Catastrophe and weather-related losses ratio | 7.5 | % | | (1.5 | ) | | 9.0 | % | | (11.4 | ) | | 20.4 | % | |
| | Current accident year loss ratio | 68.1 | % | | (2.6 | ) | | 70.7 | % | | (13.4 | ) | | 84.1 | % | |
| | Prior year reserve development ratio | (1.7 | %) | | 2.4 |
| | (4.1 | %) | | 0.8 |
| | (4.9 | %) | |
| | Net losses and loss expenses ratio | 66.4 | % | | (0.2 | ) | | 66.6 | % | | (12.6 | ) | | 79.2 | % | |
| | Acquisition cost ratio | 22.3 | % | | 2.1 |
| | 20.2 | % | | 0.3 |
| | 19.9 | % | |
| | General and administrative expense ratio(1) | 13.9 | % | | 0.8 |
| | 13.1 | % | | (0.9 | ) | | 14.0 | % | |
| | Combined ratio | 102.6 | % | | 2.7 |
| | 99.9 | % | | (13.2 | ) | | 113.1 | % | |
| | | | | | | | | | | | |
| |
(1) | The general and administration expense ratio included corporate expenses not allocated to underwriting segments of 2.8%, 2.3% and 3.1% for 2019, 2018 and 2017, respectively. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Expenses (Revenues), Net' for further details.
|
Current Accident Year Loss Ratio: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Years ended December 31, | 2020 | | % Point
Change | | 2019 | | % Point
Change | | 2018 | |
| | | | | | | | | | | |
| Current accident year loss ratio excluding catastrophe and weather-related losses | 57.7 | % | | (2.9) | | | 60.6 | % | | (1.1) | | | 61.7 | % | |
| Catastrophe and weather-related losses ratio | 17.7 | % | | 10.2 | | | 7.5 | % | | (1.5) | | | 9.0 | % | |
| Current accident year loss ratio | 75.4 | % | | 7.3 | | | 68.1 | % | | (2.6) | | | 70.7 | % | |
| Prior year reserve development ratio | (0.3 | %) | | 1.4 | | | (1.7 | %) | | 2.4 | | | (4.1 | %) | |
| Net losses and loss expenses ratio | 75.1 | % | | 8.7 | | | 66.4 | % | | (0.2) | | | 66.6 | % | |
| Acquisition cost ratio | 21.3 | % | | (1.0) | | | 22.3 | % | | 2.1 | | | 20.2 | % | |
| General and administrative expense ratio(1) | 13.2 | % | | (0.7) | | | 13.9 | % | | 0.8 | | | 13.1 | % | |
| Combined ratio | 109.6 | % | | 7.0 | | | 102.6 | % | | 2.7 | | | 99.9 | % | |
| | | | | | | | | | | |
2019 versus 2018:(1)The current accident year lossgeneral and administration expense ratio decreasedincluded corporate expenses not allocated to 68.1% in 2019 from 70.7% in 2018. The decrease in the current accident year loss ratio was impacted by a lower levelunderwriting segments of catastrophe2.3%, 2.8% and weather-related losses. During 2019, we incurred pre-tax catastrophe and weather-related losses, net of reinstatement premiums, of $336 million or 7.5 points primarily attributable to Japanese Typhoons Hagibis, Faxai and Tapah, Hurricane Dorian, Australia Wildfires and other weather-related events. Comparatively, in 2018, we incurred pre-tax catastrophe and weather-related losses, net of reinstatement premiums, of $430 million or 9.0 points primarily attributable to California Wildfires, Hurricanes Michael and Florence, Typhoon Jebi and other weather-related events.
After adjusting2.3% for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 60.6% in 2019 from 61.7% in 2018. The decrease in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses was principally due to the impact of improved pricing over loss trends and changes in business mix.
Estimates for Significant Catastrophe Events:
At December 31, 2019, net reserve for losses and loss expenses included estimated amounts for numerous catastrophe events. We caution that the magnitude and/or complexity of losses arising from these events, in particular Japanese Typhoons Hagibis, Faxai and Tapah, Hurricane Dorian, and the Australia Wildfires which occurred in 2019 together with Hurricanes Michael and Florence, California Wildfires and Typhoon Jebi which occurred in 2018 as well as Hurricanes Harvey, Irma and Maria and the California Wildfires which occurred in 2017 inherently increase the level of uncertainty and, therefore, the level of management judgment involved in arriving at estimated net reserve for losses and loss expenses. As a result, actual losses for these events may ultimately differ materially from current estimates.
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.
We continue to monitor paid and incurred loss development for catastrophe events of prior years and update estimates of ultimate losses accordingly.
Prior Year Reserve Development:
Net favorable prior year reserve development arises from changes to estimates of losses and loss expenses related to loss events that occurred in previous calendar years. Net prior year reserve development by segment was as follows:
|
| | | | | | | | | | | | | |
| | | | | | | | |
| | Years ended December 31, | 2019 | | 2018 | | 2017 | |
| | | | | | | | |
| | Insurance | $ | 53,302 |
| | $ | 92,806 |
| | $ | 60,459 |
| |
| | Reinsurance | 25,598 |
| | 106,856 |
| | 139,595 |
| |
| | Total | $ | 78,900 |
| | $ | 199,662 |
| | $ | 200,054 |
| |
| | | | | | | | |
Overview
Short-tail business
Short-tail business includes the underlying exposures in the property and other, marine, and aviation reserve classes in the insurance segment, and the underlying exposures in the property and other reserve class in the reinsurance segment.
These reserve classes recognized net adverse prior year reserve development of $85 million in 2019 including net adverse prior year reserve development of $133 million recognized by the reinsurance property and other reserve class, partially offset by net favorable prior year reserve development of $33 million contributed by the insurance marine reserve class and net favorable prior year reserve development of $11 million contributed by the insurance property and other reserve class.
The net adverse prior year reserve development of $133 million recognized by the reinsurance property and other reserve class was due to an increase in loss estimates attributable to Hurricanes Irma and Michael consistent with industry trends, an increase in loss estimates attributable Typhoon Jebi consistent with updated industry insured loss estimates, and reserve strengthening within the U.S. regional and commercial proportional property books of business and the European proportional property book of business.
These reserve classes contributed net favorable prior year reserve development of $86 million in 2018 reflecting overall better than expected loss emergence related to the 2017 catastrophe events.
Medium-tail business
Medium-tail business consists primarily of insurance and reinsurance professional lines reserve classes, insurance credit and political risk reserve class and reinsurance credit and surety reserve class.
Insurance professional lines reserve class recorded net favorable prior year reserve development of $12 million and $32 million in 2019 and 2018, respectively, reflecting generally favorable experience on older accident years as we continued to transition to more experience based actuarial methods.
Reinsurance professional lines reserve class recorded net favorable prior year reserve development of $21 million in 2018 reflecting generally favorable experience on older accident years as we continued to transition to more experience based actuarial methods.
Insurance credit and political risk reserve class recorded net favorable prior year reserve development of $19 million in 2019 reflecting generally better than expected loss emergence.
Reinsurance credit and surety reserve class recorded net favorable prior year reserve development of $53 million and $33 million in 2019 and 2018, respectively, reflecting generally better than expected loss emergence.
Long-tail business
Long-tail business consists primarily of insurance and reinsurance liability reserve classes and reinsurance motor reserve class.
Insurance liability reserve class recognized net adverse prior year reserve development of $25 million and $22 million in2020, 2019 and 2018, respectively. The net adverse prior year reserve development in 2019 was primarily relatedRefer to reserve strengthening within the U.S. excess casualty'Management’s Discussion and U.S. primary casualty booksAnalysis of business. The net adverse prior year reserve development in 2018 was primarily relatedFinancial Condition and Results of Operations – Other Expenses (Revenues), Net' for additional information.
Refer to reserve strengthening within the U.S. excess casualty book'Management's Discussion and Analysis of business.Financial Condition and Results of Operations - Results by Segment' for further details on underwriting expenses.
Reinsurance liability reserve class recognized net favorable prior year reserve development of $31 million and $23 million in 2019 and 2018, respectively. The net favorable prior year reserve development in 2019 and 2018 was due to progressively increased weight given by management to experience based indications on older accident years.
Reinsurance motor reserve class recognized net favorable prior year reserve development of $71 million and $23 million in 2019 and 2018, respectively. The net favorable prior year reserve development in 2019 was impacted by the increase in the Ogden discount rate and changes in related actuarial assumptions. The Ogden Rate which is used to calculate lump sum awards in U.K. bodily injury cases, changed from minus 0.75% to minus 0.25%, effective August 5, 2019. The net favorable prior year reserve development in 2018 was primarily attributable to non proportional treaty business on older accident years.
We caution that conditions and trends that impacted the development of reserve for losses and loss expenses in the past may not recur in the future.
The following tables map lines of business to reserve classes and the expected claim tails:
|
| | | | | | |
Insurance segment | | | | | |
| Reserve class and tail |
| | | | | | |
| Property and other | Marine | Aviation | Credit and political risk | Professional lines | Liability |
| | | | | | |
| Short | Short | Short/Medium | Medium | Medium | Long |
| | | | | | |
Reported lines of business | | | | | | |
Property | X | | | | | |
Marine | | X | | | | |
Terrorism | X | | | | | |
Aviation | | | X | | | |
Credit and political risk | | | | X | | |
Professional lines | | | | | X | |
Liability | | | | | | X |
Accident and health | X | | | | | |
Discontinued lines - Novae | X | | | | X | X |
|
| | | | | |
Reinsurance segment | | | | |
| Reserve class and tail |
| | | | | |
| Property and other | Credit and surety | Professional lines | Motor | Liability |
| | | | | |
| Short | Medium | Medium | Long | Long |
| | | | | |
Reported lines of business | | | | | |
Catastrophe | X | | | | |
Property | X | | | | |
Credit and surety | | X | | | |
Professional lines | | | X | | |
Motor | | | | X | |
Liability | | | | | X |
Engineering | X | | | | |
Agriculture | X | | | | |
Marine and other | X | | | | |
Accident and health | X | | | | |
Discontinued lines - Novae | X | | | X | X |
The following sections provide further details on prior year reserve development by segment, reserving class and accident year.
Insurance Segment:
|
| | | | | | | | | | | | | |
| | | | | | | | |
| | Years ended December 31, | 2019 | | 2018 | | 2017 | |
| | | | | | | | |
| | Property and other | $ | 11,042 |
| | $ | 64,781 |
| | $ | 11,815 |
| |
| | Marine | 33,260 |
| | 17,913 |
| | 28,206 |
| |
| | Aviation | 3,741 |
| | (2,938 | ) | | 1,895 |
| |
| | Credit and political risk | 18,810 |
| | 3,609 |
| | 70 |
| |
| | Professional lines | 11,721 |
| | 31,687 |
| | 26,248 |
| |
| | Liability | (25,272 | ) | | (22,246 | ) | | (7,775 | ) | |
| | Total | $ | 53,302 |
| | $ | 92,806 |
| | $ | 60,459 |
| |
| | | | | | | | |
In 2019, we recognized $53 million of net favorable prior year reserve development, the principal components of which were:
$33 million of net favorable prior year reserve development on marine business primarily due to better than expected loss emergence related to the 2015 through 2017 accident years.
$19 million of net favorable prior year reserve development on credit and political risk business primarily due to better than expected loss emergence related to recent accident years.
$12 million of net favorable prior year reserve development on professional lines business reflecting generally favorable experience on older accident years as we continued to transition to more experience based actuarial methods.
$11 million of net favorable prior year reserve development on property and other business primarily due to overall better than expected loss emergence related to the 2017 catastrophe events and SuperStorm Sandy, partially offset by reserve strengthening within the international book of business, mainly related to the 2018 accident year.
$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.
In 2018, we recognized $93 million of net favorable prior year reserve development, the principal components of which were:
$65 million of net favorable prior year reserve development on property and other business primarily due to overall better than expected loss emergence related to the 2017 catastrophe events.
$32 million of net favorable prior year reserve development on professional lines business primarily due to better than expected loss experience, particularly related to the 2014 and 2015 accident years.
$18 million of net favorable prior year reserve development on marine business primarily due to better than expected loss emergence on more recent accident years.
$22 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the U.S. excess casualty book of business mainly driven by the higher frequency of large auto and general liability claims mainly related to the 2015 accident year.
Reinsurance Segment:
|
| | | | | | | | | | | | | |
| | | | | | | | |
| | Years ended December 31, | 2019 | | 2018 | | 2017 | |
| | | | | | | | |
| | Property and other | $ | (133,448 | ) | | $ | 6,012 |
| | $ | 18,564 |
| |
| | Credit and surety | 53,223 |
| | 33,497 |
| | 32,791 |
| |
| | Professional lines | 3,668 |
| | 21,310 |
| | 44,164 |
| |
| | Motor | 70,872 |
| | 22,932 |
| | 1,155 |
| |
| | Liability | 31,283 |
| | 23,105 |
| | 42,921 |
| |
| | Total | $ | 25,598 |
| | $ | 106,856 |
| | $ | 139,595 |
| |
| | | | | | | | |
In 2019, we recognized $26 million of net favorable prior year reserve development, the principal components of which were:
$71 million of net favorable prior year reserve development on motor business primarily due to the impact of the increase in the Ogden Rate and changes in related actuarial assumptions, on several accident years.
$53 million of net favorable prior year reserve development on credit and surety business primarily due to generally better than expected loss emergence, mainly related to accident years 2015 through 2017.
$31 million of net favorable prior year reserve development on liability business due to increased weight given by management to experience based indications on older accident years.
$133 million of net adverse prior year reserve development on property and other business primarily due to an increase in loss estimates attributable to Hurricanes Irma and Michael consistent with industry trends, an increase in loss estimates attributable to Typhoon Jebi consistent with updated industry insured loss estimates, and reserve strengthening within the U.S. regional and commercial proportional property books of business and the European proportional property book of business.
In 2018, we recognized $107 million of net favorable prior year reserve development, the principal components of which were:
$33 million of net favorable prior year reserve development on credit and surety business primarily due to generally better than expected loss emergence, mainly related to accident years 2013 and 2014.
$23 million of net favorable prior year reserve development on motor business primarily due to non proportional treaty business related to older accident years.
$23 million of net favorable prior year reserve development on liability business primarily due to increased weight given by management to experience based indications on older accident years.
$21 million of net favorable prior year reserve development on professional lines business reflecting the generally favorable experience on older accident years as we continued to transition to more experience based actuarial methods.
Acquisition Cost Ratio:
The increase in the acquisition cost ratio to 22.3% in 2019 from 20.2% in 2018 was principally related to an increase in the insurance segment, largely associated with the acquisition of Novae.
General and Administrative Expense Ratio:
The increase in general and administrative expense ratio to 13.9% in 2019 from 13.1% in 2018 was mainly driven by a decrease in net premiums earned, an increase in information technology costs and professional fees, partially offset by an increase in fees associated with arrangements with strategic capital partners.
RESULTS BY SEGMENT
Insurance Segment
Results for the insurance segment were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
| | | | | | | | | | | |
| Revenues: | | | | | | | | | | |
| Gross premiums written | $ | 4,018,399 | | | 9% | | $ | 3,675,931 | | | (3%) | | $ | 3,797,592 | | |
| Net premiums written | 2,357,501 | | | 7% | | 2,209,155 | | | (5%) | | 2,324,747 | | |
| Net premiums earned | 2,299,038 | | | 5% | | 2,190,084 | | | (7%) | | 2,362,606 | | |
| Other insurance related income | 2,647 | | | (7%) | | 2,858 | | | (17%) | | 3,460 | | |
| | | | | | | | | | | |
| Expenses: | | | | | | | | | | |
| Current accident year net losses and loss expenses | (1,705,951) | | | | | (1,331,981) | | | | | (1,587,129) | | |
| Prior year reserve development | 8,937 | | | | | 53,302 | | | | | 92,806 | | |
| Acquisition costs | (461,533) | | | | | (468,281) | | | | | (399,193) | | |
| Underwriting-related general and administrative expenses | (378,839) | | | | | (401,963) | | | | | (395,252) | | |
| | | | | | | | | | | |
| Underwriting income (loss) | $ | (235,701) | | | | | $ | 44,019 | | | | | $ | 77,298 | | |
| | | | | | | | | | | |
| Ratios: | | | % Point
Change | | | | % Point
Change | | | |
| Current accident year loss ratio excluding catastrophe and weather-related losses | 55.1 | % | | (1.9) | | 57.0 | % | | (1.5) | | 58.5 | % | |
| Catastrophe and weather-related losses ratio | 19.1 | % | | 15.3 | | 3.8 | % | | (4.9) | | 8.7 | % | |
| Current accident year loss ratio | 74.2 | % | | 13.4 | | 60.8 | % | | (6.4) | | 67.2 | % | |
| Prior year reserve development ratio | (0.4 | %) | | 2.0 | | (2.4 | %) | | 1.6 | | (4.0 | %) | |
| Net losses and loss expenses ratio | 73.8 | % | | 15.4 | | 58.4 | % | | (4.8) | | 63.2 | % | |
| Acquisition cost ratio | 20.1 | % | | (1.3) | | 21.4 | % | | 4.5 | | 16.9 | % | |
| Underwriting-related general and administrative expense ratio | 16.5 | % | | (1.8) | | 18.3 | % | | 1.5 | | 16.8 | % | |
| Combined ratio | 110.4 | % | | 12.3 | | 98.1 | % | | 1.2 | | 96.9 | % | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year ended December 31, | 2019 | | % Change | | 2018 | | % Change | | 2017 | |
| | | | | | | | | | | | |
| | Revenues: | | | | | | | | | | |
| | Gross premiums written | $ | 3,675,931 |
| | (3%) | | $ | 3,797,592 |
| | 35% | | $ | 2,814,918 |
| |
| | Net premiums written | 2,209,155 |
| | (5%) | | 2,324,747 |
| | 31% | | 1,775,825 |
| |
| | Net premiums earned | 2,190,084 |
| | (7%) | | 2,362,606 |
| | 30% | | 1,816,438 |
| |
| | Other insurance related income | 2,858 |
| | (17)% | | 3,460 |
| | 18% | | 2,944 |
| |
| | | | | | | | | | | | |
| | Expenses: | | | | | | | | | | |
| | Current accident year net losses and loss expenses | (1,331,981 | ) | | | | (1,587,129 | ) | | | | (1,525,886 | ) | |
| | Prior year reserve development | 53,302 |
| | | | 92,806 |
| | | | 60,459 |
| |
| | Acquisition costs | (468,281 | ) | | | | (399,193 | ) | | | | (270,229 | ) | |
| | General and administrative expenses | (401,963 | ) | | | | (395,252 | ) | | | | (325,368 | ) | |
| | Underwriting income (loss) | $ | 44,019 |
| | (43%) | | $ | 77,298 |
| | nm | | $ | (241,642 | ) | |
| | | | | | | | | | | | |
| | | | | % Point Change | | | | % Point Change | | | |
| | Ratios: | | | | | | | | | | |
| | Current accident year loss ratio excluding catastrophe and weather-related losses | 57.0 | % | | (1.5) | | 58.5 | % | | (2.8) | | 61.3 | % | |
| | Catastrophe and weather-related losses ratio | 3.8 | % | | (4.9) | | 8.7 | % | | (14.0) | | 22.7 | % | |
| | Current accident year loss ratio | 60.8 | % | | (6.4) | | 67.2 | % | | (16.8) | | 84.0 | % | |
| | Prior year reserve development ratio | (2.4 | %) | | 1.6 | | (4.0 | %) | | (0.7) | | (3.3 | %) | |
| | Net losses and loss expenses ratio | 58.4 | % | | (4.8) | | 63.2 | % | | (17.5) | | 80.7 | % | |
| | Acquisition cost ratio | 21.4 | % | | 4.5 | | 16.9 | % | | 2.0 | | 14.9 | % | |
| | General and administrative expense ratio | 18.3 | % | | 1.5 | | 16.8 | % | | (1.1) | | 17.9 | % | |
| | Combined ratio | 98.1 | % | | 1.2 | | 96.9 | % | | (16.6) | | 113.5 | % | |
| | | | | | | | | | | | |
nm – not meaningful
Gross Premiums Written:
Gross premiums written by line of business were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | % Change | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | | 2019 to 2020 | | 2018 to 2019 | |
| | | | | | | | | | | | | | | | | |
| Property | $ | 996,650 | | | 26 | % | | $ | 943,760 | | | 26 | % | | $ | 1,192,807 | | | 31 | % | | 6 | % | | (21 | %) | |
| Marine | 419,405 | | | 10 | % | | 411,309 | | | 11 | % | | 367,047 | | | 10 | % | | 2 | % | | 12 | % | |
| Terrorism | 55,781 | | | 1 | % | | 60,120 | | | 2 | % | | 61,663 | | | 2 | % | | (7 | %) | | (3 | %) | |
| Aviation | 87,671 | | | 2 | % | | 74,670 | | | 2 | % | | 89,673 | | | 2 | % | | 17 | % | | (17 | %) | |
| Credit and political risk | 156,414 | | | 4 | % | | 154,999 | | | 4 | % | | 190,433 | | | 5 | % | | 1 | % | | (19 | %) | |
| Professional lines | 1,378,503 | | | 34 | % | | 1,177,274 | | | 32 | % | | 1,115,213 | | | 29 | % | | 17 | % | | 6 | % | |
| Liability | 763,155 | | | 19 | % | | 699,876 | | | 19 | % | | 553,461 | | | 15 | % | | 9 | % | | 26 | % | |
| Accident and health | 158,585 | | | 4 | % | | 144,103 | | | 4 | % | | 210,502 | | | 6 | % | | 10 | % | | (32 | %) | |
| Discontinued lines - Novae | 2,235 | | | — | % | | 9,820 | | | — | % | | 16,793 | | | — | % | | nm | | (42 | %) | |
| Total | $ | 4,018,399 | | | 100 | % | | $ | 3,675,931 | | | 100 | % | | $ | 3,797,592 | | | 100 | % | | 9 | % | | (3 | %) | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | % Change | |
| | Year ended December 31, | 2019 | | 2018 | | 2017 | | 2018 to 2019 | | 2017 to 2018 | |
| | | | | | | | | | | | | | | | | | |
| | Property | $ | 943,760 |
| | 26 | % | | $ | 1,192,807 |
| | 31 | % | | $ | 738,373 |
| | 25 | % | | (21 | %) | | 62 | % | |
| | Marine | 411,309 |
| | 11 | % | | 367,047 |
| | 10 | % | | 241,393 |
| | 9 | % | | 12 | % | | 52 | % | |
| | Terrorism | 60,120 |
| | 2 | % | | 61,663 |
| | 2 | % | | 47,514 |
| | 2 | % | | (3 | %) | | 30 | % | |
| | Aviation | 74,670 |
| | 2 | % | | 89,673 |
| | 2 | % | | 83,906 |
| | 3 | % | | (17 | %) | | 7 | % | |
| | Credit and political risk | 154,999 |
| | 4 | % | | 190,433 |
| | 5 | % | | 91,316 |
| | 3 | % | | (19 | %) | | nm |
| |
| | Professional lines | 1,177,274 |
| | 32 | % | | 1,115,213 |
| | 29 | % | | 922,502 |
| | 33 | % | | 6 | % | | 21 | % | |
| | Liability | 699,876 |
| | 19 | % | | 553,461 |
| | 15 | % | | 473,935 |
| | 17 | % | | 26 | % | | 17 | % | |
| | Accident and health | 144,103 |
| | 4 | % | | 210,502 |
| | 6 | % | | 201,159 |
| | 7 | % | | (32 | )% | | 5 | % | |
| | Discontinued lines - Novae | 9,820 |
| | — | % | | 16,793 |
| | — | % | | 14,820 |
| | 1 | % | | (42 | )% | | nm |
| |
| | Total | $ | 3,675,931 |
| | 100 | % | | $ | 3,797,592 |
| | 100 | % | | $ | 2,814,918 |
| | 100 | % | | (3 | %) | | 35 | % | |
| | | | | | | | | | | | | | | | | | |
2019 versus 2018:
Gros Grosss premiums written in 2019 decreased2020 increased by $122$342 million, or 3% ($75 million or 2% on a constant currency basis)9%, compared to 20182019. The increase was primarily attributable to professional lines, liability, property, accident and health, and credit and political risk lines, partially offset byaviation lines.
The increases in liability, professional lines, liability, and marine lines.
The decrease in property lines waswere due to the non-renewals associated with underwriting actions taken in recent years to reposition the portfolio, partially offset by new business.business and favorable rate changes. The decreaseincrease in accident and health lines was due to the cancellation of certain programnew business. The decreaseincrease in in credit and political riskaviation lines was attributabledue to reduced business opportunities. The increases in liability, professional lines and marine lines were driven by new business and favorable rate changes.timing differences.
Ceded Premiums Written
:
2019 versus 2018:Ceded premiums written in 2019 were $1,4672020 was $1,661 million, or 40%,41% of gross premiums written, compared to $1,473$1,467 million, or 39%,40% in 2018. 2019. The decreaseincrease in ceded premiums written of $6$194 million, or 13% was primarily driven by a decreaseincreases in professional lines, property, liability, and marine lines, partially offset by an increasedecreases in liabilitycredit and political risk, and aviation lines.
Net Premiums Earned:
Net premiums earned by line of business were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | % Change | |
| | Year ended December 31, | 2019 | | 2018 | | 2017 | | 2018 to 2019 | | 2017 to 2018 | |
| | | | | | | | | | | | | | | | | | |
| | Property | $ | 633,550 |
| | 29 | % | | $ | 796,945 |
| | 34 | % | | $ | 543,342 |
| | 30 | % | | (21 | %) | | 47 | % | |
| | Marine | 281,764 |
| | 13 | % | | 300,944 |
| | 13 | % | | 181,533 |
| | 10 | % | | (6 | %) | | 66 | % | |
| | Terrorism | 47,345 |
| | 2 | % | | 49,150 |
| | 2 | % | | 36,084 |
| | 2 | % | | (4 | %) | | 36 | % | |
| | Aviation | 55,028 |
| | 3 | % | | 74,203 |
| | 3 | % | | 75,107 |
| | 4 | % | | (26 | %) | | (1 | %) | |
| | Credit and political risk | 91,698 |
| | 4 | % | | 102,825 |
| | 4 | % | | 56,432 |
| | 3 | % | | (11 | %) | | 82 | % | |
| | Professional lines | 661,250 |
| | 30 | % | | 570,241 |
| | 24 | % | | 519,759 |
| | 29 | % | | 16 | % | | 10 | % | |
| | Liability | 264,667 |
| | 12 | % | | 229,373 |
| | 10 | % | | 188,770 |
| | 10 | % | | 15 | % | | 22 | % | |
| | Accident and health | 144,499 |
| | 7 | % | | 207,777 |
| | 9 | % | | 199,121 |
| | 11 | % | | (30 | %) | | 4 | % | |
| | Discontinued lines - Novae | 10,283 |
| | — | % | | 31,148 |
| | 1 | % | | 16,290 |
| | 1 | % | | (67 | %) | | nm |
| |
| | Total | $ | 2,190,084 |
| | 100 | % | | $ | 2,362,606 |
| | 100 | % | | $ | 1,816,438 |
| | 100 | % | | (7 | %) | | 30 | % | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | % Change | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | | 2019 to 2020 | | 2018 to 2019 | |
| | | | | | | | | | | | | | | | | |
| Property | $ | 605,650 | | | 26 | % | | $ | 633,550 | | | 29 | % | | $ | 796,945 | | | 34 | % | | (4 | %) | | (21 | %) | |
| Marine | 293,746 | | | 13 | % | | 281,764 | | | 13 | % | | 300,944 | | | 13 | % | | 4 | % | | (6 | %) | |
| Terrorism | 47,378 | | | 2 | % | | 47,345 | | | 2 | % | | 49,150 | | | 2 | % | | — | % | | (4 | %) | |
| Aviation | 70,910 | | | 3 | % | | 55,028 | | | 3 | % | | 74,203 | | | 3 | % | | 29 | % | | (26 | %) | |
| Credit and political risk | 105,869 | | | 5 | % | | 91,698 | | | 4 | % | | 102,825 | | | 4 | % | | 15 | % | | (11 | %) | |
| Professional lines | 715,276 | | | 31 | % | | 661,250 | | | 30 | % | | 570,241 | | | 24 | % | | 8 | % | | 16 | % | |
| Liability | 313,291 | | | 14 | % | | 264,667 | | | 12 | % | | 229,373 | | | 10 | % | | 18 | % | | 15 | % | |
| Accident and health | 143,723 | | | 6 | % | | 144,499 | | | 7 | % | | 207,777 | | | 9 | % | | (1 | %) | | (30 | %) | |
| Discontinued lines - Novae | 3,195 | | | — | % | | 10,283 | | | — | % | | 31,148 | | | 1 | % | | (69 | %) | | (67 | %) | |
| Total | $ | 2,299,038 | | | 100 | % | | $ | 2,190,084 | | | 100 | % | | $ | 2,362,606 | | | 100 | % | | 5 | % | | (7 | %) | |
| | | | | | | | | | | | | | | | | |
2019 versus 2018:Net premiums earned in 2019 decreased2020 increased by $173$109 million, or 7% ($138 million or 6% on a constant currency basis)5%, compared to 2018. 2019. The decreaseincrease was primarily driven by decreases in the gross premiums earned in property, accident and health, discontinued lines - Novae, marine and aviation lines together with an increase in ceded premiums earned in liability lines, partially offset by increases in gross premiums earned in professional lines, liability, marine, and professionalcredit and political risk lines, together with decreases in ceded premiums earned in discontinuedproperty and aviation lines, - Novaepartially offset by increases in ceded premiums earned in professional lines and liability lines, and a decrease in gross premiums earned in property lines.
Loss Ratio:
The components of the loss ratio were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended December 31, | 2020 | | % Point
Change | | 2019 | | % Point
Change | | 2018 | |
| | | | | | | | | | | |
| Current accident year loss ratio | 74.2 | % | | 13.4 | | | 60.8 | % | | (6.4) | | | 67.2 | % | |
| Prior year reserve development ratio | (0.4 | %) | | 2.0 | | | (2.4 | %) | | 1.6 | | | (4.0 | %) | |
| Loss ratio | 73.8 | % | | 15.4 | | | 58.4 | % | | (4.8) | | | 63.2 | % | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year ended December 31, | 2019 | | % Point Change | | 2018 | | % Point Change | | 2017 | |
| | | | | | | | | | | | |
| | Current accident year loss ratio | 60.8 | % | | (6.4 | ) | | 67.2 | % | | (16.8 | ) | | 84.0 | % | |
| | Prior year reserve development ratio | (2.4 | %) | | 1.6 |
| | (4.0 | %) | | (0.7 | ) | | (3.3 | %) | |
| | Loss ratio | 58.4 | % | | (4.8 | ) | | 63.2 | % | | (17.5 | ) | | 80.7 | % | |
| | | | | | | | | | | | |
Current Accident Year Loss Ratio:o
2019 versus 2018:
The current accident year loss ratio decreasedincreased to 74.2% in 2020 from 60.8% in 2019 from 67.2% in 2018.2019. The decreaseincrease in the current accident year loss ratio was impacted by a lowerhigher level of catastrophe and weather-related losses. During 2019, we incurred pre-tax2020, catastrophe and weather-related losses, net of reinstatement premiums, were $443 million, or 19.1 points, primarily attributable to the COVID-19 pandemic, Hurricanes Laura, Sally, Zeta and Delta, and other weather-related events. During 2020, catastrophe and weather-related losses ofincluded $204 million, or 8.8 points, attributable to the COVID-19 pandemic largely associated with property-related coverages, but also included event cancellation coverages. Comparatively, in 2019, catastrophe and weather-related losses were $84 million, or 3.8 points, primarily attributable to HurricaneHurricanes Dorian, and other weather-related events. Comparatively, in 2018 we incurred pre-tax catastrophe and weather-related losses of $204 million, or 8.7 points primarily attributable to Hurricanes Michael and Florence, California Wildfires, and other weather-related events.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 55.1% in 2020 from 57.0% in 2019 from 58.5% in 2018.2019. The decrease in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses was principally due to improved loss experience in property, aviation, marine, and credit and political risk lines, and the impact of improvedfavorable pricing over loss trends, and a decrease in loss experience in property lines, partially offset by an increasechanges in business mix.
Prior Year Reserve Development
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss experience in creditexpenses' for details on the reserve classes, the expected claim tails, and political risk lines.prior year development.
Acquisition Cost Ratio:
The increase in the acquisitionacquisition cost ratio decreased to 20.1% in 2020 from 21.4% in 2019, from 16.9% in 2018 was principally related toassociated with the acquisition of Novae. At the acquisition date, the allocation of the purchase price to the assets acquired and liabilities assumed based on estimated fair values at that date, resulted in the write-off of the deferred acquisition cost asset on Novae's balance sheet as the value of policies in-force on that date are considered within VOBA. Consequently,Consequently, the absence of $1 million and $12 million and $121 million of acquisitionacquisition expense in 20192020 and 2018,2019, respectively, did not significantly benefit the acquisition cost ratio in 2020 and benefited the acquisition cost ratio by 0.6 points and 5.1 points, respectively.in 2019. Adjusting the acquisition cost ratio for these amounts, the acquisition cost ratio decreased by 1.9 points in 2019 was comparable2020, compared to 2018.2019, principally related to changes in business mix in property lines and reflecting the increase in professional lines and liability lines written in recent periods.
Underwriting-Related General and Administrative Expense Ratio
:
The increase in theunderwriting-related general and administrative expense ratio decreased to 16.5% in 2020 from 18.3% in 2019, from 16.8% in 2018 was mainly driven by a decrease in net premiums earned, an increasedecreases in the allocation of corporate costs to the segment, travel and entertainment expenses, and professional fees, together with an increase in professional fees,net premiums earned, partially offset by a decreasean increase in personnel costs.
Reinsurance Segment
Results for the reinsurance segment were as follows:
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year ended December 31, | 2019 | | % Change | | 2018 | | % Change | | 2017 | |
| | | | | | | | | | | | |
| | Revenues: | | | | | | | | | | |
| | Gross premiums written | $ | 3,222,927 |
| | 4% | | $ | 3,112,473 |
| | 14% | | $ | 2,741,355 |
| |
| | Net premiums written | 2,280,460 |
| | (2%) | | 2,334,215 |
| | 4% | | 2,251,318 |
| |
| | Net premiums earned | 2,397,094 |
| | (1%) | | 2,428,889 |
| | 4% | | 2,332,322 |
| |
| | Other insurance related income (losses) | 13,586 |
| | nm | | 7,162 |
| | nm | | (4,184 | ) | |
| | | | | | | | | | | | |
| | Expenses: | | | | | | | | | | |
| | Current accident year net losses and loss expenses | (1,791,717 | ) | | | | (1,802,820 | ) | | | | (1,961,940 | ) | |
| | Prior year reserve development | 25,598 |
| | | | 106,856 |
| | | | 139,595 |
| |
| | Acquisition costs | (556,301 | ) | | | | (569,642 | ) | | | | (553,362 | ) | |
| | General and administrative expenses | (103,772 | ) | | | | (123,916 | ) | | | | (124,115 | ) | |
| | Underwriting income (loss) | $ | (15,512 | ) | | nm | | $ | 46,529 |
| | nm | | $ | (171,684 | ) | |
| | | | | | | | | | | | |
| | | | | % Point Change | | | | % Point Change | | | |
| | Ratios: | | | | | | | | | | |
| | Current accident year loss ratio excluding catastrophe and weather-related losses | 64.0 | % | | (0.8) | | 64.8 | % | | (0.8) | | 65.6 | % | |
| | Catastrophe and weather-related losses ratio | 10.7 | % | | 1.3 | | 9.4 | % | | (9.1) | | 18.5 | % | |
| | Current accident year loss ratio | 74.7 | % | | 0.5 | | 74.2 | % | | (9.9) | | 84.1 | % | |
| | Prior year reserve development ratio | (1.0 | %) | | 3.4 | | (4.4 | %) | | 1.6 | | (6.0 | %) | |
| | Net losses and loss expenses ratio | 73.7 | % | | 3.9 | | 69.8 | % | | (8.3) | | 78.1 | % | |
| | Acquisition cost ratio | 23.2 | % | | (0.3) | | 23.5 | % | | (0.2) | | 23.7 | % | |
| | General and administrative expense ratio | 4.3 | % | | (0.8) | | 5.1 | % | | (0.2) | | 5.3 | % | |
| | Combined ratio | 101.2 | % | | 2.8 | | 98.4 | % | | (8.7) | | 107.1 | % | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
| | | | | | | | | | | |
| Revenues: | | | | | | | | | | |
| Gross premiums written | $ | 2,808,539 | | | (13%) | | $ | 3,222,927 | | | 4% | | $ | 3,112,473 | | |
| Net premiums written | 1,978,908 | | | (13%) | | 2,280,460 | | | (2%) | | 2,334,215 | | |
| Net premiums earned | 2,072,271 | | | (14%) | | 2,397,094 | | | (1%) | | 2,428,889 | | |
| Other insurance related income (loss) | (10,736) | | | nm | | 13,586 | | | nm | | 7,162 | | |
| | | | | | | | | | | |
| Expenses: | | | | | | | | | | |
| Current accident year net losses and loss expenses | (1,591,210) | | | | | (1,791,717) | | | | | (1,802,820) | | |
| Prior year reserve development | 6,972 | | | | | 25,598 | | | | | 106,856 | | |
| Acquisition costs | (467,984) | | | | | (556,301) | | | | | (569,642) | | |
| Underwriting-related general and administrative expenses | (99,129) | | | | | (103,772) | | | | | (123,916) | | |
| | | | | | | | | | | |
| Underwriting income (loss) | $ | (89,816) | | | | | $ | (15,512) | | | | | $ | 46,529 | | |
| | | | | | | | | | | |
| Ratios: | | | % Point
Change | | | | % Point
Change | | | |
| Current accident year loss ratio excluding catastrophe and weather-related losses | 60.6 | % | | (3.4) | | 64.0 | % | | (0.8) | | 64.8 | % | |
| Catastrophe and weather-related losses ratio | 16.2 | % | | 5.5 | | 10.7 | % | | 1.3 | | 9.4 | % | |
| Current accident year loss ratio | 76.8 | % | | 2.1 | | 74.7 | % | | 0.5 | | 74.2 | % | |
| Prior year reserve development ratio | (0.4 | %) | | 0.6 | | (1.0 | %) | | 3.4 | | (4.4 | %) | |
| Net losses and loss expenses ratio | 76.4 | % | | 2.7 | | 73.7 | % | | 3.9 | | 69.8 | % | |
| Acquisition cost ratio | 22.6 | % | | (0.6) | | 23.2 | % | | (0.3) | | 23.5 | % | |
| Underwriting-related general and administrative expense ratio | 4.8 | % | | 0.5 | | 4.3 | % | | (0.8) | | 5.1 | % | |
| Combined ratio | 103.8 | % | | 2.6 | | 101.2 | % | | 2.8 | | 98.4 | % | |
| | | | | | | | | | | |
nm – not meaningful
Gross Premiums Written:
Gross premiums written by line of business were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | % Change | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | | 2019 to 2020 | | 2018 to 2019 | |
| | | | | | | | | | | | | | | | | |
| Catastrophe | $ | 551,143 | | | 19 | % | | $ | 718,514 | | | 24 | % | | $ | 536,243 | | | 17 | % | | (23 | %) | | 34 | % | |
| Property | 245,744 | | | 9 | % | | 304,166 | | | 9 | % | | 342,789 | | | 11 | % | | (19 | %) | | (11 | %) | |
| Credit and surety | 232,699 | | | 8 | % | | 269,733 | | | 8 | % | | 329,126 | | | 11 | % | | (14 | %) | | (18 | %) | |
| Professional lines | 312,935 | | | 11 | % | | 261,072 | | | 8 | % | | 268,181 | | | 9 | % | | 20 | % | | (3 | %) | |
| Motor | 304,439 | | | 11 | % | | 334,887 | | | 10 | % | | 499,727 | | | 16 | % | | (9 | %) | | (33 | %) | |
| Liability | 618,913 | | | 22 | % | | 546,479 | | | 17 | % | | 438,767 | | | 14 | % | | 13 | % | | 25 | % | |
| Engineering | 25,886 | | | 1 | % | | 57,028 | | | 2 | % | | 60,358 | | | 2 | % | | (55 | %) | | (6 | %) | |
| Agriculture | 70,500 | | | 3 | % | | 224,961 | | | 7 | % | | 226,246 | | | 7 | % | | (69 | %) | | (1 | %) | |
| Marine and aviation | 73,103 | | | 3 | % | | 74,781 | | | 2 | % | | 44,741 | | | 1 | % | | (2 | %) | | 67 | % | |
| Accident and health | 371,828 | | | 13 | % | | 432,670 | | | 13 | % | | 365,660 | | | 12 | % | | (14 | %) | | 18 | % | |
| Discontinued lines - Novae | 1,349 | | | — | % | | (1,364) | | | — | % | | 635 | | | — | % | | nm | | nm | |
| Total | $ | 2,808,539 | | | 100 | % | | $ | 3,222,927 | | | 100 | % | | $ | 3,112,473 | | | 100 | % | | (13 | %) | | 4 | % | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | % Change | |
| | Year ended December 31, | 2019 | | 2018 | | 2017 | | 2018 to 2019 | | 2017 to 2018 | |
| | | | | | | | | | | | | | | | | | |
| | Catastrophe | $ | 718,514 |
| | 24 | % | | $ | 536,243 |
| | 17 | % | | $ | 436,707 |
| | 17 | % | | 34 | % | | 23 | % | |
| | Property | 304,166 |
| | 9 | % | | 342,789 |
| | 11 | % | | 352,609 |
| | 13 | % | | (11 | %) | | (3 | %) | |
| | Credit and surety | 269,733 |
| | 8 | % | | 329,126 |
| | 11 | % | | 205,352 |
| | 7 | % | | (18 | %) | | 60 | % | |
| | Professional lines | 261,072 |
| | 8 | % | | 268,181 |
| | 9 | % | | 252,272 |
| | 9 | % | | (3 | %) | | 6 | % | |
| | Motor | 334,887 |
| | 10 | % | | 499,727 |
| | 16 | % | | 391,923 |
| | 14 | % | | (33 | %) | | 28 | % | |
| | Liability | 546,479 |
| | 17 | % | | 438,767 |
| | 14 | % | | 420,701 |
| | 15 | % | | 25 | % | | 4 | % | |
| | Engineering | 57,028 |
| | 2 | % | | 60,358 |
| | 2 | % | | 77,134 |
| | 3 | % | | (6 | %) | | (22 | %) | |
| | Agriculture | 224,961 |
| | 7 | % | | 226,246 |
| | 7 | % | | 236,200 |
| | 9 | % | | (1 | %) | | (4 | %) | |
| | Marine and other | 74,781 |
| | 2 | % | | 44,741 |
| | 1 | % | | 55,925 |
| | 2 | % | | 67 | % | | (20 | %) | |
| | Accident and health | 432,670 |
| | 13 | % | | 365,660 |
| | 12 | % | | 312,919 |
| | 11 | % | | 18 | % | | 17 | % | |
| | Discontinued lines - Novae | (1,364 | ) | | — | % | | 635 |
| | — | % | | (387 | ) | | — | % | | nm |
| | nm |
| |
| | Total | $ | 3,222,927 |
| | 100 | % | | $ | 3,112,473 |
| | 100 | % | | $ | 2,741,355 |
| | 100 | % | | 4 | % | | 14 | % | |
| | | | | | | | | | | | | | | | | | |
2019 versus 2018:
Gross premiums written in 2019 increased2020 decreased by $110$414 million, or 4% ($16313%,($401 million, or 5%12% on a constant currency basis), compared to 20182019. The decrease was primarily attributable to catastrophe, liability,agriculture, accident and health, property, credit and marinesurety, engineering, and othermotor lines, partially offset by increases in liability and professional lines.
The decreases in motor, creditcatastrophe, agriculture, and surety, and property lines.
The increases in catastrophe, liability, accident and health, and marine and other lines were driven by new business. In addition, increasednon-renewals and decreased line sizes on a numberassociated with the repositioning of treaties, the restructuring of several treaties, and higher level of premiums written on a multi-year basis contributed to the increase in catastrophe and liability lines. The increases in liability, and marine and other lines were also due to premium adjustments.
portfolio. The decrease in motoraccident and health lines was driven bydue to non-renewals decreased line sizes on a number of treaties, andfollowing the impact of foreign exchange movements asdecision to exit the strengthening of the U.S. dollar drove comparative premium decreases in treaties denominated in foreign currencies, partially offset by premium adjustments.Middle East business. The decrease in credit and surety lines was driven by non-renewals and premium adjustments, partially offset by new business.attributable to reduced business opportunities due to the COVID-19 pandemic. The decrease in propertyengineering lines was primarily due to non-renewals and decreasedfollowing the decision to exit this line sizes on a number of treaties, partially offset by favorable rate changes, the restructuring of several treaties, new business, andbusiness. The decrease in motor lines was largely attributable to premium adjustments. The increases in liability and professional lines were driven by premium adjustments, and favorable market conditions associated with renewals and new business.
Ceded Premiums Written
:
2019 versus 2018: Ceded premiums written in 2019 were $9422020 was $830 million, or 29%30%, of gross premiums written, compared to $778to $942 million, or 25%29%, in 2018.2019. The increasedecrease in ceded premiums written of $113 million, or 12%, was primarily attributable todriven by decreases in catastrophe, liability,accident and health, credit and surety, and agriculture lines, partially offset by increases in liability, professional lines, and motor lines.
The decrease in catastrophe lines was attributable to decreases in premiums ceded to strategic partners and a non-renewal of a catastrophe bond. The decrease in accident and health lines partially offset by decreaseswas attributable to the restructuring of an existing quota share retrocessional treaty. The decrease in propertycredit and surety lines was attributable to a decrease in premiums ceded to a quota share retrocessional treaty and the restructuring of existing quota share retrocessional treaties. The decrease in agriculture lines.lines was attributable to a non-renewal of a large quota share retrocessional treaty.
The increaseincreases in catastropheliability and professional lines waswere attributable to an increase in premiums ceded to a new aggregate excess of loss treaty and to the new quota share retrocessional treaties with Alturas, together with additional costs associated withtreaty, partially offset by the purchaserestructuring of catastrophe bond protection and an increase in premium ceded to strategic capital partners. The increases in liability, and accident and health lines were attributable to the increase in premiums ceded to theexisting quota share retrocessional cover with Harrington Re.treaty. The increase in credit and suretymotor lines was attributable to an increase in premiums ceded to a new quota share retrocessional treaty.
The decrease in property lines was attributable to the non-renewals of fronting arrangements, together with a decrease in premiums ceded to facultative covers with Harrington Re. The decrease in agriculture lines was attributable to the restructuring of a fronting arrangement and a quota share retrocessional treaty.
Net Premiums Earned
:
Net premiums earned by line of business were as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | % Change | |
| | Year ended December 31, | 2019 | | 2018 | | 2017 | | 2018 to 2019 | | 2017 to 2018 | |
| | | | | | | | | | | | | | | | | | |
| | Catastrophe | $ | 267,591 |
| | 10 | % | | $ | 250,016 |
| | 12 | % | | $ | 209,470 |
| | 10 | % | | 7 | % | | 19 | % | |
| | Property | 311,625 |
| | 13 | % | | 317,038 |
| | 13 | % | | 304,376 |
| | 13 | % | | (2 | %) | | 4 | % | |
| | Credit and surety | 208,717 |
| | 9 | % | | 250,276 |
| | 10 | % | | 244,186 |
| | 10 | % | | (17 | %) | | 2 | % | |
| | Professional lines | 206,328 |
| | 9 | % | | 220,687 |
| | 9 | % | | 226,622 |
| | 10 | % | | (7 | %) | | (3 | %) | |
| | Motor | 398,565 |
| | 17 | % | | 438,693 |
| | 18 | % | | 371,501 |
| | 16 | % | | (9 | %) | | 18 | % | |
| | Liability | 373,664 |
| | 16 | % | | 363,292 |
| | 15 | % | | 351,940 |
| | 15 | % | | 3 | % | | 3 | % | |
| | Engineering | 63,899 |
| | 3 | % | | 67,932 |
| | 3 | % | | 66,291 |
| | 3 | % | | (6 | %) | | 2 | % | |
| | Agriculture | 188,925 |
| | 8 | % | | 176,435 |
| | 7 | % | | 195,391 |
| | 8 | % | | 7 | % | | (10 | %) | |
| | Marine and other | 59,209 |
| | 2 | % | | 35,570 |
| | 1 | % | | 64,449 |
| | 3 | % | | 66 | % | | (45 | %) | |
| | Accident and health | 319,619 |
| | 13 | % | | 299,813 |
| | 12 | % | | 289,925 |
| | 12 | % | | 7 | % | | 3 | % | |
| | Discontinued lines - Novae | (1,048 | ) | | — | % | | 9,137 |
| | — | % | | 8,171 |
| | — | % | | nm |
| | 12 | % | |
| | Total | $ | 2,397,094 |
| | 100 | % | | $ | 2,428,889 |
| | 100 | % | | $ | 2,332,322 |
| | 100 | % | | (1 | %) | | 4 | % | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | % Change | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | | 2019 to 2020 | | 2018 to 2019 | |
| | | | | | | | | | | | | | | | | |
| Catastrophe | $ | 244,934 | | | 12 | % | | $ | 267,591 | | | 10 | % | | $ | 250,016 | | | 12 | % | | (8 | %) | | 7 | % | |
| Property | 256,244 | | | 12 | % | | 311,625 | | | 13 | % | | 317,038 | | | 13 | % | | (18 | %) | | (2 | %) | |
| Credit and surety | 187,721 | | | 9 | % | | 208,717 | | | 9 | % | | 250,276 | | | 10 | % | | (10 | %) | | (17 | %) | |
| Professional lines | 207,605 | | | 10 | % | | 206,328 | | | 9 | % | | 220,687 | | | 9 | % | | 1 | % | | (7 | %) | |
| Motor | 255,916 | | | 12 | % | | 398,565 | | | 17 | % | | 438,693 | | | 18 | % | | (36 | %) | | (9 | %) | |
| Liability | 396,906 | | | 19 | % | | 373,664 | | | 16 | % | | 363,292 | | | 15 | % | | 6 | % | | 3 | % | |
| Engineering | 60,521 | | | 3 | % | | 63,899 | | | 3 | % | | 67,932 | | | 3 | % | | (5 | %) | | (6 | %) | |
| Agriculture | 73,696 | | | 4 | % | | 188,925 | | | 8 | % | | 176,435 | | | 7 | % | | (61 | %) | | 7 | % | |
| Marine and aviation | 53,516 | | | 3 | % | | 59,209 | | | 2 | % | | 35,570 | | | 1 | % | | (10 | %) | | 66 | % | |
| Accident and health | 333,996 | | | 16 | % | | 319,619 | | | 13 | % | | 299,813 | | | 12 | % | | 4 | % | | 7 | % | |
| Discontinued lines - Novae | 1,216 | | | — | % | | (1,048) | | | — | % | | 9,137 | | | — | % | | nm | | nm | |
| Total | $ | 2,072,271 | | | 100 | % | | $ | 2,397,094 | | | 100 | % | | $ | 2,428,889 | | | 100 | % | | (14 | %) | | (1 | %) | |
| | | | | | | | | | | | | | | | | |
2019 versus 2018:
nm – not meaningful
Net premiums earned in 20192020 decreased by $32$325 million, or 1%14%, ($18294 million or 1%12% on a constant currency basis), compared to 2018.2019. The decrease in net premiums earned was primarily driven by increases in ceded premiums earned in accident and health, credit and surety, and motor lines, together with decreases in gross premiums earned in agriculture, motor, catastrophe, property, and credit and surety lines, together with an increase in ceded premiums earned in liability lines, partially offset by increasesdecreases in ceded premiums earned in catastrophe and agriculture lines, and an increase in gross premiumpremiums earned in accident and health, and marine and otherliability lines.
Other Insurance Related Income (Loss)
:
Other insurance related incomeloss was $11 million in 2019 of $14 million2020, compared to other insurance related income of $14 million in 20182019. The decrease of $7$24 million an increase of $7 million,was primarily due to an increasethe recognition of a full limit loss of $10 million associated with the WHO pandemic risk-linked swap and a decrease in fees associated with arrangements with strategic capital partners.
Loss Ratio
:
The components of the loss ratio were as follows: |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Year ended December 31, | | 2019 | | % Point Change | | 2018 | | % Point Change | | 2017 | |
| | | | | | | | | | | | | |
| | Current accident year loss ratio | | 74.7 | % | | 0.5 | | 74.2 | % | | (9.9 | ) | | 84.1 | % | |
| | Prior year reserve development ratio | | (1.0 | %) | | 3.4 | | (4.4 | %) | | 1.6 |
| | (6.0 | %) | |
| | Loss ratio | | 73.7 | % | | 3.9 | | 69.8 | % | | (8.3 | ) | | 78.1 | % | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Year ended December 31, | | 2020 | | % Point
Change | | 2019 | | % Point
Change | | 2018 | |
| | | | | | | | | | | | |
| Current accident year loss ratio | | 76.8 | % | | 2.1 | | | 74.7 | % | | 0.5 | | | 74.2 | % | |
| Prior year reserve development ratio | | (0.4 | %) | | 0.6 | | | (1.0 | %) | | 3.4 | | | (4.4 | %) | |
| Loss ratio | | 76.4 | % | | 2.7 | | | 73.7 | % | | 3.9 | | | 69.8 | % | |
| | | | | | | | | | | | |
Current Accident Year Loss Ratio:Ratio
2019 versus 2018:
The current accident year loss ratio increased to 76.8% in 2020 from 74.7% in 2019 from 74.2% in 2018.2019. The increase in the current accident year loss ratio was impacted by a higher level of catastrophe and weather-related losses. During 2019, we incurred pre-tax2020, catastrophe and weather-related losses, net of reinstatement premiums, were $330 million, or 16.2 points, primarily attributable to the COVID-19 pandemic, the Midwest derecho, Hurricane Laura, wildfires across the West Coast of the United States, and other weather-related events. During 2020, catastrophe and weather-related losses included $156 million, or 7.6 points, attributable to the COVID-19 pandemic largely associated with property-related coverages, but also included accident and health, and mortgage-related coverages.
Comparatively, in 2019, catastrophe and weather-related losses, net of reinstatement premiums, were $252 million or 10.7 points, primarily attributable to Japanese Typhoons Hagibis, Faxai and Tapah, Hurricane Dorian, Australia Wildfires, and other weather-related events. Comparatively, in 2018 we incurred pre-tax catastrophe and weather-related losses, net of reinstatement premiums, of $226 million or 9.4 points primarily attributable to California Wildfires, Hurricanes Michael and Florence, Typhoon Jebi and other weather-related events.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 60.6% in 2020 from 64.0% in 2019 from 64.8% in 2018.2019. The decrease in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses was principally due to the impact of changes in business mix a decrease inand improved loss experience in property and engineering lines, partially offset by an increase in loss experience in aviation, agriculture and motoraviation lines.
Prior Year Reserve Development
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for details on the reserve classes, the expected claim tails, and prior year development.
Acquisition Cost Ratio:
The decrease in the acquisition cost ratio decreased to 22.6% in 2020 from 23.2% in 2019, from 23.5% in 2018 was principally related to changes in business mix adjustments related to loss sensitive features, and the impact of retrocessional contracts.
Underwriting-Related General and Administrative Expense Ratio
:
The decrease in theunderwriting-related general and administrative expense ratio increased to 4.8% in 2020 from 4.3% in 2019, from 5.1% in 2018 was mainly driven by an increasedecreases in net premium earned and fees associated with arrangements with strategic capital partners, together with decreases in information technology costs and personnel costs, partially offset by a decrease in travel and entertainment expenses.
NET INVESTMENT INCOME AND NET INVESTMENT GAINS (LOSSES)
Net Investment Income
Net investment income from our cash and investment portfolio by major asset class was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
| | | | | | | | | | | |
| Fixed maturities | $ | 317,121 | | | (17%) | | $ | 384,053 | | | 8% | | $ | 356,273 | | |
| Other investments | 16,059 | | | (73%) | | 60,038 | | | 23% | | 48,959 | | |
| Equity securities | 9,328 | | | (11%) | | 10,434 | | | 4% | | 10,077 | | |
| Mortgage loans | 15,432 | | | 5% | | 14,712 | | | 8% | | 13,566 | | |
| Cash and cash equivalents | 13,582 | | | (49%) | | 26,882 | | | (2%) | | 27,566 | | |
| Short-term investments | 2,749 | | | (61%) | | 7,053 | | | (25%) | | 9,365 | | |
| Gross investment income | 374,271 | | | (26%) | | 503,172 | | | 8% | | 465,806 | | |
| Investment expense | (24,670) | | | —% | | (24,600) | | | (10%) | | (27,299) | | |
| Net investment income | $ | 349,601 | | | (27%) | | $ | 478,572 | | | 9% | | $ | 438,507 | | |
| | | | | | | | | | | |
| Pre-tax yield:(1) | | | | | | | | | | |
| Fixed maturities | 2.6 | % | | | | 3.2 | % | | | | 3.0 | % | |
| | | | | | | | | | | |
(1)Pre-tax yield is calculated by dividing net premiums earned,investment income by the average month-end amortized cost balances.
Fixed Maturities
2020 versus 2019: Net investment income in 2020 decreased by $67 million or 17%, compared to 2019 due to a decrease in yields and a smaller allocation of the portfolio to fixed maturities.
Other Investments
Other investments include hedge funds, direct lending funds, private equity funds, real estate funds, other privately held investments, an increaseindirect investment in CLO-Equities and overseas deposits. These investments are recorded at fair value, with changes in fair value and income distributions reported in net investment income. Consequently, the pre-tax return on other investments may vary materially year over year, particularly during volatile equity and credit markets.
Net investment income from other investments was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Hedge, direct lending, private equity and real estate funds | $ | 16,267 | | | $ | 42,186 | | | $ | 40,295 | | |
| Other privately held investments | 5,809 | | | 18,050 | | | 2,036 | | |
| CLO-Equities | (6,017) | | | (198) | | | 6,628 | | |
| Total net investment income from other investments(1) | $ | 16,059 | | | $ | 60,038 | | | $ | 48,959 | | |
| | | | | | | |
| Pre-tax return on other investments(2) | 2.2 | % | | 8.5 | % | | 6.4 | % | |
| | | | | | | |
(1)Excluding overseas deposits.
(2)The pre-tax return on other investments is calculated by dividing total net investment income from other investments by the average month-end fair value balances held for the periods indicated, excluding overseas deposits.
2020 versus 2019: Pre-tax return on other investments in 2020 decreased to 2.2% compared to 8.5% in 2019. The decrease was primarily attributable to lower returns from direct lending and real estate funds and a realized gain of $13 million associated with the sale of a privately held investment in 2019.
Net Investment Gains (Losses)
Fixed maturities classified as available for sale are reported at fair value. Realized gains (losses) on fixed maturities are reported in net investment gains (losses) when these securities are sold or impaired.
Equity securities are reported at fair value. Realized gains (losses) on equity securities are also reported in net investment gains (losses) when securities are sold or impaired. In addition, changes in the allocationfair values of equity securities are reported in net investment gains (losses).
Changes in the fair value of investment derivatives, mainly foreign exchange forward contracts and exchange traded interest rate swaps, are recorded in net investment gains (losses).
Net investment gains (losses) were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| On sale of investments: | | | | | | |
| Fixed maturities and short-term investments | $ | 92,119 | | | $ | 36,645 | | | $ | (96,086) | | |
| Equity securities | 19,808 | | | 3,126 | | | 17,046 | | |
| | 111,927 | | | 39,771 | | | (79,040) | | |
| Allowance for expected credit losses | (323) | | | — | | | — | | |
| Impairment losses (1) | (1,486) | | | — | | | — | | |
| OTTI losses | — | | | (6,984) | | | (9,733) | | |
| Change in fair value of investment derivatives | (2,434) | | | (1,823) | | | 5,445 | | |
| Net unrealized gains (losses) on equity securities | 21,449 | | | 60,269 | | | (66,890) | | |
| Net investment gains (losses) | $ | 129,133 | | | $ | 91,233 | | | $ | (150,218) | | |
| | | | | | | |
(1) Related to instances where the Company intends to sell securities, or it is more likely than not that the Company will be required to sell securities before their anticipated recovery.
2020 versus 2019: Net investment gains in 2020 were $129 million compared to net investment gains of $91 million in 2019. Net investment gains reported in 2020 mainly reflected net realized gains on the sale of U.S Government, agency RMBS and exchange traded funds and net unrealized gains on equity securities. Net investment gains reported in 2019 mainly reflected net unrealized gains on equity securities and net realized gains on the sale of U.S. government and agency RMBS.
On Sale of Investments
Generally, sales of individual securities occur when there are changes in the relative value, credit quality, or duration of a particular issue. We may also sell securities to re-balance our investment portfolio in order to change exposure to particular asset classes or sectors.
Impairment and OTTI Losses
The impairment losses (refer to 'Critical Accounting Estimates – Impairment losses' for further details) recognized in net income by asset class were as follows:
2020 versus 2019: Impairment losses in 2020 were $1 million compared to OTTI losses of $7 million in 2019. The impairment losses in 2020 were principally due to impairments of non-investment grade corporate costsdebt securities that we intend to sell or more likely than not will be required to sell. OTTI losses in 2019 included impairments on non-U.S. denominated securities due to foreign exchange losses associated with the segment.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.
Change in Fair Value of Investment Derivatives From time to time, we economically hedge foreign exchange exposure and interest rate risk with derivative contracts.
During 2020, foreign exchange hedges resulted in $2 million of net losses which primarily related to securities denominated in euro which experienced volatility during 2020.
During 2019, foreign exchange hedges resulted in $2 million of net gains which primarily related to securities denominated in euro which experienced volatility during 2019. We also recorded net losses of $4 million related to interest rate swaps.
Our derivative instruments are not designated as hedges under current accounting guidance, therefore, net unrealized gains (losses) on the hedged securities were recorded in accumulated other comprehensive income in the statement of changes in shareholders’ equity.
Total Return
Our investment strategy is to take a long-term view by actively managing our investment portfolio to maximize total return within certain guidelines and constraints. In assessing returns under this approach, we include net investment income, net investment gains (losses), the change in unrealized gains (losses) on fixed maturities, and interest in income (loss) of equity method investments generated by our investment portfolio.
Total return on cash and investments was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Net investment income | $ | 349,601 | | | $ | 478,572 | | | $ | 438,507 | | |
| Net investments gains (losses) | 129,133 | | | 91,233 | | | (150,218) | | |
| Change in net unrealized gains (losses) on fixed maturities(1) | 269,937 | | | 385,364 | | | (191,529) | | |
| Interest in income (loss) of equity method investments | (3,612) | | | 9,718 | | | 993 | | |
| Total | $ | 745,059 | | | $ | 964,887 | | | $ | 97,753 | | |
| | | | | | | |
| Average cash and investments(2) | $ | 15,562,097 | | | $ | 15,322,688 | | | $ | 15,361,287 | | |
| | | | | | | |
| Total return on average cash and investments, pre-tax: | | | | | | |
| Including investment related foreign exchange movements | 4.8 | % | | 6.3 | % | | 0.6 | % | |
| Excluding investment related foreign exchange movements(3) | 4.4 | % | | 6.1 | % | | 0.9 | % | |
| | | | | | | |
(1)Change in net unrealized gains (losses) on fixed maturities is calculated by taking net unrealized gains (losses) at period end less net unrealized gains (losses) at the prior period end.
(2)The average cash and investments balance is calculated by taking the average of the period end fair value balances.
(3)Pre-tax total return on cash and investments excluding foreign exchange rate movements is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to pre-tax total return on cash and investments, the most comparable GAAP financial measure, included foreign exchange gains (losses) of $55 million, $25 million and $(48) million for the years ended December 31, 2020, 2019 and 2018, respectively.
OTHER EXPENSES (REVENUES), NET
Our
The following table provides a summary of other expenses (revenues), net were as follows:net:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
| | | | | | | | | | | |
| Corporate expenses | $ | 101,822 | | | (21%) | | $ | 129,096 | | | 19% | | $ | 108,221 | | |
| Foreign exchange losses (gains) | 81,069 | | | nm | | (12,041) | | | nm | | (29,165) | | |
| Interest expense and financing costs | 75,049 | | | 10% | | 68,107 | | | 1% | | 67,432 | | |
| Income tax expense (benefit) | (12,321) | | | nm | | 23,692 | | | nm | | (29,486) | | |
| Total | $ | 245,619 | | | | | $ | 208,854 | | | | | $ | 117,002 | | |
| | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year ended December 31, | 2019 | | % Change | | 2018 | | % Change | | 2017 | |
| | | | | | | | | | | | |
| | Corporate expenses | $ | 129,096 |
| | 19% | | $ | 108,221 |
| | (17%) | | $ | 129,945 |
| |
| | Foreign exchange losses (gains) | (12,041 | ) | | nm | | (29,165 | ) | | nm | | 134,737 |
| |
| | Interest expense and financing costs | 68,107 |
| | 1% | | 67,432 |
| | 23% | | 54,811 |
| |
| | Income tax expense (benefit) | 23,692 |
| | nm | | (29,486 | ) | | nm | | (7,542 | ) | |
| | Total | $ | 208,854 |
| | nm | | $ | 117,002 |
| | nm | | $ | 311,951 |
| |
| | | | | | | | | | | | |
nm-not meaningful
Corporate Expenses
Corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As a percentage of net premiums earned, corporate expenses were 2.8% anddecreased to 2.3% in 2019 and 2018, respectively.2020 from 2.8% in 2019.
The increasedecrease in corporate expenses in 2019 compared to 20182020 was primarily related to ongoing investmentsdecreases in information technology costs, travel and digital capabilities, an increase inentertainment costs, personnel costs, and professional fees, partially offset by an increasea decrease in the allocation of corporate costs to the insurance and reinsurance segments.segment.
Foreign Exchange Losses (Gains)
Some of our business is written in currencies other than the U.S. dollar. Foreign exchange losses in 2020 were mainly driven by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling and the euro.
Foreign exchange gains in 2019 were mainly driven by the impact of the strengthening of the U.S. dollar on the re-measurement of net insurance-related liabilities denominated in euro, partially offset by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling.
Foreign exchange gains in 2018 were mainly driven by the impact of the strengthening of the U.S. dollar on the re-measurement of net insurance-related liabilities mainly denominated in pound sterling and euro.
Interest ExpenseChange in Fair Value of Investment Derivatives
From time to time, we economically hedge foreign exchange exposure and Financing Costsinterest rate risk with derivative contracts.
Interest expense and financing costs areDuring 2020, foreign exchange hedges resulted in $2 million of net losses which primarily related to securities denominated in euro which experienced volatility during 2020.
During 2019, foreign exchange hedges resulted in $2 million of net gains which primarily related to securities denominated in euro which experienced volatility during 2019. We also recorded net losses of $4 million related to interest duerate swaps.
Our derivative instruments are not designated as hedges under current accounting guidance, therefore, net unrealized gains (losses) on the 5.875% senior unsecured notes ("5.875% Senior Notes") issuedhedged securities were recorded in 2010, the 5.150% senior unsecured notes ("5.150% Senior Notes") issued in 2014, the 4.000% senior unsecured notes ("4.000% Senior Notes") issued in 2017, the 3.900% Senior Notes and the Junior Subordinated Notes issued in 2019.
Interest expense and financing costs increased by $1 million in 2019 compared to 2018, due to the issuance of the 3.900% Senior Notes on June 19, 2019, and the issuance of the Junior Subordinated Notes on December 10, 2019, partially offset by the repayment of the 2.650% Senior Notes on April 1, 2019 and the repayment of the Dekania Notes on November 15, 2018.
Income Tax Expense (Benefit)
Income tax expense (benefit) primarily results fromaccumulated other comprehensive income (loss) generated by our foreign operations in the U.S.statement of changes in shareholders’ equity.
Total Return
Our investment strategy is to take a long-term view by actively managing our investment portfolio to maximize total return within certain guidelines and Europe. Our effective tax rate, which is calculated asconstraints. In assessing returns under this approach, we include net investment income, tax expense (benefit)net investment gains (losses), divided by income (loss) before tax includingthe change in unrealized gains (losses) on fixed maturities, and interest in income (loss) of equity method investments was 6.8% and (217.9)%, in 2019 and 2018, respectively. This effective rate can vary between years dependinggenerated by our investment portfolio.
Total return on the distribution of net income (loss) among tax jurisdictions, as well as other factors.
The tax expense of $24 million in 2019 was principally due to the geographic distribution of pre-tax income with the expense being driven by pre-tax income generated in our U.S. and European operations, partially offset by pre-tax losses in our U.K. operations.
The tax benefit of $29 million in 2018 was principally due to the geographic distribution of pre-tax losses with the benefit being driven by pre-tax losses in our U.K. and European operations, partially offset by pre-tax income in our U.S. operations.
NET INVESTMENT INCOME AND NET INVESTMENT GAINS (LOSSES)
Net Investment Income
Net investment income from our cash and investment portfolio by major asset class was as follows:
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | Year ended December 31, | 2019 | | % Change | | 2018 | | % Change | | 2017 | |
| | | | | | | | | | | | |
| | Fixed maturities | $ | 384,053 |
| | 8% | | $ | 356,273 |
| | 14% | | $ | 312,662 |
| |
| | Other investments | 60,038 |
| | 23% | | 48,959 |
| | (36%) | | 76,858 |
| |
| | Equity securities | 10,434 |
| | 4% | | 10,077 |
| | (32%) | | 14,919 |
| |
| | Mortgage loans | 14,712 |
| | 8% | | 13,566 |
| | 26% | | 10,780 |
| |
| | Cash and cash equivalents | 26,882 |
| | (2%) | | 27,566 |
| | nm | | 10,057 |
| |
| | Short-term investments | 7,053 |
| | (25%) | | 9,365 |
| | nm | | 2,718 |
| |
| | Gross investment income | 503,172 |
| | 8% | | 465,806 |
| | 9% | | 427,994 |
| |
| | Investment expense | (24,600 | ) | | (10%) | | (27,299 | ) | | —% | | (27,189 | ) | |
| | Net investment income | $ | 478,572 |
| | 9% | | $ | 438,507 |
| | 9% | | $ | 400,805 |
| |
| | | | | | | | | | | | |
| | Pre-tax yield:(1) | | | | | | | | | | |
| | Fixed maturities | 3.2 | % | | | | 3.0 | % | | | | 2.7 | % | |
| | | | | | | | | | | | |
nm - not meaningful
| |
(1) | Pre-tax yield is calculated by dividing net investment income by the average month-end amortized cost balances for the periods indicated. |
Fixed Maturities
2019 versus 2018: Net investment income in 2019 increased by $28 million or 8%, compared to 2018 due to an increase in yields and a larger allocation of the portfolio to fixed maturities.
Other Investments
Other investments include hedge funds, direct lending funds, private equity funds, real estate funds, other privately held investments, indirect investments in CLO-Equities and overseas deposits. These investments are recorded at fair value, with changes in fair value and income distributions reported in net investment income. Consequently, the pre-tax return on other investments may vary materially year over year, particularly during volatile equity and credit markets.
Net investment income from other investments was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Net investment income | $ | 349,601 | | | $ | 478,572 | | | $ | 438,507 | | |
| Net investments gains (losses) | 129,133 | | | 91,233 | | | (150,218) | | |
| Change in net unrealized gains (losses) on fixed maturities(1) | 269,937 | | | 385,364 | | | (191,529) | | |
| Interest in income (loss) of equity method investments | (3,612) | | | 9,718 | | | 993 | | |
| Total | $ | 745,059 | | | $ | 964,887 | | | $ | 97,753 | | |
| | | | | | | |
| Average cash and investments(2) | $ | 15,562,097 | | | $ | 15,322,688 | | | $ | 15,361,287 | | |
| | | | | | | |
| Total return on average cash and investments, pre-tax: | | | | | | |
| Including investment related foreign exchange movements | 4.8 | % | | 6.3 | % | | 0.6 | % | |
| Excluding investment related foreign exchange movements(3) | 4.4 | % | | 6.1 | % | | 0.9 | % | |
| | | | | | | |
|
| | | | | | | | | | | | | |
| | | | | | | | |
| | Year ended December 31, | 2019 | | 2018 | | 2017 | |
| | | | | | | | |
| | Hedge, direct lending, private equity and real estate funds | $ | 42,186 |
| | $ | 40,295 |
| | $ | 69,740 |
| |
| | Other privately held investments | 18,050 |
| | 2,036 |
| | 4,560 |
| |
| | CLO-Equities | (198 | ) | | 6,628 |
| | 2,558 |
| |
| | Total net investment income from other investments(1) | $ | 60,038 |
| | $ | 48,959 |
| | $ | 76,858 |
| |
| | | | | | | | |
| | Pre-tax return on other investments(2) | 8.5 | % | | 6.4 | % | | 9.6 | % | |
| | | | | | | | |
| |
| (1) | Excluding overseas deposits. |
| |
(2) | The pre-tax return on other investments is calculated by dividing total net investment income from other investments by the average month-end fair value balances held for the periods indicated, excluding overseas deposits. |
2019 versus 2018: Pre-tax return on other investmentsChange in 2019 increased to 8.5% compared to 6.4% in 2018. The increase was primarily attributable to a realized gain of $13 million associated with the sale of a privately held investment, partially offset by lower returns from CLO-Equities.
Net Investment Gains (Losses)
Fixed maturities classified as available for sale are reported at fair value. Realizednet unrealized gains (losses) on fixed maturities are reported inis calculated by taking net investmentunrealized gains (losses) when these securities are sold or impaired.
Equity securities are reported at fair value. Realizedperiod end less net unrealized gains (losses) at the prior period end.
(2)The average cash and investments balance is calculated by taking the average of the period end fair value balances.
(3)Pre-tax total return on equity securities are also reportedcash and investments excluding foreign exchange rate movements is a non-GAAP financial measure as defined in net investmentItem 10(e) of SEC Regulation S-K. The reconciliation to pre-tax total return on cash and investments, the most comparable GAAP financial measure, included foreign exchange gains (losses) when securities are sold or impaired. In addition, changesof $55 million, $25 million and $(48) million for the years ended December 31, 2020, 2019 and 2018, respectively.
OTHER EXPENSES (REVENUES), NET
The following table provides a summary of other expenses (revenues), net:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
| | | | | | | | | | | |
| Corporate expenses | $ | 101,822 | | | (21%) | | $ | 129,096 | | | 19% | | $ | 108,221 | | |
| Foreign exchange losses (gains) | 81,069 | | | nm | | (12,041) | | | nm | | (29,165) | | |
| Interest expense and financing costs | 75,049 | | | 10% | | 68,107 | | | 1% | | 67,432 | | |
| Income tax expense (benefit) | (12,321) | | | nm | | 23,692 | | | nm | | (29,486) | | |
| Total | $ | 245,619 | | | | | $ | 208,854 | | | | | $ | 117,002 | | |
| | | | | | | | | | | |
nm – not meaningful
Corporate Expenses
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 decreased to 2.3% in 2020 from 2.8% in 2019.
The decrease in corporate expenses in 2020 was primarily related to decreases in information technology costs, travel and entertainment costs, personnel costs, and professional fees, partially offset by a decrease in the fair valuesallocation of equity securities are reportedcorporate costs to the insurance segment.
Foreign Exchange Losses (Gains)
Some of our business is written in currencies other than the U.S. dollar. Foreign exchange losses in 2020 were mainly driven by the impact of the weakening of the U.S. dollar on the remeasurement of net investment gains (losses).
Changesinsurance-related liabilities denominated in pound sterling and the fair value of investment derivatives, mainly foreign exchange forward contracts and exchange traded interest rate swaps, are recorded in net investment gains (losses).
Net investment gains (losses) were as follows:
|
| | | | | | | | | | | | | |
| | | | | | | | |
| | Year ended December 31, | 2019 | | 2018 | | 2017 | |
| | | | | | | | |
| | On sale of investments: | | | | | | |
| | Fixed maturities and short-term investments | $ | 36,645 |
| | $ | (96,086 | ) | | $ | (26,396 | ) | |
| | Equity securities | 3,126 |
| | 17,046 |
| | 77,384 |
| |
| | | 39,771 |
| | (79,040 | ) | | 50,988 |
| |
| | OTTI charges recognized in net income | (6,984 | ) | | (9,733 | ) | | (14,493 | ) | |
| | Change in fair value of investment derivatives | (1,823 | ) | | 5,445 |
| | (8,269 | ) | |
| | Net unrealized gains (losses) on equity securities | 60,269 |
| | (66,890 | ) | | — |
| |
| | Net investment gains (losses) | $ | 91,233 |
| | $ | (150,218 | ) | | $ | 28,226 |
| |
| | | | | | | | |
2019 versus 2018
: Net investment
Foreign exchange gains in 2019 were $91 million compared to net investment lossesmainly driven by the impact of $150 million in 2018. Net investment gains reported in 2019 mainly reflected net unrealized gains on equity securities and net realized gains on the sale of U.S. government and agency RMBS securities. Net investment losses reported in 2018 mainly reflected net realized investment losses on the sale of agency RMBS, U.S. government and corporate debt securities and net unrealized losses on equity securities of $67 million.
On Sale of Investments
Generally, sales of individual securities occur when there are changes in the relative value, credit quality, or duration of a particular issue. We may also sell to re-balance our investment portfolio in order to change exposure to particular asset classes or sectors.
OTTI Charges
The OTTI charges (refer to 'Critical Accounting Estimates – OTTI' for further details) recognized in net income by asset class were as follows:
|
| | | | | | | | | | | | | |
| | | | | | | | |
| | Year ended December 31, | 2019 | | 2018 | | 2017 | |
| | | | | | | | |
| | Fixed maturities: | | | | | | |
| | Non-U.S. government | $ | 90 |
| | $ | 4,697 |
| | $ | 8,187 |
| |
| | Corporate debt | 6,894 |
| | 4,995 |
| | 6,306 |
| |
| | Non-Agency CMBS | — |
| | 41 |
| | — |
| |
| | Total OTTI charge recognized in net income | $ | 6,984 |
| | $ | 9,733 |
| | $ | 14,493 |
| |
| | | | | | | | |
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 againston the re-measurement of net insurance-related liabilities denominated in euro, partially offset by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling and the euro and impairments on non-investment grade corporate debt securities that had declined significantly in value.sterling.
Change in Fair Value of Investment Derivatives
From time to time, we economically hedge foreign exchange exposure and interest rate risk with derivative contracts.
During 2020, foreign exchange hedges resulted in $2 million of net losses which primarily related to securities denominated in euro which experienced volatility during 2020.
During 2019, foreign exchange hedges resulted in $2 million of net gains which primarily related to securities denominated in euro which experienced volatility during 2019. We also recorded net losses of $4 million related to interest rate swaps.
During 2018, foreign exchange hedges resulted in $3 million of net gains which primarily related to securities denominated in euro and pound sterling as each of these currencies experienced volatility during 2018. We also recorded net gains of $2 million related to interest rate swaps.
Our derivative instruments are not designated as hedges under current accounting guidance, therefore, net unrealized gains (losses) on the hedged securities were recorded in accumulated other comprehensive income in the statement of changes in shareholders’ equity.
Total Return
Our investment strategy is to take a long-term view by actively managing our investment portfolio to maximize total return within certain guidelines and constraints. In assessing returns under this approach, we include net investment income, net investment gains (losses), the change in unrealized gains (losses) on fixed maturities, and interest in income (loss) of equity method investments generated by our investment portfolio.
Total return on cash and investments was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Net investment income | $ | 349,601 | | | $ | 478,572 | | | $ | 438,507 | | |
| Net investments gains (losses) | 129,133 | | | 91,233 | | | (150,218) | | |
| Change in net unrealized gains (losses) on fixed maturities(1) | 269,937 | | | 385,364 | | | (191,529) | | |
| Interest in income (loss) of equity method investments | (3,612) | | | 9,718 | | | 993 | | |
| Total | $ | 745,059 | | | $ | 964,887 | | | $ | 97,753 | | |
| | | | | | | |
| Average cash and investments(2) | $ | 15,562,097 | | | $ | 15,322,688 | | | $ | 15,361,287 | | |
| | | | | | | |
| Total return on average cash and investments, pre-tax: | | | | | | |
| Including investment related foreign exchange movements | 4.8 | % | | 6.3 | % | | 0.6 | % | |
| Excluding investment related foreign exchange movements(3) | 4.4 | % | | 6.1 | % | | 0.9 | % | |
| | | | | | | |
(1)Change in net unrealized gains (losses) on fixed maturities is calculated by taking net unrealized gains (losses) at period end less net unrealized gains (losses) at the prior period end.
(2)The average cash and investments balance is calculated by taking the average of the period end fair value balances.
(3)Pre-tax total return on cash and investments excluding foreign exchange rate movements is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to pre-tax total return on cash and investments, the most comparable GAAP financial measure, included foreign exchange gains (losses) of $55 million, $25 million and $(48) million for the years ended December 31, 2020, 2019 and 2018, respectively.
|
| | | | | | | | | | | | | |
| | | | | | | | |
| | Year ended December 31, | 2019 | | 2018 | | 2017 | |
| | | | | | | | |
| | Net investment income | $ | 478,572 |
| | $ | 438,507 |
| | $ | 400,805 |
| |
| | Net investments gains (losses) | 91,233 |
| | (150,218 | ) | | 28,226 |
| |
| | Change in net unrealized gains (losses) on fixed maturities(1) | 385,364 |
| | (191,529 | ) | | 177,259 |
| |
| | Interest in income (loss) of equity method investments | 9,718 |
| | 993 |
| | (8,402 | ) | |
| | Total | $ | 964,887 |
| | $ | 97,753 |
| | $ | 597,888 |
| |
| | | | | | | | |
| | Average cash and investments(2) | $ | 15,322,688 |
| | $ | 15,361,287 |
| | $ | 14,854,569 |
| |
| | | | | | | | |
| | Total return on average cash and investments, pre-tax: | | | | | | |
| | Including investment related foreign exchange movements | 6.3 | % | | 0.6 | % | | 4.0 | % | |
| | Excluding investment related foreign exchange movements(3) | 6.1 | % | | 0.9 | % | | 3.5 | % | |
| | | | | | | | |
| | |
(1) | Change in net unrealized gains (losses) on fixed maturities is calculated by taking net unrealized gains (losses) at period end less net unrealized gains (losses) at the prior period end. |
OTHER EXPENSES (REVENUES), NET
| | |
(2) | The average cash and investments balance is calculated by taking the average of the period end fair value balances. |
The following table provides a summary of other expenses (revenues), net:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Year ended December 31, | 2020 | | % Change | | 2019 | | % Change | | 2018 | |
| | | | | | | | | | | |
| Corporate expenses | $ | 101,822 | | | (21%) | | $ | 129,096 | | | 19% | | $ | 108,221 | | |
| Foreign exchange losses (gains) | 81,069 | | | nm | | (12,041) | | | nm | | (29,165) | | |
| Interest expense and financing costs | 75,049 | | | 10% | | 68,107 | | | 1% | | 67,432 | | |
| Income tax expense (benefit) | (12,321) | | | nm | | 23,692 | | | nm | | (29,486) | | |
| Total | $ | 245,619 | | | | | $ | 208,854 | | | | | $ | 117,002 | | |
| | | | | | | | | | | |
nm – not meaningful
Corporate Expenses
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 decreased to 2.3% in 2020 from 2.8% in 2019.
The decrease in corporate expenses in 2020 was primarily related to decreases in information technology costs, travel and entertainment costs, personnel costs, and professional fees, partially offset by a decrease in the allocation of corporate costs to the insurance segment.
Foreign Exchange Losses (Gains)
Some of our business is written in currencies other than the U.S. dollar. Foreign exchange losses in 2020 were mainly driven by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling and the euro.
Foreign exchange gains in 2019 were mainly driven by the impact of the strengthening of the U.S. dollar on the re-measurement of net insurance-related liabilities denominated in euro, partially offset by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling.
Interest Expense and Financing Costs
Interest expense and financing costs are related to interest due on the 5.875% senior unsecured notes ("5.875% Senior Notes") issued in 2010 and repaid in June 2020, the 5.150% senior unsecured notes ("5.150% Senior Notes") issued in 2014, the 4.000% senior unsecured notes ("4.000% Senior Notes") issued in 2017, the 3.900% senior unsecured notes ("3.900% Senior Notes"), and the 4.900% fixed-rate reset junior subordinated notes ("Junior Subordinated Notes") issued in 2019.
Interest expense and financing costs increased by $7 million in 2020, compared to 2019, due to the issuance of the 3.900% Senior Notes on June 19, 2019 and the issuance of the Junior Subordinated Notes on December 10, 2019, partially offset by the repayment of the 2.650% Senior Notes on April 1, 2019 and the repayment of the 5.875% Senior Notes on June 1, 2020.
Income Tax Expense (Benefit)
Income tax expense (benefit) primarily results from income (loss) generated by our foreign operations in the U.S. and Europe. Our effective tax rate, which is calculated as income tax expense (benefit), divided by income (loss) before tax including interest in income (loss) of equity method investments, was 9.3%, 6.8%, and (217.9%) in 2020, 2019, and 2018, respectively. This effective rate can vary between years depending on the distribution of net income (loss) among tax jurisdictions, as well as other factors
The tax benefit of $12 million in 2020 was principally due to the generation of pre-tax losses in our U.K. operations.
The tax expense of $24 million in 2019 was principally due to the geographic distribution of pre-tax income with the expense being driven by pre-tax income generated in our U.S. and European operations, partially offset by pre-tax losses in our U.K. operations.
| | |
(3) | Pre-tax total return on average cash and investments excluding foreign exchange rate movements is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to pre-tax total return on cash and investments, the most comparable GAAP financial measure, included foreign exchange gains (losses) of $25 million, $(48) million and $80 million for the years ended December 31, 2019, 2018 and 2017, respectively. |
FINANCIAL MEASURES
We believe that the following financial indicators are important in evaluating performance and measuring the overall growth in value generated for common shareholders:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Year ended and at December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Return on average common equity(1) | (3.2 | %) | | 6.3 | % | | — | % | |
| Operating return on average common equity(2) | (3.7 | %) | | 4.7 | % | | 3.6 | % | |
| Book value per diluted common share(3) | $ | 55.09 | | | $ | 55.79 | | | $ | 49.93 | | |
| Cash dividends declared per common share | $ | 1.65 | | | $ | 1.61 | | | $ | 1.57 | | |
| Increase (decrease) in book value per diluted common share adjusted for dividends | $ | 0.95 | | | $ | 7.47 | | | $ | (2.38) | | |
| | | | | | | |
(1) Return on average common equity ("ROACE") is calculated by dividing net income (loss) available (attributable) to common shareholders for the year by the average common shareholders' equity determined using the common shareholders' equity balances at the beginning and end of the year.
(2) Operating return on average common equity ("operating ROACE"), a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to the most comparable GAAP financial measure, ROACE, and a discussion of the rationale for its presentation is provided in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures Reconciliation'.
(3) Book value per diluted common share represents common shareholders’ equity divided by the number of diluted common share outstanding, determined using the treasury stock method. Cash-settled restricted stock units are excluded.
Return on Average Common Equity
Our objective is to generate superior returns on capital that appropriately reward 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 challenge the ability to achieve a profitability target in any specific period.
ROACE reflects the impact of net income (loss) available (attributable) to common shareholders, including net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
The decrease in ROACE in 2020 compared to 2019, was primarily driven by the underwriting loss, a decrease in net investment income, and the foreign exchange losses, partially offset by an increase in net investment gains, the income tax benefit, and decreases in corporate expenses, reorganization expenses, and the amortization of value of business acquired ("VOBA") associated with the acquisition of Novae.
Operating ROACE excludes the impact of net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
The decrease in operating ROACE in 2020, compared to 2019, was primarily driven by the underwriting loss and a decrease in investment income, partially offset by the income tax benefit, and decreases in corporate expenses and the amortization of VOBA associated with the acquisition of Novae.
Book Value per Diluted Common Share
We consider book value per diluted common share to be an appropriate measure of returns to common shareholders, as we believe growth in book value on a diluted basis will ultimately translate into appreciation of our stock price.
In 2020, book value per diluted common share decreased by 1%, due to the net loss generated and common dividends declared, partially offset by net unrealized investment gains reported in other comprehensive income.
In 2019, book value per diluted common share increased by 12%, primarily driven by net income generated and net unrealized investment gains reported in other comprehensive income, partially offset by common dividends declared. The net unrealized investment gains in 2019 reflected a decrease in interest rates and a tightening of credit spreads which positively impacted the market values of fixed maturities.
Cash Dividends Declared per Common Share
We believe in returning excess capital to shareholders by way of dividends. Accordingly, dividend policy is an integral part of the value we create for shareholders. Our Board of Directors have approved seventeen successive annual increases in quarterly common share dividends.
Book Value per Diluted Common Share Adjusted for Dividends
Taken together, we believe that growth in book value per diluted common share and common share dividends declared represent the total value created for common shareholders. As companies in the insurance industry have differing dividend payout policies, we believe that investors use the book value per diluted common share adjusted for dividends metric to measure comparable performance across the industry.
In 2020, the increase in total value of $0.95, or 2%, was driven by net unrealized investment gains recognized in other comprehensive income, partially offset by the net loss generated for the year.
In 2019, the increase in total value of $7.47, or 15%, was driven by net income generated and net unrealized investment gains reported in other comprehensive income.
NON-GAAP FINANCIAL MEASURES RECONCILIATION
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| Years ended December 31, | 2020 | | 2019 | | 2018 | | |
| | | | | | | | |
| Net income (loss) available (attributable) to common shareholders | $ | (150,674) | | $ | 282,361 | | | $ | 396 | | | |
| Net investment (gains) losses(1) | (129,133) | | (91,233) | | | 150,218 | | | |
| Foreign exchange losses (gains)(2) | 81,069 | | (12,041) | | | (29,165) | | | |
| Reorganization expenses(3) | 7,881 | | 37,384 | | | 66,940 | | | |
| Interest in (income) loss of equity method investments(4) | 3,612 | | (9,718) | | | (993) | | | |
| Income tax expense (benefit) | 13,023 | | 6,656 | | | (26,697) | | | |
| Operating income (loss) | $ | (174,222) | | $ | 213,409 | | | $ | 160,699 | | | |
| | | | | | | | |
| Earnings (loss) per diluted common share (5) | $ | (1.79) | | $ | 3.34 | | $ | — | | |
| Net investment (gains) losses | (1.53) | | (1.08) | | 1.79 | | |
| Foreign exchange losses (gains) | 0.96 | | (0.14) | | (0.35) | | |
| Reorganization expenses | 0.09 | | 0.44 | | 0.80 | | |
| Interest in (income) loss of equity method investments | 0.04 | | (0.12) | | (0.01) | | |
| Income tax expense (benefit) | 0.15 | | 0.08 | | (0.32) | | |
| Operating income (loss) per diluted common share(5) | $ | (2.08) | | $ | 2.52 | | $ | 1.91 | | |
| | | | | | | | |
| Weighted average diluted common shares outstanding(6) | 84,262 | | 84,473 | | 84,007 | | |
| | | | | | | | |
| Average common shareholders' equity | $ | 4,757,351 | | $ | 4,512,040 | | $ | 4,410,668 | | |
| | | | | | | | |
| Return on average common equity | (3.2%) | | 6.3% | | —% | | |
| | | | | | | | |
| Operating return on average common equity | (3.7%) | | 4.7% | | 3.6% | | |
| | | | | | | | |
nm – not meaningful
(1)Tax cost (benefit) of $18 million, $12 million and $(12) million for the years ended December 31, 2020, 2019 and 2018, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize capital losses.
(2)Tax cost (benefit) of $(4) million, $1 million and $(4) million for the years ended December 31, 2020, 2019 and 2018, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the tax status of specific foreign exchange transactions.
(3)Tax (benefit) of $(1) million, $(7) million and $(11) million for the years ended December 31, 2020, 2019 and 2018, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
(4)Tax cost (benefit) of $nil for the years ended December 31, 2020, 2019, respectively and $0.3 million for the year ended December 31, 2018, Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
(5)Loss per diluted common share and operating loss per diluted common share for the year ended December 31, 2020, were calculated using weighted average common shares outstanding due to the net loss attributable to common shareholders and the operating loss recognized in the year.
(6)Refer to Item 8, Note 13 to the Consolidated Financial Statements 'Earnings Per Common Share' for further details.
Rationale for the Use of Non-GAAP Financial Measures
We present our results of operations in the way we believe will be meaningful and useful to investors, analysts, rating agencies and others who use our financial information to evaluate our performance. Some of the measurements we use are considered non-GAAP financial measures under SEC rules and regulations. In this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we present underwriting-related general and administrative expenses, consolidated underwriting income (loss), operating income (loss) (in total and on a per share basis), operating return on average common equity ("operating ROACE"), amounts presented on a constant currency basis, and pre-tax total return on cash and investments excluding foreign exchange movements which are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. We believe that these non-GAAP financial measures, which may be defined and calculated differently by other companies, help explain and enhance the understanding of our results of operations. However, these measures should not be viewed as a substitute for those determined in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
Underwriting-Related General and Administrative Expenses
Underwriting-related general and administrative expenses include those general and administrative expenses that are incremental and/or directly attributable to our underwriting operations. While this measure is presented in Item 8, Note 3 to the Consolidated Financial Statements 'Segment Information', it is considered a non-GAAP financial measure when presented elsewhere on a consolidated basis.
Corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As these costs are not incremental and/or directly attributable to our underwriting operations, these costs are excluded from underwriting-related general and administrative expenses, and therefore, consolidated underwriting income (loss). General and administrative expenses, the most comparable GAAP financial measure to underwriting-related general and administrative expenses, also includes corporate expenses.
The reconciliation of underwriting-related general and administrative expenses to general and administrative expenses, the most comparable GAAP financial measure, is presented in 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Consolidated Results of Operations'.
Consolidated Underwriting Income (Loss)
Consolidated underwriting income (loss) is a pre-tax measure of underwriting profitability that takes into account net premiums earned and other insurance related income (loss) as revenues and net losses and loss expenses, acquisition costs and underwriting-related general and administrative expenses as expenses. 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.
We evaluate our underwriting results separately from the performance of our investment portfolio. As a result, we believe it is appropriate to exclude net investment income and net investment gains (losses) from our underwriting profitability measure.
Foreign exchange losses (gains) in our consolidated statements of operations primarily relate to the impact of foreign exchange rate movements on our net insurance-related liabilities. However, we manage our investment portfolio in such a way that unrealized and realized foreign exchange losses (gains) on our investment portfolio generally offset a large portion of the foreign exchange losses (gains) arising from our underwriting portfolio. As a result, we believe that foreign exchange losses (gains) are not a meaningful contributor to our underwriting performance, therefore, foreign exchange losses (gains) are excluded from consolidated underwriting income (loss).
Interest expense and financing costs primarily relate to interest payable on our debt. As these expenses are not incremental and/or directly attributable to our underwriting operations, these expenses are excluded from underwriting-related general and administrative expenses, and therefore, consolidated underwriting income (loss).
Reorganization expenses are related to the transformation program which was launched in 2017. This program encompasses the integration of Novae, which commenced in the fourth quarter of 2017, the realignment of our accident and health business, together with other initiatives designed to increase efficiency and enhance profitability, while delivering a customer-centric operating model. Reorganization expenses are primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from consolidated underwriting income (loss).
Amortization of intangible assets including VOBA arose from business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from consolidated underwriting income (loss).
We believe that the presentation of underwriting-related general and administrative expenses and consolidated underwriting income (loss) provides investors with an enhanced understanding of our results of operations, by highlighting the underlying pre-tax profitability of our underwriting activities. The reconciliation of consolidated underwriting income (loss) to net income (loss), the most comparable GAAP financial measure, is presented in 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Consolidated Results of Operations'.
Operating Income (Loss)
Operating income (loss) represents after-tax operational results exclusive of net investment gains (losses), foreign exchange losses (gains), reorganization expenses and interest in income (loss) of equity method investments.
Although the investment of premiums to generate income and investment gains (losses) is an integral part of our operations, the determination to realize investment gains (losses) is independent of the underwriting process and is heavily influenced by the availability of market opportunities. Furthermore, many users believe that the timing of the realization of investment gains (losses) is somewhat opportunistic for many companies.
Foreign exchange losses (gains) in our consolidated statements of operations primarily relate to the impact of foreign exchange rate movements on net insurance-related liabilities. In addition, we recognize unrealized foreign exchange losses (gains) on our equity securities and foreign exchange losses (gains) realized on the sale of our available for sale investments and equity securities in net investment gains (losses). We also recognize unrealized foreign exchange losses (gains) on our available for sale investments in other comprehensive income (loss). These unrealized foreign exchange losses (gains) generally offset a large portion of the foreign exchange losses (gains) reported in net income (loss), thereby minimizing the impact of foreign exchange rate movements on total shareholders’ equity. As a result, foreign exchange losses (gains) in our consolidated statements of operations in isolation are not a meaningful contributor to the performance of our business.
Reorganization expenses are related to the transformation program which was launched in 2017. This program encompasses the integration of Novae, which commenced in the fourth quarter of 2017, the realignment of our accident and health business, together with other initiatives designed to increase efficiency and enhance profitability, while delivering a customer-centric operating model. Reorganization expenses are primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from operating income (loss).
Interest in income (loss) of equity method investments is primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, this income (loss) is excluded from operating income (loss).
Certain users of our financial statements evaluate performance exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), reorganization expenses and interest in income (loss) of equity method investments to understand the profitability of recurring sources of income.
We believe that showing net income (loss) available (attributable) to common shareholders exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), reorganization expenses and interest in income (loss) of equity method investments reflects the underlying fundamentals of our business. In addition, we believe that this presentation enables investors and other users of our financial information to analyze performance in a manner similar to how our management analyzes the underlying business performance. We also believe this measure follows industry practice and, therefore, facilitates comparison of our performance with our peer group. We believe that equity analysts and certain rating agencies that follow us, and the insurance industry as a whole, generally exclude these items from their analyses for the same reasons. The reconciliation of operating income (loss) to net income (loss) available (attributable) to common shareholders, the most comparable GAAP financial measure, is presented above.
We also present operating income (loss) per diluted common share and operating ROACE, which are derived from the operating income (loss) measure and are reconciled above to the most comparable GAAP financial measures, earnings (loss) per diluted common share and return on average common equity ("ROACE"), respectively.
Constant Currency Basis
We present gross premiums written, net premiums written and net premiums earned on a constant currency basis in this MD&A. The amounts presented on a constant currency basis are calculated by applying the average foreign exchange rate from the current year to the prior year amounts. We believe this presentation enables investors and other users of our financial information to analyze growth in gross premiums written, net premiums written and net premiums earned on a constant basis. The reconciliation to gross premiums written, net premiums written and net premiums earned on a GAAP basis is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results by Segment'.
Pre-Tax Total Return on Cash and Investments excluding Foreign Exchange Movements
Pre-tax total return on cash and investments excluding foreign exchange movements measures net investment income (loss), net investments gains (losses), interest in income (loss) of equity method investments and change in unrealized gains (losses) generated by average cash and investment balances. The reconciliation of pre-tax total return on cash and investments excluding foreign exchange movements to pre-tax total return on cash and investments, the most comparable GAAP financial measure, is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Net Investment Income and Net Investment Gains (Losses)'. We believe this presentation enables investors and other users of our financial information to analyze the performance of our investment portfolio.
Acquisition of Novae
On October 2, 2017, we acquired Novae. At the acquisition date, we identified value of business acquired ("VOBA"), which represents the present value of the expected underwriting profit within policies that were in-force at the closing date of the transaction. In addition, the allocation of the acquisition price to the assets acquired and liabilities assumed based on estimated fair values at the acquisition date resulted in the write-off of the deferred acquisition cost asset on Novae's balance sheet at the acquisition date as the value of policies in-force on that date are considered within VOBA. Consequently, underwriting income (loss) in 2020, 2019 and 2018 included the recognition of premiums attributable to Novae's balance sheet at the acquisition date without the recognition of the associated acquisition costs.
CASH AND INVESTMENTS
Details of cash and investments are as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | | December 31, 2020 | | | | December 31, 2019 | |
| | | | Fair value | | | | Fair value | |
| | | | | | | | | |
| Fixed maturities | | | $ | 12,041,799 | | | | | $ | 12,468,205 | | |
| Equity securities | | | 518,445 | | | | | 474,207 | | |
| Mortgage loans | | | 593,290 | | | | | 432,748 | | |
| Other investments | | | 829,156 | | | | | 770,923 | | |
| Equity method investments | | | 114,209 | | | | | 117,821 | | |
| Short-term investments | | | 161,897 | | | | | 38,471 | | |
| Total investments | | | $ | 14,258,796 | | | | | $ | 14,302,375 | | |
| | | | | | | | | |
| Cash and cash equivalents(1) | | | $ | 1,503,232 | | | | | $ | 1,576,457 | | |
| | | | | | | | | |
(1)Includes restricted cash and cash equivalents of $600 million and $335 million for 2020 and 2019, respectively.
|
| | | | | | | | | |
| | | | | | |
| | | December 31, 2019 | | December 31, 2018 | |
| | | Fair value | | Fair value | |
| | | | | | |
| | Fixed maturities | $ | 12,468,205 |
| | $ | 11,435,347 |
| |
| | Equity securities | 474,207 |
| | 381,633 |
| |
| | Mortgage loans | 432,748 |
| | 298,650 |
| |
| | Other investments | 770,923 |
| | 787,787 |
| |
| | Equity method investments | 117,821 |
| | 108,103 |
| |
| | Short-term investments | 38,471 |
| | 144,040 |
| |
| | Total investments | $ | 14,302,375 |
| | $ | 13,155,560 |
| |
| | | | | | |
| | Cash and cash equivalents(1) | $ | 1,576,457 |
| | $ | 1,830,020 |
| |
| | | | | | |
| |
(1) | Includes restricted cash and cash equivalents of $335 million and $597 million for 2019 and 2018, respectively. |
Overview
The fair value of total investments increaseddecreased by $1.1 billion$44 million in 2019, driven by2020, as cash inflows from operations and the investment of cash balances, the
increase in the market value of fixed maturities due to a decrease in interest ratesand equities was more than offset by the repayment of $500 million of 5.875% Senior Notes and the tighteningredemption of credit spreads, and the increase in the market value$225 million of equity securities due to the improved performance of global equity markets.5.50% Series D preferred shares.
An analysis of our investment portfolio by asset class is detailed below:
Fixed Maturities
Details of our fixed maturities portfolio are as follows:
|
| | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 | |
| | | Fair value | | % of total | | Fair value | | % of total | |
| | | | | | | | | | |
| | Fixed maturities: | | | | | | | | |
| | U.S. government and agency | $ | 2,112,881 |
| | 17 | % | | $ | 1,515,697 |
| | 13 | % | |
| | Non-U.S. government | 576,592 |
| | 5 | % | | 493,016 |
| | 4 | % | |
| | Corporate debt | 4,930,254 |
| | 38 | % | | 4,876,921 |
| | 44 | % | |
| | Agency RMBS | 1,592,584 |
| | 13 | % | | 1,643,308 |
| | 14 | % | |
| | CMBS | 1,365,052 |
| | 11 | % | | 1,092,530 |
| | 10 | % | |
| | Non-Agency RMBS | 84,922 |
| | 1 | % | | 40,687 |
| | — | % | |
| | ABS | 1,598,693 |
| | 13 | % | | 1,637,603 |
| | 14 | % | |
| | Municipals(1) | 207,227 |
| | 2 | % | | 135,585 |
| | 1 | % | |
| | Total | $ | 12,468,205 |
| | 100 | % | | $ | 11,435,347 |
| | 100 | % | |
| | | | | | | | | | |
| | Credit ratings: | | | | | | | | |
| | U.S. government and agency | $ | 2,112,881 |
| | 17 | % | | $ | 1,515,697 |
| | 13 | % | |
| | AAA(2) | 4,896,833 |
| | 38 | % | | 4,569,632 |
| | 40 | % | |
| | AA | 865,601 |
| | 7 | % | | 874,932 |
| | 8 | % | |
| | A | 1,848,331 |
| | 15 | % | | 1,769,686 |
| | 15 | % | |
| | BBB | 1,684,589 |
| | 14 | % | | 1,678,962 |
| | 15 | % | |
| | Below BBB(3) | 1,059,970 |
| | 9 | % | | 1,026,438 |
| | 9 | % | |
| | Total | $ | 12,468,205 |
| | 100 | % | | $ | 11,435,347 |
| | 100 | % | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 | |
| | Fair value | | % of total | | Fair value | | % of total | |
| | | | | | | | | |
| Fixed maturities: | | | | | | | | |
| U.S. government and agency | $ | 1,918,699 | | | 16 | % | | $ | 2,112,881 | | | 17 | % | |
| Non-U.S. government | 671,273 | | | 6 | % | | 576,592 | | | 5 | % | |
| Corporate debt | 4,655,951 | | | 39 | % | | 4,930,254 | | | 38 | % | |
| Agency RMBS | 1,286,209 | | | 11 | % | | 1,592,584 | | | 13 | % | |
| CMBS | 1,353,587 | | | 11 | % | | 1,365,052 | | | 11 | % | |
| Non-agency RMBS | 140,104 | | | 1 | % | | 84,922 | | | 1 | % | |
| ABS | 1,720,078 | | | 14 | % | | 1,598,693 | | | 13 | % | |
| Municipals(1) | 295,898 | | | 2 | % | | 207,227 | | | 2 | % | |
| Total | $ | 12,041,799 | | | 100 | % | | $ | 12,468,205 | | | 100 | % | |
| | | | | | | | | |
| Credit ratings: | | | | | | | | |
| U.S. government and agency | $ | 1,918,699 | | | 16 | % | | $ | 2,112,881 | | | 17 | % | |
| AAA(2) | 4,551,312 | | | 37 | % | | 4,896,833 | | | 38 | % | |
| AA | 913,707 | | | 8 | % | | 865,601 | | | 7 | % | |
| A | 1,896,407 | | | 16 | % | | 1,848,331 | | | 15 | % | |
| BBB | 1,732,058 | | | 14 | % | | 1,684,589 | | | 14 | % | |
| Below BBB(3) | 1,029,616 | | | 9 | % | | 1,059,970 | | | 9 | % | |
| Total | $ | 12,041,799 | | | 100 | % | | $ | 12,468,205 | | | 100 | % | |
| | | | | | | | | |
| |
(1) | Includes bonds issued by states, municipalities, and political subdivisions. |
| |
(2) | Includes U.S. government-sponsored agencies, residential mortgage-backed securities ("RMBS") and commercial mortgage-backed securities ("CMBS"). |
| |
(3) | Non-investment grade and non-rated securities. |
(1)Includes bonds issued by states, municipalities, and political subdivisions.
(2)Includes U.S. government-sponsored agencies, residential mortgage-backed securities ("RMBS") and commercial mortgage-backed securities ("CMBS").
(3)Non-investment grade and non-rated securities.
At December 31, 2019,2020, fixed maturities had a weighted average credit rating of AA- (2018:(2019: AA-), a book yield of 2.3% (2019: 2.8% (2018: 3.1%), and an average duration of 3.3 years (2019: 3.2 years (2018: 3.0 years). The interest rate swap positions, which reduced duration to 2.8 years at December 31, 2018, were closed during 2019. At December 31, 2019,2020, fixed maturities together with short-term investments and cash and cash equivalents (i.e. total investments of $14.1$13.7 billion), had a weighted average credit rating of AA- (2018:(2019: AA-) and an average duration of 3.0 years (2019: 2.9 years (2018: 2.6 years). At December 31, 2018, duration inclusive of interest rate swaps was 2.5 years.
Our methodology for assigning credit ratings to fixed maturities is in line with the methodology used for the Barclays U.S. Aggregate Bond index. This methodology uses the middle of Standard & Poor's (S&P), Moody's and Fitch ratings. When ratings from only two of these agencies are available, the lower rating is used. When only one agency rates a security, that rating is used.
To calculate the weighted average credit rating for fixed maturities, we assign points to each rating with 29 points for the highest rating (AAA) and 2 points for the lowest rating (D) and then calculate the weighted average based on the fair values of the individual securities. Securities that are not rated by S&P, Moody’s or Fitch are excluded from weighted average calculations. At December 31, 2019,2020, the fair value of fixed maturities not rated was $33.5$50 million (2018: $55.9(2019: $34 million).
In addition to managing credit risk exposure within our fixed maturities portfolio we also monitor the aggregation of country risk exposure on a group-wide basis (refer to Item 1 'Risk and Capital Management' for further details). Country risk exposure is the risk that events in a country, such as currency crises, regulatory changes and other political events, will adversely affect the ability of obligors in the country to honor their obligations. For corporate debt and structured securities, we measure the country of risk exposure based on a number of factors including, but not limited to, location of management, principal operations and country of revenues.
An analysis of our fixed maturities portfolio by major asset classes is detailed below.
Non-U.S. Government
Non-U.S. government securities include bonds issued by non-U.S. governments and their agencies along with supranational organizations (collectively also known as sovereign debt securities).
Details of exposures to governments in the eurozone and other non-U.S. government concentrations by fair value are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 | |
| Country | Fair value | | % of total | | Weighted
average
credit rating | | Fair value | | % of total | | Weighted
average
credit rating | |
| | | | | | | | | | | | | |
| Eurozone countries: | | | | | | | | | | | | |
| Supranationals(1) | $ | 19,773 | | | 3 | % | | AAA | | $ | 11,928 | | | 2 | % | | AAA | |
| Netherlands | $ | 14,482 | | | 2 | % | | AA+ | | $ | 12,034 | | | 2 | % | | AA+ | |
| Germany | 3,689 | | | 1 | % | | AAA | | 4,356 | | | 1 | % | | AAA | |
| Austria | 3,629 | | | 1 | % | | AA+ | | 3,972 | | | 1 | % | | AA+ | |
| France | 503 | | | — | % | | AA | | 4,908 | | | 1 | % | | AA | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Total eurozone | $ | 42,076 | | | 7 | % | | AA+ | | $ | 37,198 | | | 7 | % | | AA+ | |
| | | | | | | | | | | | | |
| Other concentrations: | | | | | | | | | | | | |
| United Kingdom | $ | 305,083 | | | 45 | % | | AA- | | $ | 238,238 | | | 41 | % | | AA | |
| Canada | 139,834 | | | 21 | % | | AAA | | 129,191 | | | 22 | % | | AA+ | |
| Mexico | 21,404 | | | 3 | % | | BBB | | 22,402 | | | 4 | % | | BBB+ | |
| Other | 162,876 | | | 24 | % | | AA | | 149,563 | | | 26 | % | | AA+ | |
| Total other concentrations | $ | 629,197 | | | 93 | % | | AA+ | | $ | 539,394 | | | 93 | % | | AA+ | |
| Total non-U.S. government | $ | 671,273 | | | 100 | % | | AA- | | $ | 576,592 | | | 100 | % | | AA- | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 | |
| | Country | Fair value | | % of total | | Weighted average credit rating | | Fair value | | % of total | | Weighted average credit rating | |
| | | | | | | | | | | | | | |
| | Eurozone countries: | | | | | | | | | | | | |
| | Netherlands | $ | 12,034 |
| | 2 | % | | AA+ | | $ | 5,534 |
| | 1 | % | | AA+ | |
| | Supranationals(1) | 11,928 |
| | 2 | % | | AAA | | 3,849 |
| | 1 | % | | AAA | |
| | France | 4,908 |
| | 1 | % | | AA | | 4,156 |
| | 1 | % | | AA | |
| | Germany | 4,356 |
| | 1 | % | | AAA | | — |
| | — | % | | — | |
| | Austria | 3,972 |
| | 1 | % | | AA+ | | 2,309 |
| | — | % | | AA+ | |
| | Belgium | — |
| | — | % | | — | | 10,983 |
| | 2 | % | | AA- | |
| | Spain | — |
| | — | % | | — | | 1,629 |
| | — | % | | A- | |
| | Portugal | — |
| | — | % | | — | | 876 |
| | — | % | | BBB- | |
| | Total eurozone | $ | 37,198 |
| | 7 | % | | AA+ | | $ | 29,336 |
| | 5 | % | | AA | |
| | | | | | | | | | | | | | |
| | Other concentrations: | | | | | | | | | | | | |
| | United Kingdom | $ | 238,238 |
| | 41 | % | | AA | | $ | 219,452 |
| | 45 | % | | AA | |
| | Canada | 129,191 |
| | 22 | % | | AA+ | | 90,187 |
| | 18 | % | | AA+ | |
| | Mexico | 22,402 |
| | 4 | % | | BBB+ | | 28,735 |
| | 6 | % | | BBB+ | |
| | Other | 149,563 |
| | 26 | % | | AA+ | | 125,306 |
| | 26 | % | | A+ | |
| | Total other concentrations | $ | 539,394 |
| | 93 | % | | AA+ | | $ | 463,680 |
| | 95 | % | | AA+ | |
| | Total non-U.S. government | $ | 576,592 |
| | 100 | % | | AA- | | $ | 493,016 |
| | 100 | % | | AA- | |
| | | | | | | | | | | | | | |
| |
(1) | Includes supranationals only in the eurozone. |
At December 31, 2019,2020, net unrealized gains on non-U.S. government securities was $12$38 million (2018: net unrealized losses of $15(2019: $12 million) which included gross unrealized foreign exchange losses of $3$1 million (2018: $13(2019: $3 million), mainly related to U.K. government bonds.
Corporate Debt
Corporate debt securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries.
Details of our corporate debt securities portfolio by sector are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 | |
| | | Fair value | | % of total | | Weighted
average
credit rating | | Fair value | | % of total | | Weighted
average
credit rating | |
| | | | | | | | | | | | | | |
| | Financial institutions: | | | | | | | | | | | | |
| | U.S. banking | $ | 969,570 |
| | 20 | % | | A- | | $ | 1,075,998 |
| | 22 | % | | A- | |
| | Foreign banking | 370,981 |
| | 8 | % | | A | | 433,182 |
| | 9 | % | | A | |
| | Corporate/commercial finance | 358,008 |
| | 7 | % | | BBB- | | 305,896 |
| | 6 | % | | BB | |
| | Insurance | 147,287 |
| | 3 | % | | A | | 134,537 |
| | 3 | % | | A | |
| | Investment brokerage | 53,173 |
| | 1 | % | | A- | | 35,223 |
| | 1 | % | | A | |
| | Total financial institutions | 1,899,019 |
| | 39 | % | | A- | | 1,984,836 |
| | 41 | % | | A- | |
| | | | | | | | | | | | | | |
| | Consumer non-cyclicals | 614,605 |
| | 12 | % | | BBB- | | 584,248 |
| | 12 | % | | BBB- | |
| | Communications | 454,400 |
| | 9 | % | | BB+ | | 420,511 |
| | 9 | % | | BBB- | |
| | Consumer cyclical | 452,375 |
| | 9 | % | | BBB- | | 468,250 |
| | 10 | % | | BBB- | |
| | Technology | 354,449 |
| | 7 | % | | BBB- | | 328,101 |
| | 7 | % | | BBB- | |
| | Industrials | 346,289 |
| | 7 | % | | BB | | 321,306 |
| | 7 | % | | BB | |
| | Energy | 239,857 |
| | 5 | % | | BBB | | 267,644 |
| | 5 | % | | BBB | |
| | Utilities | 141,104 |
| | 3 | % | | BBB+ | | 149,276 |
| | 3 | % | | BBB+ | |
| | Other | 428,156 |
| | 9 | % | | A+ | | 352,749 |
| | 6 | % | | A+ | |
| | Total | $ | 4,930,254 |
| | 100 | % | | BBB+ | | $ | 4,876,921 |
| | 100 | % | | BBB+ | |
| | | | | | | | | | | | | | |
| | Credit quality summary: | | | | | | | | | | | | |
| | Investment grade | $ | 3,935,941 |
| | 80 | % | | A- | | $ | 3,892,399 |
| | 80 | % | | A- | |
| | Non-investment grade | 994,313 |
| | 20 | % | | B+ | | 984,522 |
| | 20 | % | | B | |
| | Total | $ | 4,930,254 |
| | 100 | % | | BBB+ | | $ | 4,876,921 |
| | 100 | % | | BBB+ | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 | |
| | Fair value | | % of total | | Weighted
average
credit rating | | Fair value | | % of total | | Weighted
average
credit rating | |
| | | | | | | | | | | | | |
| Financial institutions: | | | | | | | | | | | | |
| U.S. banking | $ | 905,944 | | | 19 | % | | A | | $ | 969,570 | | | 20 | % | | A- | |
| Foreign banking | 274,462 | | | 6 | % | | A+ | | 370,981 | | | 8 | % | | A | |
| Corporate/commercial finance | 273,682 | | | 6 | % | | BBB- | | 358,008 | | | 7 | % | | BBB- | |
| Insurance | 135,843 | | | 3 | % | | A+ | | 147,287 | | | 3 | % | | A | |
| Investment brokerage | 62,340 | | | 1 | % | | A- | | 53,173 | | | 1 | % | | A- | |
| Total financial institutions | 1,652,271 | | | 35 | % | | A- | | 1,899,019 | | | 39 | % | | A- | |
| | | | | | | | | | | | | |
| Consumer non-cyclicals | 660,513 | | | 14 | % | | BBB | | 614,605 | | | 12 | % | | BBB- | |
| Consumer cyclical | 463,953 | | | 10 | % | | BB+ | | 452,375 | | | 9 | % | | BBB- | |
| Communications | 427,266 | | | 9 | % | | BBB- | | 454,400 | | | 9 | % | | BB+ | |
| Industrials | 424,506 | | | 9 | % | | BB | | 346,289 | | | 7 | % | | BB | |
| Technology | 339,666 | | | 7 | % | | BBB- | | 354,449 | | | 7 | % | | BBB- | |
| Utilities | 181,641 | | | 4 | % | | BBB+ | | 141,104 | | | 3 | % | | BBB+ | |
| Energy | 179,570 | | | 4 | % | | BBB+ | | 239,857 | | | 5 | % | | BBB | |
| Other | 326,565 | | | 8 | % | | A+ | | 428,156 | | | 9 | % | | A+ | |
| Total | $ | 4,655,951 | | | 100 | % | | BBB | | $ | 4,930,254 | | | 100 | % | | BBB+ | |
| | | | | | | | | | | | | |
| Credit quality summary: | | | | | | | | | | | | |
| Investment grade | $ | 3,720,558 | | | 80 | % | | A- | | $ | 3,935,941 | | | 80 | % | | A- | |
| Non-investment grade | 935,393 | | | 20 | % | | B | | 994,313 | | | 20 | % | | B+ | |
| Total | $ | 4,655,951 | | | 100 | % | | BBB | | $ | 4,930,254 | | | 100 | % | | BBB+ | |
| | | | | | | | | | | | | |
At December 31, 2019,2020, our non-investment grade portfolio had a fair value of $994$935 million (2018: $985(2019: $994 million), a weighted average credit rating of B (2019: B+ (2018: B)) and duration of 1.52.0 years (2018: 2.4(2019: 1.5 years). At December 31, 2019,2020, our corporate debt portfolio, including non-investment grade securities, had a duration of 3.13.7 years (2018:(2019: 3.1 years).
Mortgage-Backed Securities
Details of the fair values of our RMBS and CMBS portfolios by credit rating are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 | |
| | RMBS | | CMBS | | RMBS | | CMBS | |
| | | | | | | | | |
| Government agency | $ | 1,286,209 | | | $ | 311,698 | | | $ | 1,592,584 | | | $ | 332,383 | | |
| AAA | 109,903 | | | 972,222 | | | 64,685 | | | 991,627 | | |
| AA | 8,378 | | | 64,459 | | | 1,377 | | | 37,872 | | |
| A | 7,101 | | | 1,608 | | | 1,107 | | | 3,170 | | |
| BBB | 677 | | | 2,375 | | | 1,760 | | | — | | |
| Below BBB(1) | 14,045 | | | 1,225 | | | 15,993 | | | — | | |
| Total | $ | 1,426,313 | | | $ | 1,353,587 | | | $ | 1,677,506 | | | $ | 1,365,052 | | |
| | | | | | | | | |
(1)Non-investment grade securities
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 | |
| | | RMBS | | CMBS | | RMBS | | CMBS | |
| | | | | | | | | | |
| | Government agency | $ | 1,592,584 |
| | $ | 332,383 |
| | $ | 1,643,308 |
| | $ | 204,744 |
| |
| | AAA | 64,685 |
| | 991,627 |
| | 20,965 |
| | 824,226 |
| |
| | AA | 1,377 |
| | 37,872 |
| | 3,066 |
| | 52,875 |
| |
| | A | 1,107 |
| | 3,170 |
| | 1,459 |
| | 9,943 |
| |
| | BBB | 1,760 |
| | — |
| | 3,218 |
| | 742 |
| |
| | Below BBB(1) | 15,993 |
| | — |
| | 11,979 |
| | — |
| |
| | Total | $ | 1,677,506 |
| | $ | 1,365,052 |
| | $ | 1,683,995 |
| | $ | 1,092,530 |
| |
| | | | | | | | | | |
| |
(1) | Non-investment grade securities |
Residential MBS
Agency RMBS consist of bonds issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association which are primarily AAA rated and are supported by loans which are diversified across geographical areas. At December 31, 2019,2020, agency RMBS had an average duration of 3.43.2 years (2018: 3.9(2019: 3.4 years).
Non-AgencyNon-agency RMBS mainly include investment-grade bonds originated by non-agencies. At December 31, 2019,2020, non-agency RMBS had an average duration of 2.11.5 years (2018: 0.8(2019: 2.1 years) and weighted average life of 6.14.7 years (2018: 4.0(2019: 6.1 years).
Commercial MBS
CMBS mainly include investment-grade bonds originated by non-agencies. At December 31, 2019,2020, approximately 99% (2018:(2019: 99%) of our CMBS were rated AA or better. At December 31, 2019,2020, the weighted average estimated subordination percentage of the portfolio was 29% (2018: 31%(2019: 29%), which represents the current weighted average estimated percentage of the capital structure subordinated to the investment holding that is available to absorb losses before the security incurs the first dollar loss of principal. At December 31, 2019,2020, CMBS had an average duration of 5.14.8 years (2018: 4.7(2019: 5.1 years) and weighted average life of 6.15.5 years (2018: 5.5(2019: 6.1 years).
Asset-Backed Securities
ABS mainly include investment-grade bonds backed by pools of loans with a variety of underlying collateral, including auto loans, student loans, credit card receivables and collateralized loan obligations ("CLOs") originated by a variety of financial institutions.
Details of the fair value of our ABS portfolio by underlying collateral and credit rating are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | Asset-backed securities | |
| | | AAA | | AA | | A | | BBB | | Below BBB | | Total | |
| | | | | | | | | | | | | | |
| | At December 31, 2019 | | | | | | | |
| | CLO - debt tranches | $ | 840,999 |
| | $ | 46,463 |
| | $ | 16,682 |
| | $ | 10,385 |
| | $ | 23,447 |
| | $ | 937,976 |
| |
| | Auto | 349,103 |
| | — |
| | — |
| | — |
| | — |
| | 349,103 |
| |
| | Student loan | 69,690 |
| | 5,003 |
| | — |
| | — |
| | — |
| | 74,693 |
| |
| | Credit card | 19,657 |
| | — |
| | — |
| | — |
| | — |
| | 19,657 |
| |
| | Other | 177,488 |
| | 9,142 |
| | 27,860 |
| | 2,186 |
| | 588 |
| | 217,264 |
| |
| | Total | $ | 1,456,937 |
| | $ | 60,608 |
| | $ | 44,542 |
| | $ | 12,571 |
| | $ | 24,035 |
| | $ | 1,598,693 |
| |
| | % of total | 91% | | 4% | | 3% | | 1% | | 1% | | 100% | |
| | | | | | | | | | | | | | |
| | At December 31, 2018 | | | | | | | |
| | CLO - debt tranches | $ | 900,157 |
| | $ | 27,492 |
| | $ | — |
| | $ | 9,938 |
| | $ | 23,540 |
| | $ | 961,127 |
| |
| | Auto | 365,685 |
| | 7,872 |
| | 4,231 |
| | — |
| | — |
| | 377,788 |
| |
| | Student loan | 79,419 |
| | 17,415 |
| | — |
| | — |
| | — |
| | 96,834 |
| |
| | Credit card | 33,219 |
| | — |
| | — |
| | — |
| | — |
| | 33,219 |
| |
| | Other | 127,638 |
| | 13,457 |
| | 24,867 |
| | 103 |
| | 2,570 |
| | 168,635 |
| |
| | Total | $ | 1,506,118 |
| | $ | 66,236 |
| | $ | 29,098 |
| | $ | 10,041 |
| | $ | 26,110 |
| | $ | 1,637,603 |
| |
| | % of total | 92% | | 4% | | 2% | | 1% | | 1% | | 100% | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Asset-backed securities | |
| | AAA | | AA | | A | | BBB | | Below BBB | | Total | |
| | | | | | | | | | | | | |
| At December 31, 2020 | | | | | | | |
| CLO - debt tranches | $ | 820,870 | | | $ | 55,107 | | | $ | 48,269 | | | $ | 46,150 | | | $ | 75,954 | | | $ | 1,046,350 | | |
| Auto | 278,964 | | | — | | | — | | | — | | | — | | | 278,964 | | |
| Student loan | 113,294 | | | 7,513 | | | — | | | — | | | — | | | 120,807 | | |
| Credit card | 10,254 | | | — | | | — | | | — | | | — | | | 10,254 | | |
| Other | 214,749 | | | 15,744 | | | 17,075 | | | 15,641 | | | 494 | | | 263,703 | | |
| Total | $ | 1,438,131 | | | $ | 78,364 | | | $ | 65,344 | | | $ | 61,791 | | | $ | 76,448 | | | $ | 1,720,078 | | |
| % of total | 84% | | 5% | | 4% | | 4% | | 3% | | 100% | |
| | | | | | | | | | | | | |
| At December 31, 2019 | | | | | | | |
| CLO - debt tranches | $ | 840,999 | | | $ | 46,463 | | | $ | 16,682 | | | $ | 10,385 | | | $ | 23,447 | | | $ | 937,976 | | |
| Auto | 349,103 | | | — | | | — | | | — | | | — | | | 349,103 | | |
| Student loan | 69,690 | | | 5,003 | | | — | | | — | | | — | | | 74,693 | | |
| Credit card | 19,657 | | | — | | | — | | | — | | | — | | | 19,657 | | |
| Other | 177,488 | | | 9,142 | | | 27,860 | | | 2,186 | | | 588 | | | 217,264 | | |
| Total | $ | 1,456,937 | | | $ | 60,608 | | | $ | 44,542 | | | $ | 12,571 | | | $ | 24,035 | | | $ | 1,598,693 | | |
| % of total | 91% | | 4% | | 3% | | 1% | | 1% | | 100% | |
| | | | | | | | | | | | | |
At December 31, 2019,2020, the average duration our ABS portfolio was 0.70.9 years (2018:(2019: 0.7 years) and the weighted average life was 3.53.6 years (2018: 3.6(2019: 3.5 years).
Municipals
Municipals comprise revenue bonds and general obligation bonds issued by U.S. domiciled state and municipal entities and are primarily held in the taxable portfolios of our U.S. subsidiaries.
Details of the fair value of our municipals portfolio by state and between Revenue bonds and General Obligation ("G.O.") bonds are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | G.O. | | Revenue | | Total | | % of total fair value | | Gross unrealized gains | | Gross unrealized losses | | Weighted average credit rating | |
| | | | | | | | | | | | | | | | |
| | At December 31, 2019 | | | | | | | | | | | | | | |
| | New York | $ | 5,011 |
| | $ | 44,549 |
| | $ | 49,560 |
| | 24% | | $ | 1,139 |
| | $ | (35 | ) | | AA+ | |
| | California | 21,333 |
| | 21,416 |
| | 42,749 |
| | 21% | | 1,088 |
| | (4 | ) | | AA | |
| | Massachusetts | 16,122 |
| | 522 |
| | 16,644 |
| | 8% | | 22 |
| | (117 | ) | | AA | |
| | Texas | 3,702 |
| | 11,232 |
| | 14,934 |
| | 7% | | 418 |
| | (88 | ) | | AA | |
| | Michigan | — |
| | 13,952 |
| | 13,952 |
| | 7% | | 194 |
| | (17 | ) | | AA- | |
| | Other | 12,796 |
| | 56,592 |
| | 69,388 |
| | 33% | | 1,498 |
| | (146 | ) | | A+ | |
| | | $ | 58,964 |
| | $ | 148,263 |
| | $ | 207,227 |
| | 100% | | $ | 4,359 |
| | $ | (407 | ) | | AA | |
| | | | | | | | | | | | | | | | |
| | At December 31, 2018 | | | | | | | | | | | | | | |
| | New York | $ | 9,805 |
| | $ | 29,479 |
| | $ | 39,284 |
| | 29% | | $ | 67 |
| | $ | (726 | ) | | AA | |
| | California | 21,371 |
| | 13,314 |
| | 34,685 |
| | 26% | | 518 |
| | (168 | ) | | AA- | |
| | Utah | — |
| | 9,507 |
| | 9,507 |
| | 7% | | 57 |
| | — |
| | AA+ | |
| | Florida | — |
| | 9,160 |
| | 9,160 |
| | 7% | | 19 |
| | (34 | ) | | AA | |
| | Michigan | — |
| | 9,147 |
| | 9,147 |
| | 7% | | — |
| | (136 | ) | | AA- | |
| | Other | 4,326 |
| | 29,476 |
| | 33,802 |
| | 24% | | 253 |
| | (333 | ) | | AA- | |
| | | $ | 35,502 |
| | $ | 100,083 |
| | $ | 135,585 |
| | 100% | | $ | 914 |
| | $ | (1,397 | ) | | AA- | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | G.O. | | Revenue | | Total | | % of total
fair value | | Gross
unrealized
gains | | Gross
unrealized
losses | | Weighted
average
credit rating | |
| | | | | | | | | | | | | | | |
| At December 31, 2020 | | | | | | | | | | | | | | |
| New York | $ | 18,346 | | | $ | 39,597 | | | $ | 57,943 | | | 20% | | $ | 3,287 | | | $ | — | | | AA | |
| California | 8,041 | | | 33,340 | | | 41,381 | | | 14% | | 1,881 | | | (2) | | | AA- | |
| Texas | 8,884 | | | 25,193 | | | 34,077 | | | 12% | | 1,635 | | | — | | | AA | |
| Massachusetts | 21,090 | | | 10,842 | | | 31,932 | | | 11% | | 700 | | | — | | | AA+ | |
| Michigan | — | | | 15,413 | | | 15,413 | | | 5% | | 948 | | | — | | | AA- | |
| Other | 20,426 | | | 94,726 | | | 115,152 | | | 38% | | 4,697 | | | (29) | | | A+ | |
| | $ | 76,787 | | | $ | 219,111 | | | $ | 295,898 | | | 100% | | $ | 13,148 | | | $ | (31) | | | AA- | |
| | | | | | | | | | | | | | | |
| At December 31, 2019 | | | | | | | | | | | | | | |
| New York | $ | 5,011 | | | $ | 44,549 | | | $ | 49,560 | | | 24% | | $ | 1,139 | | | $ | (35) | | | AA+ | |
| California | 21,333 | | | 21,416 | | | 42,749 | | | 21% | | 1,088 | | | (4) | | | AA | |
| Massachusetts | 16,122 | | | 522 | | | 16,644 | | | 8% | | 22 | | | (117) | | | AA | |
| Texas | 3,702 | | | 11,232 | | | 14,934 | | | 7% | | 418 | | | (88) | | | AA | |
| Michigan | — | | | 13,952 | | | 13,952 | | | 7% | | 194 | | | (17) | | | AA- | |
| Other | 12,796 | | | 56,592 | | | 69,388 | | | 33% | | 1,498 | | | (146) | | | A+ | |
| | $ | 58,964 | | | $ | 148,263 | | | $ | 207,227 | | | 100% | | $ | 4,359 | | | $ | (407) | | | AA | |
| | | | | | | | | | | | | | | |
G.O. bonds are backed by the full faith and credit of the authority that issued the debt and are secured by the taxing powers of those authorities. Revenue bonds are backed by the revenue stream generated by the services provided by the issuer (e.g. sewer, water or utility projects). As issuers of revenue bonds do not have the ability to draw from tax revenues or levy taxes to fund obligations, revenue bonds may carry a greater risk of default than G.O. bonds. At December 31, 2019,2020, 75% (2019: 96% (2018: 93%) of municipals are taxable with the remainder being tax exempt.
Gross Unrealized Losses
At December 31, 2019,2020, the gross unrealized losses on our fixed maturities portfolio were $19 million (2019: $32 million (2018: $215 million).
The severity of the unrealized loss position as a percentage of amortized cost for all investment grade fixed maturities in an unrealized loss position including any impact of foreign exchange losses (gains) was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 | |
| | Severity of Unrealized Loss | Fair value | | Gross unrealized losses | | % of total gross unrealized losses | | Fair value | | Gross unrealized losses | | % of total gross unrealized losses | |
| | | | | | | | | | | | | | |
| | 0-10% | $ | 2,961,063 |
| | $ | (24,823 | ) | | 96 | % | | $ | 7,496,064 |
| | $ | (151,333 | ) | | 91 | % | |
| | 10-20% | 6,571 |
| | (1,006 | ) | | 4 | % | | 88,447 |
| | (12,573 | ) | | 8 | % | |
| | 20-30% | 10 |
| | (3 | ) | | — | % | | 5,557 |
| | (1,522 | ) | | 1 | % | |
| | 30-40% | — |
| | — |
| | — | % | | — |
| | — |
| | — | % | |
| | 40-50% | — |
| | — |
| | — | % | | — |
| | — |
| | — | % | |
| | > 50% | — |
| | — |
| | — | % | | — |
| | — |
| | — | % | |
| | Total | $ | 2,967,644 |
| | $ | (25,832 | ) | | 100 | % | | $ | 7,590,068 |
| | $ | (165,428 | ) | | 100 | % | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 | |
| Severity of
Unrealized Loss | Fair value | | Gross
unrealized
losses | | % of
total gross
unrealized
losses | | Fair value | | Gross
unrealized
losses | | % of
total gross
unrealized
losses | |
| | | | | | | | | | | | | |
| 0-10% | $ | 1,212,074 | | | $ | (9,553) | | | 87 | % | | $ | 2,961,063 | | | $ | (24,823) | | | 96 | % | |
| 10-20% | 6,102 | | | (726) | | | 7 | % | | 6,571 | | | (1,006) | | | 4 | % | |
| 20-30% | 2,374 | | | (626) | | | 6 | % | | 10 | | | (3) | | | — | % | |
| 30-40% | — | | | — | | | — | % | | — | | | — | | | — | % | |
| 40-50% | — | | | — | | | — | % | | — | | | — | | | — | % | |
| > 50% | — | | | — | | | — | % | | — | | | — | | | — | % | |
| Total | $ | 1,220,550 | | | $ | (10,905) | | | 100 | % | | $ | 2,967,644 | | | $ | (25,832) | | | 100 | % | |
| | | | | | | | | | | | | |
The decrease in gross unrealized losses on investment-grade fixed maturities reflected the decrease in interest rates and the impact of the tightening of credit spreads on investment grade corporate debt securities.
The severity of the unrealized loss position as a percentage of amortized cost for all non-investment grade fixed maturities in an unrealized loss position including any impact of foreign exchange losses (gains) was as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 | |
| | Severity of Unrealized Loss | Fair value | | Gross
unrealized
losses | | % of
total gross
unrealized
losses | | Fair value | | Gross
unrealized
losses | | % of
total gross
unrealized
losses | |
| | | | | | | | | | | | | | |
| | 0-10% | $ | 197,731 |
| | $ | (4,319 | ) | | 72 | % | | $ | 779,812 |
| | $ | (31,179 | ) | | 63 | % | |
| | 10-20% | 7,577 |
| | (1,063 | ) | | 18 | % | | 107,931 |
| | (15,074 | ) | | 31 | % | |
| | 20-30% | 1,893 |
| | (557 | ) | | 9 | % | | 9,289 |
| | (2,931 | ) | | 6 | % | |
| | 30-40% | 106 |
| | (63 | ) | | 1 | % | | 370 |
| | (227 | ) | | — | % | |
| | 40-50% | — |
| | — |
| | — | % | | — |
| | — |
| | — | % | |
| | > 50% | 13 |
| | (18 | ) | | — | % | | — |
| | — |
| | — | % | |
| | Total | $ | 207,320 |
| | $ | (6,020 | ) | | 100 | % | | $ | 897,402 |
| | $ | (49,411 | ) | | 100 | % | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 | |
| Severity of
Unrealized Loss | Fair value | | Gross
unrealized
losses | | % of
total gross
unrealized
losses | | Fair value | | Gross
unrealized
losses | | % of
total gross
unrealized
losses | |
| | | | | | | | | | | | | |
| 0-10% | $ | 220,424 | | | $ | (4,833) | | | 60 | % | | $ | 197,731 | | | $ | (4,319) | | | 72 | % | |
| 10-20% | 14,068 | | | (1,889) | | | 24 | % | | 7,577 | | | (1,063) | | | 18 | % | |
| 20-30% | 258 | | | (87) | | | 1 | % | | 1,893 | | | (557) | | | 9 | % | |
| 30-40% | 1,279 | | | (799) | | | 10 | % | | 106 | | | (63) | | | 1 | % | |
| 40-50% | 88 | | | (1) | | | — | % | | — | | | — | | | — | % | |
| > 50% | 346 | | | (397) | | | 5 | % | | 13 | | | (18) | | | — | % | |
| Total | $ | 236,463 | | | $ | (8,006) | | | 100 | % | | $ | 207,320 | | | $ | (6,020) | | | 100 | % | |
| | | | | | | | | | | | | |
The decreaseincrease in gross unrealized losses on non-investment grade fixed maturities reflected the impact of the tighteningwidening of credit spreads on non-investment grade high yield corporate debt securities.
Equity Securities
At December 31, 2019,2020, net unrealized gains on equity securities were $75$97 million (2018: $16(2019: $75 million). The increase was due to improved performance of global equity markets.
Mortgage Loans
During 2019,2020, investment in commercial mortgage loans increased to $433$593 million from $299$433 million, an increase of $134$160 million. The commercial mortgage loans are high quality and collateralized by a variety of commercial properties and are diversified geographically throughout the U.S. and by property type to reduce the risk of concentration. At December 31, 20192020 and 2018,2019, there were no credit losses or past due amounts associated with our commercial mortgage loans portfolio.
Other Investments
Details of our other investments portfolio are as follows: |
| | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | December 31, 2019 | | December 31, 2018 | |
| | | | | | | | | | |
| | Hedge funds | | | | | | | | |
| | Long/short equity funds | $ | 31,248 |
| | 4 | % | | $ | 26,779 |
| | 3 | % | |
| | Multi-strategy funds | 136,542 |
| | 18 | % | | 167,819 |
| | 22 | % | |
| | Total hedge funds | 167,790 |
| | 22 | % | | 194,598 |
| | 25 | % | |
| | | | | | | | | | |
| | Direct lending funds | 277,395 |
| | 36 | % | | 274,478 |
| | 35 | % | |
| | Private equity funds | 80,412 |
| | 10 | % | | 64,566 |
| | 8 | % | |
| | Real estate funds | 130,112 |
| | 17 | % | | 84,202 |
| | 11 | % | |
| | Total hedge, direct lending, private equity and real estate funds | 655,709 |
| | 85 | % | | 617,844 |
| | 79 | % | |
| | | | | | | | | | |
| | CLO-Equities | 14,328 |
| | 2 | % | | 21,271 |
| | 2 | % | |
| | Other privately held investments | 36,934 |
| | 5 | % | | 44,518 |
| | 6 | % | |
| | Overseas deposits | 63,952 |
| | 8 | % | | 104,154 |
| | 13 | % | |
| | Total other investments | $ | 770,923 |
| | 100 | % | | $ | 787,787 |
| | 100 | % | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 | |
| | | | | | | | | |
| Hedge funds | | | | | | | | |
| Long/short equity funds | $ | 25,300 | | | 3 | % | | $ | 31,248 | | | 4 | % | |
| Multi-strategy funds | 121,420 | | | 15 | % | | 136,542 | | | 18 | % | |
| | | | | | | | | |
| Total hedge funds | 146,720 | | | 18 | % | | 167,790 | | | 22 | % | |
| | | | | | | | | |
| Direct lending funds | 272,131 | | | 33 | % | | 277,395 | | | 36 | % | |
| Private equity funds | 124,706 | | | 15 | % | | 80,412 | | | 10 | % | |
| Real estate funds | 164,250 | | | 20 | % | | 130,112 | | | 17 | % | |
| Total hedge, direct lending, private equity and real estate funds | 707,807 | | | 86 | % | | 655,709 | | | 85 | % | |
| | | | | | | | | |
| CLO-Equities | 6,173 | | | 1 | % | | 14,328 | | | 2 | % | |
| Other privately held investments | 70,011 | | | 8 | % | | 36,934 | | | 5 | % | |
| Overseas deposits | 45,165 | | | 5 | % | | 63,952 | | | 8 | % | |
| Total other investments | $ | 829,156 | | | 100 | % | | $ | 770,923 | | | 100 | % | |
| | | | | | | | | |
Refer to Item 8, Note 5(c) to the Consolidated Financial Statements 'Investments'.
Equity Method Investments
During 2016, we paid $108 million including direct transactions costs to acquire 19% of the common equity of Harrington Reinsurance Holdings Limited ("Harrington"), the parent company of Harrington Re Ltd. ("Harrington Re"), an independent reinsurance company jointly sponsored by the Company and The Blackstone Group L.P. ("Blackstone"). Harrington is not a variable interest entity that is required to be included in the consolidated financial statements. We account for our ownership interest in Harrington under the equity method of accounting.
In our consolidated results, our ownership interest in Harrington is reported in interest in income (loss) of equity method investments. Interest in income (loss) of equity method investments was $(4) million in 2020, compared to $10 million in 2019. The decrease was attributable to negative investment returns realized by Harrington.
Restricted Assets
Refer to Item 8, Note 5(g) to the Consolidated Financial Statements 'Investments'.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity is a measure of a company’s ability to generate cash flows sufficient to meet the short-term and long-term cash requirements of its business operations. We manage liquidity at both the holding company and operating subsidiary level.
Holding Company
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 2019,2020, AXIS Capital received $250$350 million (2018: $200(2019: $250 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$0.9 billion at December 31, 2019,2020, will provide AXIS Capital with sufficient liquidity for the foreseeable future.
Operating Subsidiaries
AXIS Capital’s operating subsidiaries primarily derive cash from the net inflow of premiums less claim payments related to underwriting activities and from net investment income. Historically, these cash receipts have been sufficient to fund the operating expenses of these subsidiaries, as well as to fund dividend payments to AXIS Capital. The subsidiaries’ remaining cash flows are generally invested in our investment portfolio. The remaining cash flows have also been used to fund common share repurchases and to fund acquisitions in recent periods.
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 claimslosses are paid. However, the amount of cash required to fund claimloss payments can fluctuate significantly from period to period, due to the low frequency/high severity nature of certain types of business we write.
Consolidated cash flows from operating, investing and financing activities in the last three years were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Total cash provided by (used in)(1) | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Operating activities | $ | 343,503 | | | $ | 199,004 | | | $ | 10,773 | | |
| Investing activities | 489,921 | | | (774,315) | | | 638,554 | | |
| Financing activities | (908,803) | | | 277,510 | | | (186,207) | | |
| Effect of exchange rate changes on cash | 2,154 | | | 44,238 | | | 3,114 | | |
| Increase (decrease) in cash and cash equivalents | $ | (73,225) | | | $ | (253,563) | | | $ | 466,234 | | |
| | | | | | | |
(1) Refer to Item 8, 'Consolidated Statements of Cash Flows' for further details.
|
| | | | | | | | | | | | | |
| | | | | | | | |
| | Total cash provided by (used in)(1) | 2019 | | 2018 | | 2017 | |
| | | | | | | | |
| | Operating activities | $ | 199,004 |
| | $ | 10,773 |
| | $ | 259,229 |
| |
| | Investing activities | (774,315 | ) | | 638,554 |
| | 391,510 |
| |
| | Financing activities | 277,510 |
| | (186,207 | ) | | (545,688 | ) | |
| | Effect of exchange rate changes on cash | 44,238 |
| | 3,114 |
| | 17,228 |
| |
| | Increase (decrease) in cash and cash equivalents | $ | (253,563 | ) | | $ | 466,234 |
| | $ | 122,279 |
| |
| | | | | | | | |
| |
(1) | Refer to Item 8, ‘•Consolidated Statements of Cashflows’, for further details.
|
Net cash provided by operating activities was $344 million in 2020 compared to $199 million in 2019 compared to $11 million in 2018.2019. Cash inflows from insurance and reinsurance operations typically include premiums, net of acquisition costs, and reinsurance recoverables. Cash outflows principally include payments of claimslosses and loss adjustment expenses together with payments of premiums to reinsurers and operating expenses. Cash provided by operating activities can fluctuate due to timing differences between the collection of premiums and reinsurance recoverables and the payment of claimslosses and loss adjustment expenses, and the payment of premiums to reinsurers. OperatingOperating cash inflows increased in 20192020 compared to 2018,2019, primarily attributable to an increase in premiums received, a decrease in operating expenses, and reinsurance recoverables received,a decrease in paid income taxes, partially offset by an increase in payments of claimslosses and loss adjustment expenses, an increaseand a decrease in costs associated with the purchase of reinsuranceinterest and retrocessional covers and an increase in operating expenses.dividends received from our fixed income portfolio.
•Investing cash outflowsinflows in 2020 principally related to the net proceeds from the sale and redemption of fixed maturities of $816 million, partially offset by net purchases of mortgage loans of $160 million, short-term investments of $123 million, and other assets of $45 million. Investing cash inflows in 2019 principally related to the net purchases of fixed maturities of $693 million, net purchases of equity securities of $22 million, partially offset by net proceeds from the sale of other investments of $31 million.
Investing•Financing cash outflows were due to the repayment of $500 million 5.875% Senior Notes, the redemption of $225 million Series D preferred shares, and dividends paid to common and preferred shareholders of $173 million in 2020 (2019: $180 million). In 2019, financing cash inflows in 2018 principally relatedwere due to the net proceeds from the saleissuance of $300 million 3.900% Senior Notes and redemption$425 million of fixed maturitiesJunior Subordinated Notes, and financing cash outflows primarily related to the repayment of $364$250 million 2.650% Senior Notes. Cash outflows also included common share repurchases associated with the vesting of share-settled restricted stock units of $10 million in 2020 (2019: $10 million). The declaration and payment of future dividends and share repurchases is at the discretion of our Board of Directors and will depend on many factors including, but not limited to, our net proceeds fromincome, financial condition giving due consideration to the saleimpact of the COVID-19 pandemic, business needs, capital and redemptionsurplus requirements of equity securities of $173 millionour operating subsidiaries and the net proceeds from the sale of other investments of $181 million.
| |
• | Financing cash inflows were due to net proceeds from the issuance of $300 million 3.900% Senior Notes and $425 million of Junior Subordinated Notes. Financing cash outflows primarily related to the repayment of $250 million 2.650% Senior Notes and dividends paid to common and preferred shareholders of $180 million in 2019 (2018: $176 million). Cash outflows also included common share repurchases associated with the vesting of share-settled restricted stock units of $10 million in 2019 ( 2018: $10 million). Any future share repurchases are discretionary, the timing and amount of repurchase transactions depend on a variety of factors including, but not limited to, global insurance and reinsurance, and financial market conditions and opportunities, capital management and regulatory considerationsregulatory and contractual restrictions, including those set forth in our credit facilities (refer to 'Capital Resources – Share Repurchases' below for further details). In 2018, we also fully redeemed the $36 million of Dekania Notes at par.
|
Our diversified underwriting portfolio has demonstrated an ability to withstand catastrophic losses. 'Capital Resources – Share Repurchases' below for further details).
We have generated positive operating cash flows in all years since 2003, with the exception of 2009 which was impacted by the global financial crisis. These positive cash flows were generated notwithstanding the impacts of the global financial crisis andeven with the recognition of significant natural catastrophe-relatedcatastrophe and weather-related losses duringincluding the period.impact of the COVID-19 pandemic in 2020.
Net losses and loss expenses, gross of reinstatement premiums, included $257estimates of ultimate losses for catastrophe and weather-related losses of $773 million for the Japanese Typhoons Hagibis, Faxai and Tapah, Hurricane Dorian, and the Australia Wildfiresin 2020, $351 million in 2019 $327and $440 million for Hurricanes Michael and Florence, the California Wildfires, and Typhoon Jebi in 2018, and $744 million for Hurricanes Harvey, Irma and Maria, and the two earthquakes in Mexico and the California Wildfires in 2017.2018. There remains significant uncertainty associated with estimates of netultimate losses for certain of these events (refer to 'Underwriting Results – ConsolidatedInsurance segment – Current Accident Year Loss' and 'Underwriting Results – Reinsurance segment – Current Accident Year Loss Ratio' for further details), as well as the timing of the associated cash outflows.
Should claim payment obligations accelerate beyond our ability to fund payments from operating cash flows, we would utilize cash and cash equivalent balances and/or liquidate a portion of our investment portfolio. Our investment portfolio is heavily weighted towards conservative, high quality and highly liquid securities. We expect that, if necessary, approximately $13.6$13.0 billion of cash and invested assets at December 31, 20192020 could be available in one to three business days under normal market conditions; of this amount, $5.3$4.9 billion related to restricted assets, which primarily support our obligations in regulatory jurisdictions where we operate as a non-admitted carrier (refer to Item 8, Note 5(g) to the Consolidated Financial Statements'Investments' for further details). For context, at January 1, 2021. our largest 1-in-250 year return period, single occurrence, single-zone modeled probable maximum loss (Southeast U.S. Hurricane) was approximately $428 million,$0.4 billion, net of reinsurance. Claim payments pertaining to such an event would be paid out over a period spanning many months. Our internal risk tolerance framework aims to limit the loss of capital due to a single event, and the loss of capital that would occur from multiple but perhaps smaller events, in any year (refer to Item 1 'Risk and Capital Management'for further details).
We continue to expect that cash flows generated from operations, combined with the liquidity provided by our investment portfolio, willto be sufficient to cover required cash outflows and other contractual commitments through the foreseeable future (refer to 'Contractual Obligations and Commitments'below for further details).
Capital Resources
In addition to common equity, we have utilized other external sources of financing, including debt, preferred shares, and letter of credit facilities to support our business operations. We believe that we hold sufficient capital to allow us to take advantage of market opportunities and to maintain our financial strength ratings, as well as to comply with various local statutory regulations. We monitor capital adequacy on a regular basis and will seek to adjust our capital base (up or down) according to the needs of our business (refer to Item 1 'Risk and Capital Management' for further details).
The following table summarizes consolidated capital:
Our capital position was as follows:
|
| | | | | | | | | |
| | | | | | |
| | At December 31, | 2019 | | 2018 | |
| | | | | | |
| | Debt | $ | 1,808,157 |
| | $ | 1,341,961 |
| |
| | | | | | |
| | Preferred shares | 775,000 |
| | 775,000 |
| |
| | Common equity | 4,769,008 |
| | 4,255,071 |
| |
| | Shareholders’ equity | 5,544,008 |
| | 5,030,071 |
| |
| | Total capital | $ | 7,352,165 |
| | $ | 6,372,032 |
| |
| | | | | | |
| | Ratio of debt to total capital | 24.6 | % | | 21.1 | % | |
| | | | | | |
| | Ratio of debt and preferred equity to total capital | 35.1 | % | | 33.2 | % | |
| | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| At December 31, | 2020 | | 2019 | |
| | | | | |
| Debt | $ | 1,309,695 | | | $ | 1,808,157 | | |
| | | | | |
| Preferred shares | 550,000 | | | 775,000 | | |
| Common equity | 4,745,694 | | | 4,769,008 | | |
| Shareholders’ equity | 5,295,694 | | | 5,544,008 | | |
| Total capital | $ | 6,605,389 | | | $ | 7,352,165 | | |
| | | | | |
| Ratio of debt to total capital | 19.8 | % | | 24.6 | % | |
| Ratio of debt and preferred equity to total capital | 28.2 | % | | 35.1 | % | |
| | | | | |
We finance our operations with a combination of debt and equity capital. Debt to total capital, and debt and preferred equity to total capital ratios, provide an indication of our capital structure, along with some insight into our financial strength.
At December 31, 2019,While the consolidated balance sheet reflected an increase in debt due toimpact of the issuance of $300 million aggregate principal amount of 3.900% Senior Notes due 2029COVID-19 pandemic 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 catastrophe 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.
Weweather-related losses have reduced common shareholders' equity, we believe that our financial flexibility remains strong.strong, and adjustments are made if there are developments that are different from previous expectations.
Debt
Debt represents the 5.875% Senior Notes issued in 2010, which will mature in 2020 and the 5.150% Senior Notes issued in 2014, which will mature in 2045, the 4.000% Senior Notes issued in 2017, which will mature in 2027, the 3.900% Senior Notes issued in 2019, which will mature in 2029, and the 4.900% Junior Subordinated Notes issued in 2019, which will mature in 2040 (refer to Item 8, Note 10(a) to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details).
The 4.000% Senior Notes issued in 2017 were issued to refinance the 2.650% Senior Notes that matured and were repaid on April 1, 2019. The 3.900% Senior Notes and the 4.900% Junior Subordinated Notes were issued to refinancefinance the 5.875% Senior Notes maturing onrepayment of unsecured senior notes of $500 million that matured in June 1, 2020 and to finance the redemption of our Series D preferred shares on January 17, 2020 (refer to 'Preferred Shares' below for further details).
Preferred Shares
Series D Preferred Shares
On May 20, 2013, we issued $225 million of 5.50% Series D preferred shares with a liquidation preference of $25.00 per share. Dividends on the Series D preferred shares were non-cumulative. To the extent declared, dividends accumulated, with respect to each dividend period, in an amount per share equal to 5.50% of the liquidation preference per annum. On January 17, 2020, we redeemed all outstanding Series D preferred shares, for an aggregate liquidation preference of $225 million (refer to Item 8, Note 14 to the Consolidated Financial Statements 'Shareholder's Equity' and Note 23 of the Consolidated Financial Statements 'Subsequent Events' for further details)details).
Series E Preferred Shares
On November 7, 2016, we issued $550 million of 5.50% Series E preferred shares with a liquidation preference of $2,500 per share (equivalent to $25 per depositary share). Dividends on the Series E preferred shares are non-cumulative. To the extent declared, dividends will accumulate, with respect to each dividend period, in an amount per share equal to 5.50% of the liquidation preference per annum (equivalent to $137.50 per Series E preferred share and $1.375 per depositary share). We may redeem these shares on or after November 7, 2021 at a redemption price of $2,500 per Series E preferred share (equivalent to $25 per depositary share).
Common Equity
Underlying movements in common equity over the past two years were as follows:
|
| | | | | | | | | | |
| | | | | | | |
| | Year ended December 31, | | 2019 | | 2018 | |
| | | | | | | |
| | Common equity - opening | | $ | 4,255,071 |
| | $ | 4,566,264 |
| |
| | Net income | | 323,473 |
| | 43,021 |
| |
| | Change in unrealized losses on available for sale investments, net of tax | | 349,886 |
| | (190,829 | ) | |
| | Share repurchases | | (10,165 | ) | | (10,080 | ) | |
| | Common share dividends | | (138,487 | ) | | (134,748 | ) | |
| | Preferred share dividends | | (41,112 | ) | | (42,625 | ) | |
| | Share-based compensation expense | | 29,675 |
| | 33,505 |
| |
| | Foreign currency translation adjustment | | (1,066 | ) | | (11,165 | ) | |
| | Other | | 1,728 |
| | 1,728 |
| |
| | Common equity - closing | | $ | 4,769,003 |
| | $ | 4,255,071 |
| |
| | | | | | | |
Share Repurchases
On December 31, 2017, authorization under the Board-authorized share repurchase plan for common share repurchases through 2017 expired. A common share repurchase plan has not been authorized since that date.
Secured Letter of Credit Facilities
We routinely enter into agreements with financial institutions to obtain secured letter of credit facilities. These facilities are primarily used for the issuance of letters of credit, in the normal course of operations, to certain insurance and reinsurance entities that purchase reinsurance protection from us. These letters of credit allow those operations to take credit, under local insurance regulations, for reinsurance obtained in jurisdictions where AXIS Capital’s subsidiaries are not licensed or otherwise admitted as an insurer. The value of our letters of credit outstanding is driven by, among other factors, the amount of unearned premiums, development of loss reserves, the payment patterns of loss reserves, the expansion of our business and the loss experience of that business. A portion of these facilities may also be used for liquidity purposes.
On March 28, 20192020, certain of AXIS Capital's operating subsidiaries (the "Participating Subsidiaries") amended an existing $250 million secured letter of credit facility with Citibank Europe plc (the "$250 million Facility") with Citibank Europe plc to extend the expiration date to March 31, 2020.2021.
On December 24, 2019, the Participating Subsidiaries also amended an existing $500 million secured letter of credit facility with Citibank Europe plc (the "$500 million Facility") with Citibank Europe plc to extend the expiration date to December 31, 2023.
Letters of credit issued under the $250 million facilityFacility and the $500 million facilityFacility are principally to be used to support the reinsurance obligations of the Participating Subsidiaries. These facilities are subject to certain covenants, including the requirement to maintain sufficient collateral to cover the obligations outstanding under the facilities. Such obligations include contingent reimbursement obligations for outstanding letters of credit and fees payable to Citibank. In the event of default, Citibank may exercise certain remedies, including the exercise of control over pledged collateral and the termination of the facility to any or all of the Participating Subsidiaries.
At December 31, 2019,2020, letters of credit outstanding were $357$339 million (refer to Item 8, Note 10 to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details).
Common Equity
During the year ended December 31, 2020, common equity decreased by $23 million. The following table reconciles opening and closing common equity positions:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Year ended December 31, | | 2020 | | 2019 | |
| | | | | | |
| Common equity - opening | | $ | 4,769,008 | | | $ | 4,255,071 | | |
| Net income (loss) | | (120,424) | | | 323,473 | | |
| Change in unrealized gains on available for sale investments, net of tax | | 239,114 | | | 349,886 | | |
| Share repurchases | | (10,382) | | | (10,165) | | |
| Common share dividends | | (142,405) | | | (138,487) | | |
| Preferred share dividends | | (30,250) | | | (41,112) | | |
| Share-based compensation expense | | 35,574 | | | 29,675 | | |
| Foreign currency translation adjustment | | 3,571 | | | (1,066) | | |
| | | | | | |
| | | | | | |
| Other | | 1,888 | | | 1,733 | | |
| Common equity - closing | | $ | 4,745,694 | | | $ | 4,769,008 | | |
| | | | | | |
Share Repurchases
During 2020, we repurchased 194,000 common shares from employees to satisfy withholding tax liabilities related to the vesting of share-settled restricted stock units granted under our 2007 and 2017 Long-Term Equity Compensation Plans for a total cost of $10 million. A common share repurchase plan has not yet been authorized for 2021.
Shelf Registrations
On November 19, 2019, we filed an unallocated universal shelf registration statement with the SEC, which became effective on filing. Pursuant to the shelf registration, we may issue an unlimited amount of equity, debt, warrants, purchase contracts or a combination of these securities. Our intent and ability to issue securities pursuant to this registration statement will depend on market conditions at the time of any proposed offering.
Financial Strength Ratings
Our principal insurance and reinsurance operating subsidiaries are assigned financial strength ratings from internationally recognized rating agencies, including Standard & Poor’s, A.M. Best, and Moody’s Investors Service. These ratings are publicly announced and are available directly from the agencies, as well as on our website.
Financial strength ratings represent the opinions of the rating agencies on the overall financial strength of a company and its capacity to meet the obligations of its insurance and reinsurance contracts. Independent ratings are one of the important factors that establish a competitive position in insurance and reinsurance markets. The rating agencies consider many factors in determining the financial strength rating of an insurance company, including the relative level of statutory surplus necessary to support the business operations of the company. These ratings are based on factors considered by the rating agencies to be relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Ratings are not recommendations to buy, sell or hold securities.
The following are the most recent financial strength ratings from internationally recognized agencies in relation to our principal insurance and insurance operating subsidiaries:
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| | | | | | | | | | |
| | | | | | | | | | |
| Rating agency | | Agency’s description of rating | | Rating and outlook | | Agency’s rating
definition
| | Ranking of rating | |
| | | | | | |
| Standard & Poor’s | | An "opinion about the financial security characteristics of an insurance organization, with respect to its ability to pay under its insurance policies and contracts, in accordance with their terms". | | A+ (Stable)(Negative) (1)
| | "Strong capacity to meet its financial commitments" | | The ‘A’ groupingcategory is the third highest out of ten major rating categories. The second through eighth major rating categories may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. | |
| | | | | | |
| A.M. Best | | An "opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations". | | A+A
(Negative)(Stable) (2)
| | "SuperiorExcellent ability to meet ongoing insurance obligations" | | The ‘A+’ grouping‘A’ category is the secondthird highest rating out of fourteen. Ratings outlooks (‘Positive’, ‘Negative’ and ‘Stable’) are assigned to indicate a rating’s potential direction over an intermediate term, generally defined as 36 months. | |
| | | | | | |
| Moody’s Investors Service | | "Opinions of the ability of insurance companies to pay punctually senior policyholder claims and obligations." | | A2 (Negative) (3)
| | "Offers good financial security" | | The ‘A’ groupingcategory 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. | |
(1) On December 12, 2018,May 11, 2020, Standard & Poor's revised its outlook from stable to negative due to stable, which reflected their expectation that capital redundancy at the 'AAA' level would be restored by year-end 2019.unfavorable trends in operating performance.
(2) On February 16, 2018,May 5, 2020, A.M. Best revised its rating and outlook from A+ and negative to A and stable, to negative.respectively. The revised outlookrating was based on unfavorable trends in operating performance over the past five years, particularly emanating from the insurance segment. The revised outlook continues to reflect our strong balance sheet, favorable business profile and appropriate risk management practices.
(3) In April 2019, Moody's Investor Service revised its outlook from stable to negative reflecting higher operational and financial leverage and lower capitalization relative to peers.
Contractual Obligations and Commitments
At December 31, 2019,2020, contractual obligations and commitments by period due were:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | Payment due by period | |
| Contractual obligations and commitments | | Total | | Less than 1
year | | 1-3 years | | 3-5 years | | More than
5 years | |
| | | | | | | | | | | | |
| Operating activities | | | | | | | | | | | |
| Estimated gross losses and loss expenses payments(1) | | $ | 13,926,766 | | | $ | 3,839,180 | | | $ | 4,618,273 | | | $ | 2,400,797 | | | $ | 3,068,516 | | |
| Operating lease obligations(2) | | 140,263 | | | 17,215 | | | 35,044 | | | 21,990 | | | 66,014 | | |
| Investing activities | | | | | | | | | | | |
| Unfunded investment commitments(3) | | 634,206 | | | 249,609 | | | 112,109 | | | 125,563 | | | 146,925 | | |
| Financing activities | | | | | | | | | | | |
| Debt (principal payments)(4) | | 1,325,000 | | | — | | | — | | | — | | | 1,325,000 | | |
| Debt (interest payments)(4)(5) | | 863,561 | | | 60,680 | | | 121,539 | | | 121,796 | | | 559,546 | | |
| Total | | $ | 16,889,796 | | | $ | 4,166,684 | | | $ | 4,886,965 | | | $ | 2,670,146 | | | $ | 5,166,001 | | |
| | | | | | | | | | | | |
(1)We are obligated to pay claims for specified loss events covered by the insurance and reinsurance contracts that we write. Loss payments represent our most significant future payment obligation. In contrast to our other contractual obligations, cash payments are not determinable from the terms specified within the underlying contracts. Our best estimate of reserve for losses and loss expenses is reflected in the table above. Actual amounts and timing may differ materially from our best estimate (refer to ‘Critical Accounting Estimates – Reserve for Losses and Loss Expenses’ for further details). We have not taken into account corresponding reinsurance recoverable on unpaid amounts that would be due to us.
(2)In the ordinary course of business, we renew and enter into new leases for office space which expire at various dates (refer to Item 8, Note 12 to the Consolidated Financial Statements 'Leases' for further details).
(3)We have $588 million of unfunded investment commitments related to our other investments portfolio, which are callable by our investment managers (refer to Item 8, Note 5(c) to the Consolidated Financial Statements 'Investments' for further details). In addition, we have $46 million of unfunded commitments related to our commercial mortgage loans portfolio.
(4)Refer to Item 8, Note 10(a) to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details.
(5)Debt (interest payments) includes $15 million of unamortized discount and debt issuance expenses.
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| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | Payment due by period | |
| | Contractual obligations and commitments | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years | |
| | | | | | | | | | | | | |
| | Operating activities | | | | | | | | | | | |
| | Estimated gross losses and loss expenses payments(1) | | $ | 12,752,081 |
| | $ | 3,299,764 |
| | $ | 3,925,672 |
| | $ | 2,076,156 |
| | $ | 3,450,489 |
| |
| | Operating lease obligations(2) | | 144,612 |
| | 19,225 |
| | 39,178 |
| | 27,647 |
| | 58,562 |
| |
| | Investing activities | | | | | | | | | | | |
| | Unfunded investment commitments(3) | | $ | 619,948 |
| | $ | 201,372 |
| | 110,940 |
| | 151,125 |
| | 156,511 |
| |
| | Financing activities | | | | | | | | | | | |
| | Debt (principal payments)(4) | | $ | 1,825,000 |
| | $ | 500,000 |
| | — |
| | — |
| | 1,325,000 |
| |
| | Debt (interest payments)(4)(5) | | $ | 904,508 |
| | $ | 71,640 |
| | 118,800 |
| | 118,800 |
| | 595,268 |
| |
| | Total | | $ | 16,246,149 |
| | $ | 4,092,001 |
| | $ | 4,194,590 |
| | $ | 2,373,728 |
| | $ | 5,585,830 |
| |
| | | | | | | | | | | | | |
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(1) | We are obligated to pay claims for specified loss events covered by the insurance and reinsurance contracts that we write. Loss payments represent our most significant future payment obligation. In contrast to our other contractual obligations, cash payments are not determinable from the terms specified within the underlying contracts. Our best estimate of reserve for losses and loss expenses is reflected in the table above. Actual amounts and timing may differ materially from our best estimate (refer to ‘Critical Accounting Estimates – Reserve for Losses and Loss Expenses’ for further details). We have not taken into account corresponding reinsurance recoverable on unpaid amounts that would be due to us.
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(2) | In the ordinary course of business, we renew and enter into new leases for office space which expire at various dates (refer to Item 8, Note 12 to the Consolidated Financial Statements 'Leases' for further details).
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(3) | We have $588 million of unfunded investment commitments related to our other investments portfolio, which are callable by our investment managers (refer to Item 8, Note 5(c) to the Consolidated Financial Statements 'Investments' for further details). In addition, we have $32 million of unfunded commitments related to our commercial mortgage loans portfolio.
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(4) | Refer to Item 8, Note 10(a) to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details.
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(5) | Debt (interest payments) includes $17 million of unamortized discount and debt insurance expenses. |
CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements include certain amounts that are inherently uncertain and judgmental in nature. As a result, we are required to make assumptions and best estimates in order to determine the reported values. We consider an accounting estimate to be critical if: (1) it requires that significant assumptions be made in order to deal with uncertainties and (2) changes in the estimate could have a material impact on our results of operations, financial condition or liquidity.
We believe that the material items requiring such subjective and complex estimates are:
•reserves for losses and loss expenses;
•reinsurance recoverable on unpaid losses and loss expenses, including the provisionallowance for uncollectible amounts;expected credit losses;
•gross premiums written and net premiums earned;
•fair value measurements of financial assets and liabilities; and
other-than-temporary impairments ("OTTI") in •the carrying value ofallowance for credit losses associated with available for sale securities.
Significant accounting policies are also important to understanding the consolidated financial statements (refer to Item 8, Note 2 to the Consolidated Financial Statements 'Basis of Presentation and Significant Accounting Policies' for further details).
We believe that the amounts included in the consolidated financial statements reflect itsmanagement's best judgment. However, factors such as those described in Item 1A 'Risk Factors' could cause actual events or results to differ materially from the underlying assumptions and estimates which could lead to a material adverse impact on our results of operations, financial condition or liquidity.
Reserve for Losses and Loss Expenses
Overview
We believe the most significant accounting judgment we make is the estimate of reserve for losses and loss expenses ("loss reserves"). Loss reserves represent management’s estimate of the unpaid portion of our ultimate liability for losses and loss expenses ("ultimate losses") for insured and reinsured events that have occurred at or before the balance sheet date. Loss reserves reflect both claims that have been reported ("case reserves") to us and claims that have been incurred but not reported ("IBNR") to us. Loss reserves represent our best estimate of what the ultimate settlement and administration of claims will cost, based on our assessment of facts and circumstances known at that particular point in time.
Loss reserves are not an exact calculation of the liability but instead, are complex estimates. The process of estimating loss reserves involves a number of variables (refer to 'Selection of Reported Reserves – Management's Best Estimate' below for further details). We review estimates of loss reserves each reporting period and consider all significant facts and circumstances known at that particular point in time. As additional experience and other data become available and/or laws and legal interpretations change, we may adjust previous estimates of loss reserves. Adjustments are recognized in the period in which they are determined, therefore they can impact that period's underwriting results either favorably (indicating that current estimates are lower than previous estimates) or adversely (indicating that current estimates are higher than previous estimates).
Case Reserves
With respect to insurance business, we are generally notified of losses by our insureds and/or their brokers. Based on this information, our claims personnel estimate ultimate losses arising from the claim, including the cost of administering the claims settlement process. These estimates reflect the judgment of our claims personnel based on general reserving practices, the experience and knowledge of such personnel regarding the nature of the specific claim and, where appropriate, the advice of legal counsel, loss adjusters and other relevant consultants.
With respect to reinsurance business, we are generally notified of losses by ceding companies and/or their brokers. For excess of loss contracts, we are typically notified of insured losses on specific contracts and record a case reserve for the estimated ultimate liability arising from the claim. For contracts written on a proportional basis, we typically receive aggregated claims information and record a case reserve for the estimated ultimate liability arising from the claim based on that information. Proportional reinsurance contracts typically require that losses in excess of pre-defined amounts be separately notified so we can adequately evaluate them. Our claims department evaluates each specific loss notification we receive and records additional case reserves when a ceding company’s reserve for a claim is not considered adequate.
In deciding whether to provide treaty reinsurance, we carefully review and analyze a cedant’s underwriting and risk management practices to ensure appropriate underwriting, data capture and reporting procedures. We also undertake an extensive program of cedant audits, using outsourced legal and industry experience where necessary. This allows us to review cedants’ claims administration practices to ensure that reserves are consistent with exposures, adequately established, and properly reported in a timely manner.
IBNR
The estimation of IBNR is necessary due to potential development on reported claims and the time lag between when a loss event occurs and when it is actually reported, which is referred to as a reporting lag. Reporting lags may arise from a number of factors, including but not limited to, the nature of the loss, the use of intermediaries and complexities in the claims adjusting process. As we do not have specific information on IBNR, it must be estimated. IBNR is calculated by deducting incurred losses (i.e. paid losses and case reserves) from management’s best estimate of ultimate losses. In contrast to case reserves, which are established at the contract level, IBNR reserves are generally estimated at an aggregate level and cannot be identified as reserves for a particular loss event or contract (refer to 'Reserving for Significant Catastrophic Events' below for further details).
Reserving Methodology
Sources of Information
Our quarterly loss reserving process begins with the collection and analysis of paid and incurred claim data for each of the segments. The segmental data is disaggregated by reserve class and further disaggregated by underwriting year and accident year. Underwriting year or accident year information is used to analyze our business and to estimate loss reserves. Reserve classes are selected to ensure that the underlying contracts have homogeneous loss development characteristics, while remaining large enough to make the estimation of trends credible. Reserve classes are reviewed on a regular basis and adjusted over time as our business evolves. The paid and incurred claim data, in addition to industry benchmarks, serves as a key input to many of the methods employed by our actuaries. The relative weights assigned to our historical loss data versus industry
data vary based on a number of factors including our historical track record and the development profile for the reserve class being evaluated (refer to 'Claim Tail Analysis' below for further details).
Actuarial Analysis
Multiple actuarial methods are available to estimate ultimate losses. Each method has its own assumptions and its own advantages and disadvantages, with no single estimation method being better than the others in all situations and no one set of assumption variables being meaningful for all reserve classes. The relative strengths and weaknesses of the particular estimation methods when applied to a particular group of claims can also change over time.
The following is a brief description of the reserve estimation methods commonly employed by our actuaries including a discussion of their particular strengths and weaknesses:
•Expected Loss Ratio Method ("ELR Method"): This method estimates ultimate losses for an accident year or underwriting year by applying an expected loss ratio to the earned or written premium for that year. Generally, expected loss ratios are based on one or more of (a) an analysis of historical loss experience to date, (b) pricing information and (c) industry data, adjusted as appropriate, to reflect changes in rates, loss and exposure trends, and terms and conditions. This method is insensitive to actual incurred losses for the accident year or underwriting year in question and is, therefore, often useful in the early stages of development when very few losses have been incurred. Conversely, the lack of sensitivity to incurred/paid losses for the accident year or underwriting year in question means that this method is usually inappropriate in later stages of an accident year or underwriting year’s development.
•Loss Development Method (also referred to as the "Chain Ladder Method" or "Link Ratio Method"): This method assumes that the losses incurred/paid for each accident year or underwriting year at a particular development stage follow a relatively similar pattern. It assumes that on average, every accident year or underwriting year will display the same percentage of ultimate losses incurred/paid at the same point in time after the inception of that year. The percentages incurred/paid are established for each development stage (e.g. 12 months, 24 months, etc.) after examining averages from historical loss development data and/or external industry benchmark information. Ultimate losses are then estimated by multiplying the actual incurred/paid losses by the reciprocal of the established incurred/paid percentage. The strengths of this method are that it reacts to loss emergence/payments and that it makes full use of historical claim emergence/payment experience. However, this method has weaknesses when the underlying assumption of stable loss development/payment patterns is not valid. This could be the consequence of changes in business mix, claim inflation trends or claim reporting practices and/or the presence of large claims, among other things. Furthermore, this method tends to produce volatile estimates of ultimate losses where there is volatility in the underlying incurred/paid patterns. In particular, where the expected percentage of incurred/paid losses is low, small deviations between actual and expected claims can lead to very volatile estimates of ultimate losses. As a result, this method is often unsuitable at early development stages for an accident year or underwriting year.
•Bornhuetter-Ferguson Method ("BF Method"): This method can be seen as a combination of the ELR and Loss Development Methods, under which the Loss Development Method is given progressively more weight as an accident year or underwriting year matures. The main advantage of the BF Method is that it provides a more stable estimate of ultimate losses than the Loss Development Method at earlier stages of development, while remaining more responsive to emerging loss development than the ELR Method. In addition, the BF Method allows for the incorporation of external market information through the use of expected loss ratios, whereas the Loss Development Method does not incorporate such information.
As part of our quarterly loss reserving process, our actuaries employ the estimation method(s) that they believe will produce the most reliable estimate of ultimate losses, at that particular evaluation date, for each reserve class and accident year or underwriting year combination. Often, this is a blend (i.e. weighted average) of the results of two or more appropriate actuarial methods. These ultimate loss estimates are generally utilized to evaluate the adequacy of ultimate loss estimates for previous
accident or underwriting years, established in the prior reporting period. For the initial estimate of the current accident or underwriting year, the available claim data is typically insufficient to produce a reliable estimate of ultimate losses. As a result, initial estimates for an accident or underwriting year is generally based on the ELR Method for longer tailed lines and a BF method for shorter tailed lines. The initial ELR for each reserve class is established collaboratively by our actuaries, underwriters and management at the start of the year as part of the planning process, taking into consideration prior accident years’ or underwriting years' experience and industry benchmarks, adjusted after considering factors such as loss and exposure trends, rate differences, changes in contract terms and conditions, business mix changes and other known differences between the current year and prior accident or underwriting years. The initial expected loss ratios for a given accident or underwriting year may be modified over time if the underlying assumptions, such as loss development or premium rate changes, differ from the original assumptions.
Key Actuarial Assumptions
The use of the above actuarial methods requires us to make certain explicit assumptions, the most significant of which are: (1) expected loss ratios and (2) loss development patterns.
In earlier years, we placed significant reliance on industry benchmarks in establishing expected loss ratios and selecting loss development patterns. Over time, we have placed more reliance on our historical loss experience in establishing these ratios and selecting these patterns where we believe the weight of our experience has become sufficiently credible for consideration. The weight given to our experience differs for each of the three claim tail classes (refer to 'Claim Tail Analysis' below for further details). In establishing expected loss ratios for the insurance segment, we give consideration to a number of other factors, including exposure trends, rate adequacy on new and renewal business, ceded reinsurance costs, changes in claims emergence and our underwriters’ view of terms and conditions in the market environment. For the reinsurance segment, expected loss ratios are based on a contract-by-contract review, which considers information provided by clients together with estimates provided by our underwriters and actuaries about the impact of changes in pricing, terms and conditions and coverage. We also have considered the market experience of some classes of business as compiled and analyzed by an independent actuarial firm, as appropriate.
Claim Tail Analysis
Gross loss reserves for each of the reportable segments, segregated between case reserves and IBNR and by significant reserve class were as follows:shown below. Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for mapping of the Company's lines of business to reserve classes and the expected claim tails.
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| | | 2019 | | 2018 | |
| | At December 31, | Case reserves | | IBNR | | Total | | Case reserves | | IBNR | | Total | |
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| | Insurance segment: | | | | | | | | | | | | |
| | Property and other | $ | 655,262 |
| | $ | 327,475 |
| | $ | 982,737 |
| | $ | 792,022 |
| | $ | 505,071 |
| | $ | 1,297,092 |
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| | Marine | 235,549 |
| | 281,677 |
| | 517,226 |
| | 208,620 |
| | 335,889 |
| | 544,508 |
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| | Aviation | 116,932 |
| | 31,445 |
| | 148,377 |
| | 102,954 |
| | 41,554 |
| | 144,508 |
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| | Credit and political risk | 5,905 |
| | 124,109 |
| | 130,014 |
| | (3,171 | ) | | 127,098 |
| | 123,927 |
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| | Professional lines | 806,780 |
| | 2,041,317 |
| | 2,848,097 |
| | 678,047 |
| | 1,980,164 |
| | 2,658,212 |
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| | Liability | 396,837 |
| | 1,473,280 |
| | 1,870,117 |
| | 317,449 |
| | 1,340,613 |
| | 1,658,062 |
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| | Total Insurance | 2,217,265 |
| | 4,279,303 |
| | 6,496,568 |
| | 2,095,920 |
| | 4,330,389 |
| | 6,426,309 |
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| | Reinsurance segment: | | | | | | | | | | | | |
| | Property and other | 879,301 |
| | 1,186,655 |
| | 2,065,958 |
| | 890,747 |
| | 902,493 |
| | 1,793,240 |
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| | Credit and surety | 125,029 |
| | 190,368 |
| | 315,397 |
| | 125,256 |
| | 231,222 |
| | 356,478 |
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| | Professional lines | 429,576 |
| | 688,439 |
| | 1,118,015 |
| | 432,137 |
| | 702,449 |
| | 1,134,586 |
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| | Motor | 778,534 |
| | 516,148 |
| | 1,294,681 |
| | 701,600 |
| | 517,542 |
| | 1,219,142 |
| |
| | Liability | 431,211 |
| | 1,030,252 |
| | 1,461,462 |
| | 380,544 |
| | 970,470 |
| | 1,351,014 |
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| | Total Reinsurance | 2,643,651 |
| | 3,611,862 |
| | 6,255,513 |
| | 2,530,284 |
| | 3,324,176 |
| | 5,854,460 |
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| | Total | $ | 4,860,916 |
| | $ | 7,891,165 |
| | $ | 12,752,081 |
| | $ | 4,626,204 |
| | $ | 7,654,565 |
| | $ | 12,280,769 |
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| | 2020 | | 2019 | |
| At December 31, | Case reserves | | IBNR | | Total | | Case reserves | | IBNR | | Total | |
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| Insurance segment: | | | | | | | | | | | | |
| Property and other | $ | 704,107 | | | $ | 642,413 | | | $ | 1,346,520 | | | $ | 655,262 | | | $ | 327,475 | | | $ | 982,737 | | |
| Marine | 221,243 | | | 317,869 | | | 539,112 | | | 235,549 | | | 281,677 | | | 517,226 | | |
| Aviation | 132,613 | | | 38,018 | | | 170,631 | | | 116,932 | | | 31,445 | | | 148,377 | | |
| Credit and political risk | 8,917 | | | 152,134 | | | 161,051 | | | 5,905 | | | 124,109 | | | 130,014 | | |
| Professional lines | 801,565 | | | 2,279,712 | | | 3,081,277 | | | 806,780 | | | 2,041,317 | | | 2,848,097 | | |
| Liability | 376,486 | | | 1,635,421 | | | 2,011,907 | | | 396,837 | | | 1,473,280 | | | 1,870,117 | | |
| | | | | | | | | | | | | |
| Total Insurance | 2,244,931 | | | 5,065,567 | | | 7,310,498 | | | 2,217,265 | | | 4,279,303 | | | 6,496,568 | | |
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| Reinsurance segment: | | | | | | | | | | | | |
| Property and other | 1,086,265 | | | 1,027,316 | | | 2,113,581 | | | 879,301 | | | 1,186,655 | | | 2,065,958 | | |
| Credit and surety | 149,778 | | | 157,196 | | | 306,974 | | | 125,029 | | | 190,368 | | | 315,397 | | |
| Professional lines | 516,011 | | | 673,082 | | | 1,189,093 | | | 429,576 | | | 688,439 | | | 1,118,015 | | |
| Motor | 809,389 | | | 540,623 | | | 1,350,012 | | | 778,534 | | | 516,148 | | | 1,294,681 | | |
| Liability | 525,526 | | | 1,131,082 | | | 1,656,608 | | | 431,211 | | | 1,030,252 | | | 1,461,462 | | |
| | | | | | | | | | | | | |
| Total Reinsurance | 3,086,969 | | | 3,529,299 | | | 6,616,268 | | | 2,643,651 | | | 3,611,862 | | | 6,255,513 | | |
| | | | | | | | | | | | | |
| Total | $ | 5,331,900 | | | $ | 8,594,866 | | | $ | 13,926,766 | | | $ | 4,860,916 | | | $ | 7,891,165 | | | $ | 12,752,081 | | |
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In order to capture the key dynamics of loss reserve development and potential volatility, reserve classes should be considered according to their potential expected length of loss emergence and settlement, generally referred to as the "tail". We consider our business to consist of three claim tail classes:classes, short-tail, medium-tail and long-tail. Favorable development on prior accident year reserves indicates that current estimates are lower than previous estimates, while adverse development on prior accident year reserves indicates that current estimates are higher than previous estimates. Below is a discussion of the specifics of our loss reserve process as it applies to each claim tail class, as well as commentary on the factors contributing to our historical loss reserve development for each class.
Short-tail Business
Short-tail business generally includes exposures for which losses are usually known and paid within a relatively short period of time after the underlying loss event has occurred. Our short-tail business primarily relates to property coverages and includes terrorism, accident and health, discontinued lines - Novae, marine, and aviation hull and war business in the insurance segment, together with the catastrophe, property, engineering, agriculture, marine and other,aviation, accident and health, and discontinued lines - Novae business in the reinsurance segment.
The key actuarial assumptions for short-tail business in early accident years were primarily developed with reference to industry benchmarks for expected loss ratios and loss development patterns. As our historical loss experience amassed, it gained credibility and became relevant for consideration in establishing these key actuarial assumptions. As a result, we gradually increased the weighting assigned to our historical loss experience in selecting the expected loss ratios and loss development patterns utilized to establish estimates of ultimate losses for an accident year.
Due to the relatively short reporting and settlement patterns for short-tail business, we generally place more weight on experience-based methods and other qualitative considerations in establishing reserves for recent and more mature accident years. Referyears (refer to Item 8, Note 8 to the Consolidated Financial Statements 'Underwriting Results – Consolidated – Prior Year Reserve Development' 'Reserve for losses and loss expenses'for further details.detail on the reserve classes, the expected claim tails, and prior year development).
Although estimates of ultimate losses for short-tail business are inherently more certain than for medium and long-tail business, significant judgment is still required. For example, much of our excess insurance and excess of loss reinsurance business has high attachment points, therefore, it is often difficult to estimate whether claims will exceed those attachment points. Also,In addition, the inherent uncertainties relating to catastrophe events further add to the complexity of estimating potential exposure. In addition,Further, we use managing general agents ("MGAs") and other producers for certain business in the insurance
segment which can delay the reporting of loss information to us. We expect that the majority of development for an accident year or underwriting year will be recognized in the subsequent one to three years.
Medium-tail Business
Medium-tail business generally has claim reporting and settlement periods that are longer than those of short-tail reserve classes. Our medium-tail business primarily consists of insurance and reinsurance professional lines, reinsurance credit and surety, aviation liability business in the insurance and discontinued lines - Novae in the insurance segment. We also consider insurance credit and political risk business to have a medium tail, due to the complex nature of claims and the potential additional time that may be required to realize subrogation assets.
For our earliest accident and underwriting years, initial key actuarial expected loss ratio and loss development assumptions were established utilizing industry benchmarks. Due to the longer claim tail, the length of time required to develop credible loss history for use in the loss reserving process is greater for medium-tail business than for short-tail business. Our reserving approach for medium-tail business is tailored by line of business, with significant lines of business being specifically addressed below:
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• | Insurance•Insurance and Reinsurance Professional Lines |
For professional lines business and discontinued lines - Novae, claim payment and reporting patterns are typically medium to long-tail in nature. This business is predominantly written on a claims-made basis.
With respect to key actuarial assumptions, we rely on our loss experience when establishing expected loss ratios and selected loss development patterns. 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 or underwriting year matures. Consequently, initial loss reserves for an accident year or underwriting year are generally based on 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 experience until selections are based almost exclusively on experience-based methods. We evaluate the appropriateness of the transition to experience-based methods at the reserve class level, commencing this transition when we believe that our incurred loss development is sufficient to produce meaningful actuarial indications. The rate at which we transition fully to sole reliance on experience-based methods can vary by reserve class and by year, depending on our assessment of the stability and relevance of such indications. For some professional lines in the insurance segment, we also rely on the evaluation of the open claim inventory in addition to the commonly employed actuarial methods when establishing reserves.
Our transition from the ELR method to experience-based methods began in 2008, when we commenced gradual transition for the 2004 and prior accident years. As our loss history continued to develop, the transition was expanded to include additional accident years. Referyears (refer to Item 8, Note 8 to the Consolidated Financial Statements 'Underwriting Results – Consolidated – Prior Year Development' 'Reserve for losses and loss expenses'for further details.detail on the reserve classes, the expected claim tails, and prior year development).
•Reinsurance Credit and Surety
For reinsurance credit and surety business, initial and most recent underwriting year loss projections are generally based on the ELR method, with consideration given to qualitative factors. Given that there is a quicker and more stable reporting pattern for trade credit and mortgage business, we generally commence the transition to experience-based methods for these lines of business sooner than for surety business.
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• | •Insurance Credit and Political Risk |
Refer to 'Reserving for Credit and Political Risk Business' below for a more detailed discussion of specific loss reserve issues related to this business. When considering prior year reserve development for this line of business, it is important to note that the multi-year nature of the credit business distorts loss ratios when a single accident year is considered in isolation. In recent years, the average term of these contracts has been four to five years. Premiums for these contracts generally earn evenly over the contract term, therefore, are reflected in multiple accident years. In contrast, losses incurred on these contracts, which can be characterized as low in frequency and high in severity, are reflected in a single accident year.
The estimation of the value of recoveries on credit and political risk business requires significant management judgment. At December 31, 2019,2020, estimated recoveries on credit and political risk business were $35$52 million (2018: $24(2019: $35 million).
Long-tail Business
In contrast to short and medium-tail business, the claim tail for long-tail business is expected to be notably longer, as claims are often reported and ultimately paid or settled years, or even decades, after the related loss events occur. Our long-tail business primarily relates to liability business written in the insurance and reinsurance segments, and reinsurance motor business, and discontinued lines - Novae in the insurance and reinsurance segments.
As a general rule, estimates of accident year or underwriting year ultimate losses for long-tail business are notably more uncertain than those for short and medium-tail business. Factors that contribute additional uncertainty to estimates for long-tail business include, but are not limited to:
•more significant weight given to industry benchmarks in forming our key actuarial assumptions;
•potential volatility of actuarial estimates, given the number of years of development it takes to produce a meaningful incurred loss as a percentage of ultimate losses;
•inherent uncertainties about loss trends, claims inflation (e.g. medical, judicial, social) and general economic conditions; and
•the possibility of future litigation, legislative or judicial change that may impact future loss experience relative to the prior industry loss experience relied on in reserve estimation.
To date, key actuarial assumptions for long-tail business have been derived from a combination of industry benchmarks supplemented by our historical loss experience. While we consider industry benchmarks that we believe reflect the nature and coverage of our business, actual loss experience may differ from the benchmarks based on industry averages.
Due to the length of the development tail for this business, reserve estimates for most accident years and underwriting years are predominantly based on the BF or ELR method and the consideration of qualitative factors. As part of our quarterly loss reserving process, we monitor actual paid and incurred loss emergence relative to expected loss emergence based on selected loss development patterns. The drivers of any unfavorable loss emergence are investigated and, as a result, have led to an immediate recognition of adverse development in some instances.
Prior to the fourth quarter of 2012, we did not recognize any favorable loss emergence. As a result, during some periods, we recognized net adverse prior year reserve development for insurance liability business in light of unfavorable loss emergence for certain reserve class and accident year combinations.
Commencing with the fourth quarter 2012 loss reserving process, we began to give weight to actuarial methods that reflect our experience for liability business as we believed that our oldest accident years were at a stage of expected development where such methods would produce meaningful actuarial indications.
In 2019,2020, we continued to give weight to experience-based methods on the earlier years for insurance and reinsurance liability lines of business leading to the recognition of net favorable prior year reserve development on the reinsurance liability reserve class.business.
Reserving for Credit and Political Risk Business
Our insurance credit and political risk business consists primarilyprovides credit and political risk insurance products for banks, commodity traders, corporations and multilateral and export credit agencies. Cover is provided for a range of risks including sovereign default, credit insurancedefault, political violence, currency inconvertibility and confiscation,non-transfer, expropriation, nationalizationaircraft non-repossession and deprivation coverages ("CEND"). contract frustration due to political events.
Claims for this business tend to be characterized by their severity risk, as opposed to their frequency risk therefore, claim payment and reporting patterns are anticipated to be volatile. Under the notification provisions of our credit insurance policies, we anticipate being advised of an insured event within a relatively short time period. Consequently, we generally estimate ultimate losses based on a contract-by-contract analysis which considers the contracts’ terms, the facts and circumstances of underlying loss events and qualitative input from claims managers.
An important and distinguishing feature of many of these contracts is the contractual right, subsequent to payment of a claim to an insured, to be subrogated to, or otherwise have an interest in, the insured’s rights of recovery under an insured loan or facility agreement. These estimated recoveries are recorded as an offset to credit and political risk loss reserves. The lag between the date of a claim payment and the ultimate recovery from the corresponding security can result in negative case reserves at a point in time (as was the case at December 31, 20192020 and 2018)2019). The nature of the underlying collateral is specific to each transaction therefore we estimate the value of this collateral on a contract-by-contract basis. This valuation process is inherently subjective and involves the application of management’s judgment because active markets for the collateral often do not exist. Estimates of values are based on numerous inputs, including information provided by our insureds, as well as third-party sources including rating agencies, asset valuation specialists and other publicly available information. We also assess any post-event circumstances, including restructurings, liquidations and possession of asset proposals/agreements.
In some instances, on becoming aware of a loss event related to credit and political risk business, we negotiate a final settlement of all of our policy liabilities for a fixed amount. In most circumstances, this occurs when the insured moves to realize the benefit of the collateral that underlies the insured loan or facility and presents us with a net settlement proposal that represents a full and final payment by us under the terms of the policy. In consideration for this payment, we secure a cancellation of the policy, or a release of all claims, and waive our right to pursue a recovery of these settlement payments
against the security that may have been available to us under the insured loan or facility agreement. In certain circumstances, cancellation by way of net settlement or full payment can result in an adjustment to the premium associated with the policy.
Reserving for Significant Catastrophic Events
We cannot estimate losses from widespread catastrophic events, such as hurricanes and earthquakes, using the traditional actuarial methods described above. The magnitude and complexity of losses associated with certain of these events inherently increase the level of uncertainty and, therefore, the level of management judgment involved in arriving at loss reserve estimates. As a result, actual losses for these events may ultimately differ materially from current estimates.
Loss reserves related to the COVID-19 pandemic represent our best estimate of losses and loss expenses that have been incurred at the balance sheet date. The determination of loss reserves is based on a ground-up assessment of coverage from individual contracts and treaties across all lines of business, and includes a review of modeling analyses and market information, where appropriate. In addition, we consider information received from clients, brokers and loss adjusters, together with global shelter-in-place orders and the outcomes of recent court judgments, including the UK Supreme Court ruling.
The estimate of loss reserves related to the COVID-19 pandemic is subject to significant uncertainty. This uncertainty is driven by the inherent difficulty in making assumptions around the impact of the COVID-19 pandemic due to the lack of comparable events, the ongoing nature of the event, and its far-reaching impacts on world-wide economies and the health of the population. These assumptions include:
•the nature and the duration of the pandemic;
•the effects on human health, the economy and our customers;
•the response of government bodies including legislative, regulatory or judicial actions and social influences that could alter the interpretation of the our contracts;
•the coverage provided under our contracts;
•the coverage provided by our ceded reinsurance; and
•the evaluation of the loss and impact of loss mitigation actions.
While we believe our estimate of loss reserves is adequate for such eventslosses and loss expenses that have been incurred at the balance sheet date based on current facts and circumstances, we continue to monitor the appropriateness of these assumptions as new information comes to light and adjustments are made to our estimate of ultimate losses related to the COVID-19 pandemic if there are developments that are different from previous expectations. Adjustments are recorded in the period in which they are identified. Actual losses for this event may ultimately differ materially from current estimates.
Loss reserves related to catastrophes other than the COVID-19 pandemic represent our best estimate of losses and loss expenses that have been incurred at the balance sheet date. The determination of these loss reserves is estimated by management after a catastrophe occurs by completing an in-depth analysis of individual contracts which may potentially have been impacted by the catastrophic event. This in-depth analysis may rely on several sources of information including:
•estimates of the size of insured industry losses from the catastrophic event and our corresponding market share;
•a review of our portfolio of contracts to identify those contracts which may be exposed to the catastrophic event;
•a review of modeled loss estimates based on information previously reported by customers and brokers, including exposure data obtained during the underwriting process;
•discussions of the impact of the event with our customers and brokers; and
•catastrophe bulletins published by various independent statistical reporting agencies.
We generally use a blend of these information sources to arrive at aggregate estimateestimates of the ultimate losses arising from the catastrophic event. In subsequent reporting periods, we review changes in paid and incurred losses in relation to each significant catastrophe and adjust estimates of ultimate losses for each event if there are developments that are different from previous expectations. Adjustments are recorded in the period in which they are identified.
There are additional risks affectingthat affect our ability to accurately estimate ultimate losses for catastrophic events. For example, the estimates 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 or 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 loss reserves for that reporting period.
While we believe our estimate of loss reserves is adequate for losses and loss expenses that have been incurred at the balance sheet date based on current facts and circumstances, we monitor changes in paid and incurred losses in relation to each significant catastrophe in subsequent reporting periods, and adjustments are made to estimates of ultimate losses for each event if there are developments that are different from previous expectations. Adjustments are recorded in the period in which they are identified. Actual losses for these event may ultimately differ materially from current estimates.
Results of operations for 20192020 and 20182019 were impacted by natural catastrophe activity (refer to 'Underwriting Results – ConsolidatedInsurance segment – Current Accident Year Loss Ratio' and 'Underwriting Results – Reinsurance segment – Current Accident Year Loss Ratio' for further details).
Selection of Reported Reserves – Management’s Best Estimate
Our quarterly loss reserving process involves the collaboration of our underwriting, claims, actuarial, legal, ceded reinsurance and finance departments, includes various segmental committee meetings and culminates with the approval of a single point best estimate by our Group Reserving Committee, which comprises senior management. In selecting this best estimate, management considers actuarial estimates and applies informed judgment regarding qualitative factors that may not be fully captured in these actuarial estimates. Such factors include, but are not limited to:to, the timing of the emergence of claims, volume and complexity of claims, social and judicial trends, potential severity of individual claims and the extent of our historical loss data versus industry information. While these qualitative factors are considered in arriving at the point estimate, no specific provisions for qualitative factors are established.
With regard to establishing the fair value of reserves for losses and loss expenses for Novae at the acquisition date, weight was given to the observable value of these reserves based on the RITC transaction of the 2015 and prior years of account of Syndicate 2007, which was completed prior to the allocation of purchase price. Management made no change to the initial estimate when establishing its best estimate of reserves for losses and loss expenses at December 31, 2017. This is consistent with our general approach of recognizing all or part of the anticipated cost of third-party liability commutations if the transaction has either completed or is considered sufficiently likely to be completed in the near term.
Beginning in 2013, we significantly enhanced the capabilities and resources dedicated to the actuarial reserving function. Consequently, from the first quarter of 2014, management began to rely on its internal actuarial reserving function for its quarterly loss reserving process rather than utilizing the services of an independent actuarial firm. On an annual basis, we use an independent actuarial firm to provide an actuarial opinion on the reasonableness of loss reserves for each of our operating subsidiaries and statutory reporting entities as these actuarial opinions are required to meet various insurance regulatory requirements. The actuarial firm also discusses its conclusions from the annual review with management and presents its findings to ourthe Audit Committee of the Board of Directors.
Sensitivity Analysis
While we believe that loss reserves at December 31, 20192020 are adequate, new information, events or circumstances may result in ultimate losses that are materially greater or less than provided for in our loss reserves. As previously noted, there are many factors that may cause reserves to increase or decrease, particularly those related to catastrophe losses and long-tail lines of business.
Expected loss ratios are a key assumption in estimates of ultimate losses for business at an early stage of development. A higher expected loss ratio results in a higher ultimate loss estimate, and vice versa. Assumed loss development patterns are another significant assumption in estimating loss reserves. Accelerating a loss reporting pattern (i.e. shortening the claim tail) results in lower ultimate losses, as the estimated proportion of losses already incurred would be higher. The uncertainty in the timing of the emergence of claims (i.e. the length of the development pattern) is generally greater for a company with a relatively limited operating history, therefore, we rely on industry benchmarks to a certain extent when establishing loss reserve estimates.
The effect on estimates of gross loss reserves of reasonably likely changes in the two key assumptions used to estimate gross loss reserves at December 31, 20192020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| INSURANCE | |
| Development pattern | Expected loss ratio | |
| Property and other | 5% lower | | Unchanged | | 5% higher | |
| | | | | | | |
| 3 months shorter | $ | (57,199) | | | $ | (50,476) | | | $ | (43,738) | | |
| Unchanged | (9,188) | | | — | | | 9,172 | | |
| 3 months longer | 44,366 | | | 56,197 | | | 68,014 | | |
| | | | | | | |
| Marine | 5% lower | | Unchanged | | 5% higher | |
| | | | | | | |
| 3 months shorter | $ | (47,269) | | | $ | (36,735) | | | $ | (26,215) | | |
| Unchanged | (12,303) | | | — | | | 12,293 | | |
| 3 months longer | 15,612 | | | 29,302 | | | 42,988 | | |
| | | | | | | |
| Aviation | 5% lower | | Unchanged | | 5% higher | |
| | | | | | | |
| 3 months shorter | $ | (11,765) | | | $ | (10,282) | | | $ | (8,799) | | |
| Unchanged | (1,997) | | | — | | | 1,997 | | |
| 3 months longer | 19,663 | | | 22,800 | | | 25,937 | | |
| | | | | | | |
| Credit and political risk | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 3 months shorter | $ | (10,793) | | | $ | (40) | | | $ | 16,612 | | |
| Unchanged | (10,763) | | | — | | | 16,663 | | |
| 3 months longer | (10,714) | | | 59 | | | 16,731 | | |
| | | | | | | |
| Professional lines | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (425,931) | | | $ | (117,973) | | | $ | 191,070 | | |
| Unchanged | (320,129) | | | — | | | 320,504 | | |
| 6 months longer | (174,634) | | | 162,369 | | | 499,595 | | |
| | | | | | | |
| Liability | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (254,234) | | | $ | (47,019) | | | $ | 160,201 | | |
| Unchanged | (211,750) | | | — | | | 211,752 | | |
| 6 months longer | (157,773) | | | 59,784 | | | 277,338 | | |
| | | | | | | |
|
| | | | | | | | | | | | | |
| | | | | | | | |
| | INSURANCE | |
| | Development pattern | Expected loss ratio | |
| | Property and other | 5% lower | | Unchanged | | 5% higher | |
| | | | | | | | |
| | 3 months shorter | $ | (80,379 | ) | | $ | (70,217 | ) | | $ | (59,881 | ) | |
| | Unchanged | (12,804 | ) | | — |
| | 12,805 |
| |
| | 3 months longer | 57,932 |
| | 73,149 |
| | 88,361 |
| |
| | | | | | | | |
| | Marine | 5% lower | | Unchanged | | 5% higher | |
| | | | | | | | |
| | 3 months shorter | $ | (43,094 | ) | | $ | (46,809 | ) | | $ | (33,678 | ) | |
| | Unchanged | (10,820 | ) | | — |
| | 10,825 |
| |
| | 3 months longer | 15,156 |
| | 27,021 |
| | 38,892 |
| |
| | | | | | | | |
| | Aviation | 5% lower | | Unchanged | | 5% higher | |
| | | | | | | | |
| | 3 months shorter | $ | (7,401 | ) | | $ | (6,147 | ) | | $ | (4,894 | ) | |
| | Unchanged | (1,560 | ) | | — |
| | 1,560 |
| |
| | 3 months longer | 6,634 |
| | 8,625 |
| | 10,617 |
| |
| | | | | | | | |
| | Credit and political risk | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | | |
| | 3 months shorter | $ | (12,747 | ) | | $ | (193 | ) | | $ | 3,862 |
| |
| | Unchanged | (12,565 | ) | | — |
| | 4,065 |
| |
| | 3 months longer | (12,388 | ) | | 186 |
| | 4,260 |
| |
| | | | | | | | |
| | Professional lines | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | | |
| | 6 months shorter | $ | (388,752 | ) | | $ | (108,463 | ) | | $ | 171,829 |
| |
| | Unchanged | (291,965 | ) | | — |
| | 291,968 |
| |
| | 6 months longer | (176,479 | ) | | 129,385 |
| | 435,238 |
| |
| | | | | | | | |
| | Liability | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | | |
| | 6 months shorter | $ | (225,322 | ) | | $ | (36,754 | ) | | $ | 151,816 |
| |
| | Unchanged | (191,981 | ) | | — |
| | 191,983 |
| |
| | 6 months longer | (148,320 | ) | | 48,214 |
| | 244,739 |
| |
| | | | | | | | |
|
| | | | | | | | | | | | | |
| | | | | | | | |
| | REINSURANCE | |
| | Development pattern | Expected loss ratio | |
| | Property and other | 5% lower | | Unchanged | | 5% higher | |
| | | | | | | | |
| | 3 months shorter | $ | (112,511 | ) | | $ | (48,913 | ) | | $ | 16,103 |
| |
| | Unchanged | (68,507 | ) | | — |
| | 60,398 |
| |
| | 3 months longer | (12,475 | ) | | 53,585 |
| | 119,690 |
| |
| | | | | | | | |
| | Credit and surety | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | | |
| | 6 months shorter | $ | (36,316 | ) | | $ | (22,032 | ) | | $ | (7,748 | ) | |
| | Unchanged | (16,067 | ) | | — |
| | 15,963 |
| |
| | 6 months longer | 26,629 |
| | 45,346 |
| | 63,893 |
| |
| | | | | | | | |
| | Professional lines | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | | |
| | 6 months shorter | $ | (115,985 | ) | | $ | (44,243 | ) | | $ | 32,974 |
| |
| | Unchanged | (66,832 | ) | | — |
| | 78,229 |
| |
| | 6 months longer | (4,732 | ) | | 63,176 |
| | 141,754 |
| |
| | | | | | | | |
| | Motor | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | | |
| | 6 months shorter | $ | (83,391 | ) | | $ | (34,992 | ) | | $ | 14,148 |
| |
| | Unchanged | (50,328 | ) | | — |
| | 51,278 |
| |
| | 6 months longer | 37,369 |
| | 90,785 |
| | 144,452 |
| |
| | | | | | | | |
| | Liability | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | | |
| | 6 months shorter | $ | (192,395 | ) | | $ | (61,865 | ) | | $ | 82,787 |
| |
| | Unchanged | (118,772 | ) | | — |
| | 131,163 |
| |
| | 6 months longer | (30,239 | ) | | 90,135 |
| | 208,151 |
| |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| REINSURANCE | |
| Development pattern | Expected loss ratio | |
| Property and other | 5% lower | | Unchanged | | 5% higher | |
| | | | | | | |
| 3 months shorter | $ | (112,472) | | | $ | (53,558) | | | $ | 5,654 | | |
| Unchanged | (64,593) | | | — | | | 55,802 | | |
| 3 months longer | (6,530) | | | 55,296 | | | 117,196 | | |
| | | | | | | |
| Credit and surety | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (33,479) | | | $ | (20,454) | | | $ | (7,198) | | |
| Unchanged | (11,616) | | | — | | | 13,995 | | |
| 6 months longer | 30,774 | | | 43,182 | | | 57,935 | | |
| | | | | | | |
| Professional lines | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (121,004) | | | $ | (51,246) | | | $ | 21,768 | | |
| Unchanged | (65,076) | | | — | | | 70,517 | | |
| 6 months longer | 105 | | | 71,519 | | | 142,065 | | |
| | | | | | | |
| Motor | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (74,686) | | | $ | (31,742) | | | $ | 13,676 | | |
| Unchanged | (44,892) | | | — | | | 46,875 | | |
| 6 months longer | 12,492 | | | 61,015 | | | 110,035 | | |
| | | | | | | |
| Liability | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (201,254) | | | $ | (75,630) | | | $ | 72,860 | | |
| Unchanged | (119,751) | | | — | | | 129,118 | | |
| 6 months longer | (20,305) | | | 107,362 | | | 229,220 | | |
| | | | | | | |
The results show the cumulative increase (decrease) in loss reserves across all accident years. For example, if assumed loss development pattern for insurance property and other business was three months shorter with no accompanying change in ELR assumption, loss reserves may decrease by approximately $70$50 million. Each of the impacts set forth in the tables is estimated individually, without consideration for any correlation among key assumptions or among reserve classes. Therefore, it would be inappropriate to take each of the amounts and add them together in an attempt to estimate total volatility. While we believe the variations in the expected loss ratios and loss development patterns presented could be reasonably expected, our historical loss data regarding variability is generally limited and actual variations may be greater or less than these amounts. It is also important to note that the variations are not meant to be a "best-case" or "worst-case" series of scenarios and, therefore, it is possible that future variations in loss reserves may be more or less than the amounts presented. While we believe that these are reasonably likely scenarios, we do not believe this sensitivity analysis should be considered an actual reserve range.
Reinsurance Recoverable on Unpaid Losses and Loss Expenses
In the normal course of business, we purchase treaty and facultative reinsurance protection to limit ultimate losses from catastrophic events and to reduce loss aggregation risk. To the extent that reinsurers do not meet their obligations under the reinsurance agreements, we remain liable. Consequently, we are exposed to credit risk associated with reinsurance recoverable balances to the extent that any of our reinsurers are unable or unwilling to pay claims.
The composition of reinsuranceReinsurance recoverable on unpaid losses and loss expenses ("reinsurance recoverable") for each of the reportable segments, segregated between reinsurance recoverable related to case reserves and reinsurance recoverable related to IBNR and by linereserve class was as shown below. Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for mapping of the Company's lines of business was as follows:to reserve classes and the expected claim tails.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | 2020 | | 2019 | |
| At December 31, | Case
reserves | | IBNR | | Total | | Case
reserves | | IBNR | | Total | |
| | | | | | | | | | | | | |
| Insurance segment: | | | | | | | | | | | | |
| Property and other | $ | 232,796 | | | $ | 275,429 | | | $ | 508,225 | | | $ | 241,029 | | | $ | 117,165 | | | $ | 358,194 | | |
| Marine | 74,065 | | | 88,331 | | | 162,396 | | | 70,927 | | | 93,078 | | | 164,005 | | |
| Aviation | 60,955 | | | 3,297 | | | 64,252 | | | 34,298 | | | 1,796 | | | 36,094 | | |
| Credit and political risk | 7,239 | | | 44,428 | | | 51,667 | | | 9,730 | | | 24,885 | | | 34,615 | | |
| Professional lines | 317,600 | | | 909,583 | | | 1,227,183 | | | 318,850 | | | 786,834 | | | 1,105,684 | | |
| Liability | 185,453 | | | 997,191 | | | 1,182,644 | | | 215,203 | | | 893,178 | | | 1,108,381 | | |
| | | | | | | | | | | | | |
| Total Insurance | 878,108 | | | 2,318,259 | | | 3,196,367 | | | 890,037 | | | 1,916,936 | | | 2,806,973 | | |
| | | | | | | | | | | | | |
| Reinsurance segment: | | | | | | | | | | | | |
| Property and other * | 235,508 | | | 261,703 | | | 497,211 | | | 171,741 | | * | 277,144 | | * | 448,885 | | |
| Credit and surety | 29,138 | | | 41,005 | | | 70,143 | | | 18,490 | | | 45,985 | | | 64,475 | | |
| Professional lines | 58,646 | | | 127,599 | | | 186,245 | | | 23,968 | | | 111,537 | | | 135,505 | | |
| Motor | 105,793 | | | 122,660 | | | 228,453 | | | 99,730 | | | 109,765 | | | 209,495 | | |
| Liability | 76,352 | | | 241,870 | | | 318,222 | | | 39,722 | | | 172,701 | | | 212,423 | | |
| | | | | | | | | | | | | |
| Total Reinsurance | 505,437 | | | 794,837 | | | 1,300,274 | | | 353,651 | | | 717,132 | | | 1,070,783 | | |
| | | | | | | | | | | | | |
| Total | $ | 1,383,545 | | | $ | 3,113,096 | | | $ | 4,496,641 | | | $ | 1,243,688 | | | $ | 2,634,068 | | | $ | 3,877,756 | | |
| | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | 2019 | | 2018 | |
| | At December 31, | Case reserves | | IBNR | | Total | | Case reserves | | IBNR | | Total | |
| | | | | | | | | | | | | | |
| | Insurance segment: | | | | | | | | | | | | |
| | Property and other | $ | 241,028 |
| | $ | 117,165 |
| | $ | 358,194 |
| | $ | 268,834 |
| | $ | 213,887 |
| | $ | 482,720 |
| |
| | Marine | 70,927 |
| | 93,078 |
| | 164,005 |
| | 74,440 |
| | 112,724 |
| | 187,164 |
| |
| | Aviation | 34,298 |
| | 1,796 |
| | 36,094 |
| | 8,123 |
| | 6,187 |
| | 14,310 |
| |
| | Credit and political risk | 9,730 |
| | 24,885 |
| | 34,615 |
| | (313 | ) | | 24,848 |
| | 24,536 |
| |
| | Professional lines | 318,850 |
| | 786,834 |
| | 1,105,684 |
| | 251,817 |
| | 753,499 |
| | 1,005,316 |
| |
| | Liability | 215,203 |
| | 893,178 |
| | 1,108,381 |
| | 188,314 |
| | 789,892 |
| | 978,206 |
| |
| | Total Insurance | 890,036 |
| | 1,916,936 |
| | 2,806,973 |
| | 791,215 |
| | 1,901,037 |
| | 2,692,252 |
| |
| | | | | | | | | | | | | | |
| | Reinsurance segment: | | | | | | | | | | | | |
| | Property and other | 286,994 |
| | 161,891 |
| | 448,885 |
| | 238,029 |
| | 197,642 |
| | 435,671 |
| |
| | Credit and surety | 18,490 |
| | 45,985 |
| | 64,475 |
| | 9,609 |
| | 26,570 |
| | 36,180 |
| |
| | Professional lines | 23,968 |
| | 111,537 |
| | 135,505 |
| | 10,066 |
| | 71,542 |
| | 81,608 |
| |
| | Motor | 99,730 |
| | 109,765 |
| | 209,495 |
| | 48,525 |
| | 80,051 |
| | 128,575 |
| |
| | Liability | 39,722 |
| | 172,701 |
| | 212,423 |
| | 20,838 |
| | 106,545 |
| | 127,383 |
| |
| | Total Reinsurance | 468,904 |
| | 601,879 |
| | 1,070,783 |
| | 327,067 |
| | 482,350 |
| | 809,417 |
| |
| | | | | | | | | | | | | | |
| | Total | $ | 1,358,940 |
| | $ | 2,518,815 |
| | $ | 3,877,756 |
| | $ | 1,118,282 |
| | $ | 2,383,387 |
| | $ | 3,501,669 |
| |
| | | | | | | | | | | | | | |
At December 31, 2019,2020, reinsurance recoverables as a percentage of loss reserves was 32% (2019: 30% (2018: 29%). At December 31, 2019,2020, reinsurance recoverables (excluding the provisionallowance for uncollectible amounts)expected credit losses) that were collectible from reinsurers rated A- or better by A.M Best were 87.6% (2019: 89.1% (2018: 89.5%). Refer to Item 8, Note 11 to the Consolidated Financial Statements 'Commitments and Contingencies' for an analysis of the credit risk associated with reinsurance recoverable on unpaid and paid losses and loss expenses at December 31, 2019.2020.
The recognition of reinsurance recoverable balances requires two key estimates. The first estimate is the amount of lossesloss reserves to be ceded to our reinsurers. This amount consists of amounts related to case reserves and amounts related to IBNR.
Reinsurance recoverable related to case reserves is estimated on a case-by-case basis by applying the terms of applicable reinsurance cover to individual case reserve estimates. Reinsurance recoverable related to IBNR is generally developed as part of our loss reserving process, therefore, its estimation is subject to similar risks and uncertainties as the estimation of IBNR. Estimates of amounts to be ceded under excess of loss reinsurance contracts also take into account pricing information for those contracts and require greater judgment than estimates for proportional contracts.
The second estimate is the amount of the reinsurance recoverable balance that we believe ultimately will not be collected from reinsurers. We are selective in choosing reinsurers, buying reinsurance principally from reinsurers with a strong financial condition and industry ratings. The amount we ultimately collect may differ from our estimate due to the ability and willingness of reinsurers to pay claims, which may be negatively impacted by factors such as insolvency, contractual disputes over contract language or coverage and/or other reasons. In addition, economic conditions and/or operational performance of a
particular reinsurer may deteriorate, and this could also affect the ability and willingness of a reinsurer to meet their contractual obligations.
Consequently, we review reinsurance recoverable balances on aat least quarterly basis to estimate a provisionan allowance for uncollectible amounts. Any adjustments to the provision for uncollectible amounts are recognized in the period in which they are determined.expected credit losses.
We applyestimate a case-specific provisionsallowance for expected credit losses against reinsurance recoverable balances that we deem are unlikely to be collected in full. In addition, we use a default analysis to estimate a provisionan allowance for uncollectible amountsexpected credit losses on the remainder of the reinsurance recoverable balance.balance using a default analysis. The principal components of the default analysis are reinsurance recoverable balances by reinsurer and default factors applied to estimate uncollectible amounts based on our reinsurers’ credit ratings.ratings and the length of collection periods. The default factors are based on a model developed by a major rating agency. The default analysis considers current and forecasted economic conditions.
The allowance for expected credit losses is recognized in net income (loss). Any adjustment to the allowance for expected credit losses is recognized in the period in which it is determined. Write-offs of reinsurance recoverable balances, together with associated allowances for expected credit losses, are recognized in the period in which balances are deemed uncollectible.
At December 31, 20192020 the allowance for expected credit losses was $24 million and 2018,at December 31, 2019, the provision for uncollectible amounts was $18 million and $21 million, respectively.million. We have not written off any significant reinsurance recoverable balances in the last three years.
At December 31, 2019,2020, the use of different assumptions within our approach could have a material effect on the provisionallowance for uncollectible amounts.expected credit losses. To the extent the creditworthiness of our reinsurers deteriorates due to an adverse event affecting the reinsurance industry, such as a large number of catastrophes, uncollectible amounts could be significantly greater than the provisionallowance for uncollectible amounts.expected credit losses. Given the various considerations used to estimate the provisionallowance for uncollectible amounts,expected credit losses, we cannot precisely quantify the effect a specific industry event may have on the provisionallowance for uncollectible amounts.expected credit losses.
Gross Premiums Written
Revenues primarily relate to premiums generated by our underwriting operations. The basis for recognizing gross premiums written varies by policy or contract type.
Insurance Segment
Insurance premiums written are recorded in accordance with the terms of the underlying policies.
For the majority of our insurance business, a fixed premium which is identified in the policy is recorded at the inception of the policy. This premium is adjusted if underlying insured values change. We actively monitor underlying insured values and any adjustments to premiums are recognized in the period in which they are determined. Gross premiums written on a fixed premium basis accounted forfor 86% and 87% and 88% ofof the segment’s gross premiums written for the years ended December 31, 20192020 and 2018,2019, respectively. Some of this business is written through MGAs, third parties granted authority to bind risks on our behalf in accordance with our underwriting guidelines. For this business, premiums are recorded based on monthly statements received from MGAs or best estimates based on historical experience.
A limited amount of our insurance business is written on a line slip or proportional basis, where we assume an agreed proportion of the premiums and losses of a particular risk or group of risks along with other unrelated insurers. As premiums for this business are not identified in the policy, premiums are recognized at the inception of the policy based on estimates provided by clients through brokers (refer to 'Reinsurance Segment' below for further details). We review these premium estimates on a quarterly basis and any adjustments to premium estimates are recognized in the period in which they are determined. Gross premiums written on a line slip or proportional basis accounted for 13%14% and 12%13% of the segment’s gross premiums written for the years ended December 31, 20192020 and 2018,2019, respectively, therefore the impact of these premium estimates on pre-tax net income was immaterial.
InFor the credit and political risk line of business, we write certain policies on a multi-year basis. Premiums in respect of these policies are recorded at the inception of the policy based on management’s best estimateestimate of premiums to be received, including assumptions relating to prepayments/refinancing. At December 31, 2019,2020, the average duration of unearned premiums for credit and political risk line of business was 5.3 years (2019: 5.9 years (2018: 5.7 years).
Reinsurance Segment
Reinsurance premiums are recorded at the inception of the contract and are estimated based on informationestimates received from ceding companies.
The reinsurance segment provides cover to cedants (i.e. insurance companies) on an excess of loss and proportional basis. In most cases, cedants seek protection from us for business that they have not yet written at the time they enter into agreements with us, therefore, cedants must estimate their underlying premiums when purchasing reinsurance cover from us.
For multi-year contracts premiums are recorded at the inception of the contract based on management’s best estimate of premiums to be received. Premiums are recognized on an annual basis for multi-year contracts where the cedant has the ability to unilaterally commute or cancel coverage within the term of the contract.
Excess of loss reinsurance contracts with cedants typically include minimum or deposit premium provisions. For excess of loss reinsurance contracts, minimum or deposit premiums are generally considered to be the best estimate of premiums at the inception of the contract. The minimum or deposit premium is normally adjusted at the end of the contract period to reflect changes in the underlying risks in force during the contract period. Any adjustments to minimum or deposit premiums are recognized in the period in which they are determined. Gross premiums written for excess of loss reinsurance contracts accounted for 48%52% and 38%48% of the reinsurance segment’s gross premiums written for the years ended December 31, 20192020 and 2018,2019, respectively.
Many of our excess of loss reinsurance contracts also include provisions that require an automatic reinstatement of coverage in the event of a loss. In a year of significant loss events, reinstatement premiums will be higher than in a year in which there are no large loss events. Reinstatement premiums are recognized and earned at the time a loss event occurs and losses are recorded. While the reinstatement premium amount is defined by contract terms, recognition of reinstatement premiums is based on estimates of losses and loss expenses, which reflect management’s judgment (refer to 'Critical Accounting Estimates – Reserve for Losses and Loss Expenses' above for further details).
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:
•changes in renewal rates or rates of new business accepted by cedants (changes could result from changes in the relevant insurance market that could affect more than one of our cedants or could be a consequence of changes in the marketing strategy or risk appetite of an individual cedant);
•changes in underlying exposure values; and/or
•changes in rates being charged by cedants.
As a result of this review process, any adjustments to premium estimates are recognized in the period in which they are determined. Changes in premium estimates could be material to gross premiums written in the period. Changes in premium estimates could be also material to net premiums earned in the period in which they are determined as any adjustment may be substantially or fully earned. Gross premiums written for proportional reinsurance contracts, including adjustments to premium estimates established in prior years, accounted for 52%48% and 62%52% of the reinsurance segment’s gross premiums written for the years ended December 31, 20192020 and 2019, respectively.
Premiums estimatesGross premiums written for proportional reinsurance contracts incepting during the year were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Catastrophe | $ | 13,863 | | | $ | 17,149 | | | $ | 12,944 | | |
| Property | 135,312 | | | 184,552 | | | 237,527 | | |
| Credit and surety | 91,940 | | | 162,948 | | | 221,260 | | |
| Professional lines | 156,643 | | | 159,234 | | | 174,126 | | |
| Motor | 228,754 | | | 194,871 | | | 361,471 | | |
| Liability | 265,358 | | | 251,515 | | | 246,554 | | |
| Engineering | 15,472 | | | 51,052 | | | 48,692 | | |
| Agriculture | 52,682 | | | 194,379 | | | 205,116 | | |
| Accident and health | 300,646 | | | 335,538 | | | 284,675 | | |
| Marine and Aviation | 19,065 | | | 22,697 | | | 11,360 | | |
| Total estimated premiums | $ | 1,279,735 | | | $ | 1,573,935 | | | $ | 1,803,725 | | |
| | | | | | | |
| Gross premiums written (reinsurance segment) | $ | 2,808,539 | | | $ | 3,222,927 | | | $ | 3,112,473 | | |
| As a % of total gross premiums written | 46 | % | | 49 | % | | 58 | % | |
| | | | | | | |
|
| | | | | | | | | | | | | |
| | | | | | | | |
| | Year ended December 31, | 2019 | | 2018 | | 2017 | |
| | | | | | | | |
| | Catastrophe | $ | 17,149 |
| | $ | 12,944 |
| | $ | 16,344 |
| |
| | Property | 184,552 |
| | 237,527 |
| | 248,580 |
| |
| | Professional lines | 159,234 |
| | 174,126 |
| | 214,184 |
| |
| | Credit and surety | 162,948 |
| | 221,260 |
| | 223,184 |
| |
| | Motor | 194,871 |
| | 361,471 |
| | 318,494 |
| |
| | Liability | 251,515 |
| | 246,554 |
| | 263,790 |
| |
| | Agriculture | 194,379 |
| | 205,116 |
| | 202,234 |
| |
| | Engineering | 51,052 |
| | 48,692 |
| | 67,221 |
| |
| | Accident and health | 335,538 |
| | 284,675 |
| | 189,567 |
| |
| | Other | 22,697 |
| | 11,360 |
| | 51,211 |
| |
| | Total estimated premiums | $ | 1,573,935 |
| | $ | 1,803,725 |
| | $ | 1,794,809 |
| |
| | | | | | | | |
| | Gross premiums written (reinsurance segment) | $ | 3,222,927 |
| | $ | 3,112,473 |
| | $ | 2,741,355 |
| |
| | As a % of total gross premiums written | 49 | % | | 58 | % | | 65 | % | |
| | | | | | | | |
Historical experienceexperience has shown that cumulative adjustments to initial premium estimates for proportional reinsurance contracts have rangedranged from 0% to 4%5% over the last 5 years. Giving more weight to recent years where premium volume was
comparable to current levels, we believe that a reasonably likely change to 20192020 initial premium estimates for proportional reinsurance contracts would be 3% in either direction. A change in initial premium estimates of this magnitude would result in a change in gross premiums written of approximately $47$39 million. A change in initial premium estimates of this magnitude would not have a material impact on pre-tax net income, after consideringconsidering current losses and loss expenses ratios. However, larger variations, positive or negative, are possible.
Net Premiums Earned
Premiums are earned evenly over the period during which we are exposed to the underlying risk. Changes in circumstances subsequent to the inception of contracts can impact the earning periods. For example, when exposure limits for a contract are reached, any associated unearned premiums are fully earned. This can have a significant impact on net premiums earned, particularly for multi-year contracts such as those in the credit and political risk line of business.
Fixed premium insurance policies and excess of loss reinsurance contracts are generally written on a "losses occurring" or "claims made" basis over the term of the contract. Consequently, premiums are earned evenly over the contract term, which is generally 12 months.
Line slip or proportional insurance policies and proportional reinsurance contracts are generally written on a "risks attaching" basis, covering claims that relate to the underlying policies written during the terms of these contracts. As the underlying business incepts throughout the contract term which is typically one year, and the underlying business typically has a one year coverage period, these premiums are generally earned evenly over a 24-month period.
Fair Value Measurements of Financial Assets and Liabilities
Fair value is defined as the price to sell an asset or transfer a liability (i.e. the "exit price") in an orderly transaction between market participants. U.S. GAAP prescribes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement. The hierarchy is broken down into three levels as follows:
•Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.
•Level 2 – Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
•Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect our judgments about assumptions that market participants might use.
Refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value Measurements' for further information on the valuation techniques including significant inputs and assumptions generally used in estimating the fair values of our financial instruments.
Our estimated fair value of a financial instrument may differ from the amount that could be realized if the securityfinancial instrument was sold in an immediate sale, e.g., a forced transaction. In addition, the valuation of financial instruments is more subjective when markets are less liquid due to the lack of available market based inputs, as was the case during the global financial market crisis in late 2008 and early 2009. This may lead us to change the selection of valuation technique (from market to cash flow approach) or may cause us to use multiple valuation techniques to estimate the fair value of a financial instrument. This circumstance may require significant management judgment and could cause a financial instrument to be reclassified between levels of the fair value hierarchy.
Fixed Maturities and Equity Securities
At December 31, 2019,2020, the fair values of 95% (2018: 92%(2019: 95%) of total fixed maturities and equity securities waswere based on prices provided by globally recognized independent pricing services where we have a current and detailed understanding of how their prices were derived. The remaining securities were priced by either non-binding broker quotes or internal valuation models.
Generally, we obtain quotes directly from broker-dealers who are active in the corresponding markets when prices are unavailable from independent pricing services. This may also be the case if the pricing from pricing services is not reflective of current market levels, as detected by our pricing control tolerance procedures. Generally, broker-dealers value securities through their trading desks based on observable market inputs. Their pricing methodologies include mapping securities based
on trade data, bids or offers, observed spreads and performance on newly issued securities. They may also establish pricing through observing secondary trading of similar securities.
At December 31, 20192020 and 2018,2019, we have not adjusted any pricing provided by independent pricing services (refer to 'Management Pricing Validation' below). In addition, total Level 3 fixed maturities and equity securities amounted to $8$15 million (2018: $87(2019: $8 million), less than 1% of total fixed maturities and equity securities (refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value Measurements' for further information).
Management Pricing Validation
While we obtain pricing from pricing services and/or broker-dealers, management is ultimately responsible for determining the fair value measurements of all securities. To ensure fair value measurement is applied consistently and in accordance with U.S. GAAP, we annually update our understanding of the pricing methodologies used by the pricing services and broker-dealers.
We also challenge any prices we believe may not be representative of fair value under current market conditions. Our review process includes, but is not limited to: (i) initial and ongoing evaluation of the pricing methodologies and valuation models used by outside parties to calculate fair value; (ii) quantitative analysis; (iii) a review of multiple quotes obtained in the pricing process and the range of resulting fair values for each security, if available, and (iv) randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates provided by the independent pricing sources and broker-dealers.
Other Investments
Hedge Funds, Direct Lending Funds, Private Equity Funds and Real Estate Funds
The fair values of hedge funds, direct lending funds, private equity funds and real estate funds are estimated using net asset values (NAVs) as advised by external fund managers or third-party administrators (refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value Measurements' for further information).
CLO-Equity Securities
At December 31, 20192020 and 2018,2019, we had invested indirectly, through a fund structure in CLO-Equities, also known as "cash flow CLOs" in the industry. During 2019,2020, the CLO-Equity market continued to be relatively inactive with only a small number of transactions being observed, particularly related to transactions involving our CLO-Equities. Our indirect investment in CLO-Equities is valued using a discounted cash flow model prepared by an external manager. At December 31, 20192020 and 2018,2019, the estimated fair value of our indirect investment in CLO-Equities was $6 million (2019: $14 million (2018: $21 million).
Significant inputs used in discounted cash flow models were as follows:
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| | | | | |
| | | | | | |
| | At December 31, | 2019 | | 2018 | |
| | | | | | |
| | Default rates | 3.5% | | 3.0% | |
| | Loss severity rate | 35.0% | | 35.0% | |
| | Collateral spreads | 3.0% | | 3.0% | |
| | Estimated maturity dates | 7 years | | 7 years | |
| | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| At December 31, | 2020 | | 2019 | |
| | | | | |
| Default rates | 4.5% | | 3.5% | |
| Loss severity rate | 50.0% | | 35.0% | |
| Collateral spreads | 3.0% | | 3.0% | |
| Estimated maturity dates | 5 years | | 7 years | |
| | | | | |
The default and loss severity rates are the most judgmental unobservable market inputs to the discounted cash flow model to which the valuation of our indirect investment in CLO-Equities is most sensitive.
As the significant inputs used to price this security are unobservable, the fair value of the indirect investment in CLO-Equities is classified as Level 3.
Other Privately Held Investments
Other privately held investments include convertible preferred shares, common shares, convertible notes and notes payable.a variable yield security. These securitiesinvestments are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these investments are generally determined using capital statements obtained from each investee. In 2018,2020, the fair valuesvalue of some of these investments werethe variable yield security was determined using an internallyexternally developed discounted cash flow model.
Significant inputs used in discounted cash flow models were as follows:
| | | | | | | | | | | | | | | | | |
| | | | | |
| At December 31, | 2020 | | 2019 | |
| | | | | |
| Discount rate | 1.3% | | — | |
| Default rate | 0.5% | | — | |
| Loss absorption yield | 1.0% | | — | |
| Estimated maturity date | 5 years | | — | |
| | | | | |
|
| | | | | |
| | | | | | |
| | At December 31, | 2019 | | 2018 | |
| | | | | | |
| | Discount rate | - | | 3.0% - 8.0% | |
| | | | | | |
As the significant inputs used to price these investments are unobservable, the fair values of other privately held investments are classified as Level 3.
Overseas Deposits
Overseas deposits include investments in private funds held by Syndicate 2007 in whichwhere the underlying investments are primarily U.S. government, Non-U.S.non-U.S. government and corporate debt securities. The funds do not trade on an exchange, therefore, are not included in available for sale investments. As the significant inputs used to price the underlying investments are observable market inputs, the fair values of overseas deposits are classified as Level 2.
Other-Than-Temporary Impairments ("OTTI")Impairment Losses and the Allowance for Expected Credit Losses - Fixed Maturities Available for Sale
A fixed maturity is impaired if the fair value of the investment is below amortized cost.
On a quarterly basis, we review all impaired securities to determine if impairments are other-than-temporary. The OTTI assessment is inherently judgmental, especially when securities have experienced severe declines in fair value over a short period. Our impairment review process begins with a quantitative analysis to identify securities to be evaluated for potential OTTI. For identified securities, fundamental analysis is performed that considers the following quantitative and qualitative factors:
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a. | the length of time and extent to which the fair value is less than the amortized cost. |
| |
b. | the financial condition, near-term and long-term prospects for the issuer of the security, including relevant industry conditions and trends, and the implications of rating agency actions, and offering prices. |
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c. | the reason for the decline (e.g. credit spread widening, credit event, foreign exchange rate movements); |
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d. | the historical and implied volatility of the fair value. |
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e. | the collateral structure and credit support of the security, if applicable. |
The following discussion provides further details regarding our processes for identification of impairments that are other-than-temporaryof fixed maturities, available for fixed maturitiessale following the adoption of ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments," and the recognition of the related OTTI charges.impairment losses.
During 2019,2020, we recorded an OTTI charge in net incomeallowance for expected credit losses of $7$0.3 million (2018: $10 million)and an impairment loss of $1 million (refer to 'Net Investment Income and Net Investment Gains (Losses)' for further details).
Fixed Maturities
Fixed maturities classified as available for sale are reported at fair value at the balance sheet date. Our available for sale ("AFS") investment portfolio is the largest component of consolidated total assets and it is a multiple of shareholders’ equity. As a result, an OTTI chargeimpairment losses could be material to our financial condition and operating results particularly during periods of dislocation in financial markets.
An available for sale fixed maturity is impaired if the fair value of the investment is below amortized cost.
If a fixed maturity is impaired and we intend to sell the security or it is more likely than not that we 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 (i.e. the difference between the security’s fair value and its amortized cost)loss is charged to net income and is included in net investment gains (losses) in the consolidated statements of operations.
In instances where we intend to hold the impaired fixed maturity, and we do not anticipate to fully recover the amortized cost based on projected cash flows to be collected from the security (i.e. a credit loss exists), the credit loss component of the impairment is charged to net income and is included in net investment gains (losses) in the consolidated statements of operations. On recognition of an OTTI charge, the The new cost basis for the security is the amortized cost basis less the OTTIimpairment charge recognized in net income. The new cost basis is not adjusted for subsequent increases in fair value. The difference between the new cost basis and the cash flows expected to be collected is accreted or amortized on a quarterly basis to net
investment income over the remaining life of the fixed maturity. The non-credit component (e.g. interest rates, market conditions, etc.) of the OTTI charge is recognized in other comprehensive income.
From time to time, we may sell fixed maturities subsequent to the balance sheet date that we did not intend to sell at the balance sheet date. Conversely, we may not sell fixed maturities that we intended to sell at the balance sheet date. These changes in intent may arise due to events occurring subsequent to the balance sheet date. The types of events that may result in a change in intent include, but are not limited to, significant changes in the economic facts and circumstances related to the specific issuer, changes in liquidity needs, or changes in tax laws or the regulatory environment.
ForIn instances where we intend to hold the impaired investment-grade securities (i.e. rated BBB-fixed maturity, we determine whether the decline in fair value below the amortized cost basis has resulted from a credit loss or above) thatother factors. If we do not intendanticipate to sellfully recover the amortized cost based on projected cash flows to be collected from the security (i.e. a credit loss exists), an allowance for expected credit losses is established. The allowance for expected credit losses is limited to the difference between a security's amortized cost basis and itits fair value. At December 31, 2020, the allowance for expected credit losses was $0.3 million. The allowance for expected credit loss is more likely than not thatcharged to net income and is included in net investment gains (losses) in the consolidated statements of operations.
On a quarterly basis, we will not be required to sell, we have established some parameters for identifying securities with potentialassess whether unrealized losses on fixed maturities represent credit losses.impairments by considering the below factors:
Our parameters focus primarily on the duration and a.the extent to which the fair value is less than amortized cost;
b.adverse conditions related to the security, industry, or geographical area;
c.downgrades in the security's credit rating by a credit rating agency; and
d.failure of the decline, including but not limited to:issuer to make scheduled principal or interest payments.
declinesThe length of time a security has been in value greater than 20% for nine consecutive months, and
declines in value greater than 10% for twelve consecutive months.
For impaired securities in our high yield portfolios that we do not intend to sell and it is more likely than not that we will not be required to sell, we have established separate parameters foran unrealized loss position no longer impacts the determination of whether a credit loss assessment. Due to the additional volatility inherent in high yield securities relative to investment-grade securities, we focus on the severity of the impairment and work closely with our external high yield investment managers to identify securities with significant potential credit losses.exists.
If a security meets oneis assessed to be credit impaired, it is subject to a discounted cash flow analysis by comparing the present value of expected future cash flows with the amortized cost basis. If the present value of expected cash flows is less than the amortized cost, a credit loss exists and an allowance for expected credit losses is recognized. If the present value of expected future cash flows is equal to or greater than the amortized cost basis, an expected credit loss does not exist.
The non-credit component (e.g. interest rates, market conditions, etc.) of the above parameters, we perform a fundamental analysis that considers the quantitative and qualitative factors noted above to determine whether an impairment charge should beloss is recognized in the period under review.other comprehensive income.
Our credit impairment review process excludes fixed maturities guaranteed, either explicitly or implicitly, by the U.S. government and its agencies (U.S. Government, U.S. Agency and U.S. Agency RMBS) because we anticipate these securities will not be settled below amortized cost. These securities are evaluated for intention to sell at a loss.
The allowance for expected credit loss component of an OTTI chargelosses recognized in net income is calculated based on the difference between the amortized cost of the security and the net present value of projected future cash flows expected to be collected from the security. The significant inputs and the methodology used to estimate the allowance for expected credit losses are disclosed in Item 8, Note 5 (f) to the Consolidated Financial Statements 'Investments'.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to Item 8, Note 2(m) to the Consolidated Financial Statements 'Basis of Presentation and Significant Accounting Policies' for a discussion ofAt December 31, 2020, there were no recently issued accounting pronouncements that we have not yet adopted.adopted that we expect could have a material impact on our results of operations, financial condition or liquidity.
OFF-BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS
At December 31, 2019,2020, we were 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 we believe is material to investors.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKMarket risk representsis the potential for an economic loss due to adverse changesrisk that our financial instruments may be negatively impacted by movements in the fair values of financial instrumentsmarket prices or rates such as equity prices, interest rates, credit spreads and foreign exchange rates (refer to Item 1 'Risk and Capital Management' for further details).
We own a substantial amount of assets whose fair values are subject to market risks. Our fixed maturities are classified as available for sale, therefore changes in fair values caused by changes in interest rates and foreign currency exchange rates have an immediate impact on other comprehensive income, total shareholders’ equity and book value per common share but may not have an immediate impact on net income. Changes in these market risks impact net income when, and if, securities are sold, or an OTTIimpairment charge or an allowance for expected credit losses is
recorded. Equity securities are reported at fair value, with changes in fair values recognized in net income. At December 31, 20192020 and 2018,2019, we also invested in alternative investments including hedge funds, direct lending funds, private equity funds, real estate funds, CLO-Equities, other privately held investments and overseas deposits. These investments are also exposed to market risks, with the changes in fair values immediately reported in net income.
Sensitivity Analysis
The following is a sensitivity analysis of our primary market risk exposures at December 31, 20192020 and 2018.2019.
Our policies to address these risks in 20192020 were not materially different from 2018.2019. We do not currently anticipate significant changes in our primary market risk exposures or in how those exposures are managed in future reporting periods based on what is known or expected to be in effect in future reporting periods.
Interest Rate and Credit Spread Risk
Interest rate risk includes fluctuations in interest rates and credit spreads that have a direct impact on the fair values of fixed maturities. As interest rates rise and credit spreads widen, the fair value of fixed maturities falls, and the converse is also true.
We monitor sensitivity to interest rate and credit spread changes by revaluing fixed maturities using a variety of different interest rates (inclusive of credit spreads). We use duration and convexity at the security level to estimate the change in fair value that would result from a change in each security’s yield. Duration measures the price sensitivity of an asset to changes in yield rates. Convexity measures how the duration of the security changes with interest rates. The duration and convexity analysis take into account changes in prepayment expectations for MBS and ABS. The analysis is performed at the security level and aggregated to the asset category levels.
The following table presents the estimated pre-tax impact on the fair value of fixed maturities due to an instantaneous increase in the U.S. yield curve of 100 basis points and an additional 100 basis point credit spread widening for corporate debt, non-agency residential and commercial MBS, ABS and municipal bond securities.
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| | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| | | Fair value | | Potential adverse change in fair value | |
Increase in interest rate by 100 basis points | | Widening of credit spreads by 100 basis points | | Total | |
| | | | | | | | | | |
| | At December 31, 2019 | | | | | | | | |
| | U.S. government and agency | $ | 2,112,881 |
| | $ | (78,364 | ) | | $ | — |
| | $ | (78,364 | ) | |
| | Non-U.S. government | 576,592 |
| | (20,430 | ) | | — |
| | (20,430 | ) | |
| | Agency RMBS | 1,592,584 |
| | (54,850 | ) | | — |
| | (54,850 | ) | |
| | | | | | | | | | |
| | Securities exposed to credit spreads: | | | | | | | | |
| | Corporate debt | 4,930,254 |
| | (154,282 | ) | | (162,741 | ) | | (317,023 | ) | |
| | CMBS | 1,365,052 |
| | (69,922 | ) | | (74,549 | ) | | (144,471 | ) | |
| | Non agency RMBS | 84,922 |
| | (1,766 | ) | | (3,205 | ) | | (4,971 | ) | |
| | ABS | 1,598,693 |
| | (10,951 | ) | | (47,745 | ) | | (58,696 | ) | |
| | Municipals | 207,227 |
| | (9,045 | ) | | (9,399 | ) | | (18,444 | ) | |
| | | $ | 12,468,205 |
| | $ | (399,610 | ) | | $ | (297,639 | ) | | $ | (697,249 | ) | |
| | | | | | | | | | |
| | At December 31, 2018 | | | | | | | | |
| | U.S. government and agency | $ | 1,515,697 |
| | $ | (36,818 | ) | | $ | — |
| | $ | (36,818 | ) | |
| | Non-U.S. government | 493,016 |
| | (17,219 | ) | | — |
| | (17,219 | ) | |
| | Agency RMBS | 1,643,308 |
| | (63,612 | ) | | — |
| | (63,612 | ) | |
| | | | | | | | | | |
| | Securities exposed to credit spreads: | | | | | | | | |
| | Corporate debt | 4,876,921 |
| | (149,896 | ) | | (167,165 | ) | | (317,061 | ) | |
| | CMBS | 1,092,530 |
| | (51,005 | ) | | (54,608 | ) | | (105,613 | ) | |
| | Non agency RMBS | 40,687 |
| | (315 | ) | | (1,321 | ) | | (1,636 | ) | |
| | ABS | 1,637,603 |
| | (10,966 | ) | | (54,226 | ) | | (65,192 | ) | |
| | Municipals | 135,585 |
| | (4,838 | ) | | (5,316 | ) | | (10,154 | ) | |
| | | $ | 11,435,347 |
| | $ | (334,669 | ) | | $ | (282,636 | ) | | $ | (617,305 | ) | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | Fair value | | Potential adverse change in fair value | |
Increase in
interest rate
by 100
basis points | | Widening of
credit spreads
by 100
basis points | | Total | |
| | | | | | | | | |
| At December 31, 2020 | | | | | | | | |
| U.S. government and agency | $ | 1,918,699 | | | $ | (67,495) | | | $ | — | | | $ | (67,495) | | |
| Non-U.S. government | 671,273 | | | (23,491) | | | — | | | (23,491) | | |
| Agency RMBS | 1,286,209 | | | (41,345) | | | — | | | (41,345) | | |
| | | | | | | | | |
| Securities exposed to credit spreads: | | | | | | | | |
| Corporate debt | 4,655,951 | | | (169,961) | | | (174,114) | | | (344,075) | | |
| CMBS | 1,353,587 | | | (64,430) | | | (68,978) | | | (133,408) | | |
| Non-agency RMBS | 140,104 | | | (2,137) | | | (4,022) | | | (6,159) | | |
| ABS | 1,720,078 | | | (15,460) | | | (53,007) | | | (68,467) | | |
| Municipals | 295,898 | | | (15,314) | | | (15,375) | | | (30,689) | | |
| | $ | 12,041,799 | | | $ | (399,633) | | | $ | (315,496) | | | $ | (715,129) | | |
| | | | | | | | | |
| At December 31, 2019 | | | | | | | | |
| U.S. government and agency | $ | 2,112,881 | | | $ | (78,364) | | | $ | — | | | $ | (78,364) | | |
| Non-U.S. government | 576,592 | | | (20,430) | | | — | | | (20,430) | | |
| Agency RMBS | 1,592,584 | | | (54,850) | | | — | | | (54,850) | | |
| | | | | | | | | |
| Securities exposed to credit spreads: | | | | | | | | |
| Corporate debt | 4,930,254 | | | (154,282) | | | (162,741) | | | (317,023) | | |
| CMBS | 1,365,052 | | | (69,922) | | | (74,549) | | | (144,471) | | |
| Non-agency RMBS | 84,922 | | | (1,766) | | | (3,205) | | | (4,971) | | |
| ABS | 1,598,693 | | | (10,951) | | | (47,745) | | | (58,696) | | |
| Municipals | 207,227 | | | (9,045) | | | (9,399) | | | (18,444) | | |
| | $ | 12,468,205 | | | $ | (399,610) | | | $ | (297,639) | | | $ | (697,249) | | |
| | | | | | | | | |
U.S. government agencies have a limited range of spread widening, therefore, 100 basis points of spread widening for these securities is highly improbable in normal market conditions. Our non-U.S. government debt obligations are highly-rated and we believe the potential for future widening of credit spreads would also be limited for these securities. Certain of our holdings in non-agency RMBS and ABS have floating interest rates, which mitigate interest rate risk exposure.
The above sensitivity analysis reflects our view of changes that are reasonably possible over a one-year period. Note this should not be construed as our prediction of future market events, but rather an illustration of the impact of such events.
Our investment in CLO-Equities is also exposed to interest rate risk, but an increase in the risk free yield curve of 100 basis points would have an insignificant impact toon its fair value.
In addition, our investment in bond mutual funds is exposed to interest rate risk, however, this exposure is largely mitigated by the short duration of the underlying securities.
Equity Price Risk
Our portfolio of equity securities, excluding the bond mutual funds, has exposure to equity price risk. This risk is defined as the potential loss in fair value resulting from adverse changes in stock prices. The global equity portfolio is managed to a benchmark composite index, which consists of a blend of the S&P 500 and MSCI World indices. Changes in the underlying indices have a corresponding impact on the overall portfolio. At December 31, 2019,2020, the fair value of equity securities was
$298 $241 million (2018: $237(2019: $298 million). At December 31, 2019,2020, the impact of a 20% decline in the overall market prices of our equity exposures would be $60$48 million (2018: $47(2019: $60 million), on a pre-tax basis.
Our investment in hedge funds has significant exposure to equity strategies with net long positions. At December 31, 2019,2020, the impact of an instantaneous 15% decline in the fair value of our investment in hedge funds would be $25$22 million (2018: $29 (2019: $25 million), on a pre-tax basis.
Foreign Currency Risk
The following table presents a sensitivity analysis of total net foreign currency exposures.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | AUD | | NZD | | CAD | | EUR | | GBP | | JPY | | Other | | Total | |
| | | | | | | | | | | | | | | | | |
| At December 31, 2020 | | | | | | | | | | | | | | | | |
| Net managed assets (liabilities), excluding derivatives | $ | 7,100 | | | $ | 2,067 | | | $ | 231,382 | | | $ | (527,046) | | | $ | (412,049) | | | $ | (125,523) | | | $ | 70,496 | | | $ | (753,573) | | |
| Foreign currency derivatives, net | (769) | | | 5,752 | | | (205,005) | | | 466,006 | | | 329,055 | | | 122,459 | | | 9,097 | | | 726,595 | | |
| Net managed foreign currency exposure | 6,331 | | | 7,819 | | | 26,377 | | | (61,040) | | | (82,994) | | | (3,064) | | | 79,593 | | | (26,978) | | |
| Other net foreign currency exposure | 1 | | | — | | | 118 | | | (2,369) | | | (1,245) | | | — | | | 38,631 | | | 35,136 | | |
| Total net foreign currency exposure | $ | 6,332 | | | $ | 7,819 | | | $ | 26,495 | | | $ | (63,409) | | | $ | (84,239) | | | $ | (3,064) | | | $ | 118,224 | | | $ | 8,158 | | |
| Net foreign currency exposure as a percentage of total shareholders’ equity | 0.1 | % | | 0.1 | % | | 0.5 | % | | (1.2 | %) | | (1.6 | %) | | (0.1 | %) | | 2.2 | % | | 0.2 | % | |
| Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement(1) | $ | 633 | | | $ | 782 | | | $ | 2,650 | | | $ | (6,341) | | | $ | (8,424) | | | $ | (306) | | | $ | 11,822 | | | $ | 816 | | |
| | | | | | | | | | | | | | | | | |
| At December 31, 2019 | | | | | | | | | | | | | | | | |
| Net managed assets (liabilities), excluding derivatives | $ | 42,435 | | | $ | (2,247) | | | $ | 157,512 | | | $ | (442,481) | | | $ | (198,535) | | | $ | (160,737) | | | $ | 114,073 | | | $ | (489,980) | | |
| Foreign currency derivatives, net | (23,881) | | | 6,407 | | | (125,019) | | | 356,501 | | | 144,866 | | | 204,918 | | | 4,366 | | | 568,158 | | |
| Net managed foreign currency exposure | 18,554 | | | 4,160 | | | 32,493 | | | (85,980) | | | (53,669) | | | 44,181 | | | 118,439 | | | 78,178 | | |
| Other net foreign currency exposure | 1 | | | — | | | 116 | | | (319) | | | (316) | | | — | | | 51,323 | | | 50,805 | | |
| Total net foreign currency exposure | $ | 18,555 | | | $ | 4,160 | | | $ | 32,609 | | | $ | (86,299) | | | $ | (53,985) | | | $ | 44,181 | | | $ | 169,762 | | | $ | 128,983 | | |
| Net foreign currency exposure as a percentage of total shareholders’ equity | 0.3 | % | | 0.1 | % | | 0.6 | % | | (1.6 | %) | | (1.0 | %) | | 0.8 | % | | 3.1 | % | | 2.3 | % | |
| Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement(1) | $ | 1,856 | | | $ | 416 | | | $ | 3,261 | | | $ | (8,630) | | | $ | (5,399) | | | $ | 4,418 | | | $ | 16,976 | | | $ | 12,898 | | |
| | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | AUD | | NZD | | CAD | | EUR | | GBP | | JPY | | Other | | Total | |
| | | | | | | | | | | | | | | | | | |
| | At December 31, 2019 | | | | | | | | | | | | | | | | |
| | Net managed assets (liabilities), excluding derivatives | $ | 42,435 |
| | $ | (2,247 | ) | | $ | 157,512 |
| | $ | (442,481 | ) | | $ | (198,535 | ) | | $ | (160,737 | ) | | $ | 114,073 |
| | $ | (489,980 | ) | |
| | Foreign currency derivatives, net | (23,881 | ) | | 6,407 |
| | (125,019 | ) | | 356,501 |
| | 144,866 |
| | 204,918 |
| | 4,366 |
| | 568,158 |
| |
| | Net managed foreign currency exposure | 18,554 |
| | 4,160 |
| | 32,493 |
| | (85,980 | ) | | (53,669 | ) | | 44,181 |
| | 118,439 |
| | 78,178 |
| |
| | Other net foreign currency exposure | 1 |
| | — |
| | 116 |
| | (319 | ) | | (316 | ) | | — |
| | 51,323 |
| | 50,805 |
| |
| | Total net foreign currency exposure | $ | 18,555 |
| | $ | 4,160 |
| | $ | 32,609 |
| | $ | (86,299 | ) | | $ | (53,985 | ) | | $ | 44,181 |
| | $ | 169,762 |
| | $ | 128,983 |
| |
| | Net foreign currency exposure as a percentage of total shareholders’ equity | 0.3 | % | | 0.1 | % | | 0.6 | % | | (1.6 | %) | | (1.0 | %) | | 0.8 | % | | 3.1 | % | | 2.3 | % | |
| | Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement(1) | $ | 1,856 |
| | $ | 416 |
| | $ | 3,261 |
| | $ | (8,630 | ) | | $ | (5,399 | ) | | $ | 4,418 |
| | $ | 16,976 |
| | $ | 12,898 |
| |
| | | | | | | | | | | | | | | | | | |
| | At December 31, 2018 | | | | | | | | | | | | | | | | |
| | Net managed assets (liabilities), excluding derivatives | $ | 56,992 |
| | $ | (5,943 | ) | | $ | 110,394 |
| | $ | (329,761 | ) | | $ | (166,396 | ) | | $ | (8,944 | ) | | $ | 64,523 |
| | $ | (279,135 | ) | |
| | Foreign currency derivatives, net | (38,383 | ) | | 3,020 |
| | (128,266 | ) | | 329,708 |
| | 20,138 |
| | (8,663 | ) | | (939 | ) | | 176,615 |
| |
| | Net managed foreign currency exposure | 18,609 |
| | (2,923 | ) | | (17,872 | ) | | (53 | ) | | (146,258 | ) | | (17,607 | ) | | 63,584 |
| | (102,520 | ) | |
| | Other net foreign currency exposure | 1 |
| | — |
| | 82 |
| | (33 | ) | | 379 |
| | — |
| | 52,924 |
| | 53,353 |
| |
| | Total net foreign currency exposure | $ | 18,610 |
| | $ | (2,923 | ) | | $ | (17,790 | ) | | $ | (86 | ) | | $ | (145,879 | ) | | $ | (17,607 | ) | | $ | 116,508 |
| | $ | (49,167 | ) | |
| | Net foreign currency exposure as a percentage of total shareholders’ equity | 0.4 | % | | (0.1 | %) | | (0.4 | %) | | — | % | | (2.9 | %) | | (0.4 | %) | | 2.3 | % | | (1.0 | %) | |
| | Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement(1) | $ | 1,861 |
| | $ | (292 | ) | | $ | (1,779 | ) | | $ | (9 | ) | | $ | (14,588 | ) | | $ | (1,761 | ) | | $ | 11,651 |
| | $ | (4,917 | ) | |
| | | | | | | | | | | | | | | | | | |
| |
(1) | Assumes 10% change in underlying currencies relative to the U.S. dollar. |
Net Managed Foreign Currency Exposure
Our net managed foreign currency exposure is subject to internal risk tolerance standards. For significant foreign currency exposures, defined as those where net asset/liability position exceeds the greater of 1% of total shareholders' equity or $55$53 million the value of assets denominated in those currencies should fall within a range of 90 - 110% of liabilities denominated in the same currency. In addition, aggregate foreign currency exposure is subject to the same tolerance range. We may use derivative instruments to maintain net managed foreign currency exposures within our risk tolerance levels.
Other Net Foreign Currency Exposure
Other net foreign currency exposure includes those assets managed by specific investment managers who have the discretion to hold foreign currency exposures as part of their total return strategy. At December 31, 2019,2020, other net foreign currency exposure primarily consisted of our emerging market debt securities portfolio (refer to Item 7 portfolio.
'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Cash and Investments' for further details).
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| | | | | |
| Index to Consolidated Financial Statements and Accompanying Notes | Page |
| |
| Report of Independent Registered Public Accounting Firm | |
| |
Consolidated Balance Sheets at December 31, 20192020 and 20182019 | |
| |
Consolidated Statements of Operations for the years ended December 31, 2020, 2019 2018 and 20172018 | |
| |
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2020, 2019 2018 and 20172018 | |
| |
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2020, 2019 2018 and 20172018 | |
| |
Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 2018 and 20172018 | |
| |
| Notes to Consolidated Financial Statements | |
| |
Note 1 – HistoryOrganization | |
| |
| Note 2 – Basis of Presentation and Significant Accounting Policies | |
| |
| Note 3 – Segment Information | |
| |
| Note 4 – Goodwill and Intangible Assets | |
| |
| Note 5 – Investments | |
| |
| Note 6 – Fair Value Measurements | |
| |
| Note 7 – Derivative Instruments | |
| |
| Note 8 – Reserve for Losses and Loss Expenses | |
| |
| Note 9 – Reinsurance | |
| |
| Note 10 – Debt and Financing Arrangements | |
| |
| Note 11 – Commitments and Contingencies | |
| |
| Note 12 – Leases | |
| |
| Note 13 – Earnings Per Common Share | |
| |
| Note 14 – Shareholders’ Equity | |
| |
| Note 15 – Retirement Plans | |
| |
| Note 16 – Share-Based Compensation | |
| |
| Note 17 – Related Party Transactions | |
| |
Note 18 – Transaction and Reorganization Expenses | |
| |
| Note 19 – Income Taxes | |
| |
| Note 20 – Other Comprehensive Income (Loss) | |
| |
| Note 21 – Statutory Financial Information | |
| |
| Note 22 – Unaudited Condensed Quarterly Financial Data | |
| |
| Note 23 – Subsequent Events | |
| |
| |
| |
| |
| |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of AXIS Capital Holdings Limited
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AXIS Capital Holdings Limited and subsidiaries (the "Company") as of December 31, 20192020 and 2018,2019, 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, 2019,2020, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 202026, 2021 expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Reserve for losses and loss expenses - Refer to Notes 2 and 8 to the consolidated financial statements
Critical Audit Matter Description
The Company’s estimate of loss and loss expense reserves is derived using expected trends in claim severity and frequency and other factors that may vary significantly as claims are settled. The estimate is sensitive to significant assumptions, including the initial expected loss ratio and loss development factors. The estimate is also sensitive to the selection of actuarial methods and weighting of these methods applied to project the ultimate losses, the estimation of ultimate reserves associated with catastrophic events, and other factors. Further, not all catastrophic events can be modeled using traditional actuarial methodologies, which increases the degree of judgment needed in estimating loss reserves for such events.
Auditing the Company’s methods, assumptions and best estimate of the cost of the ultimate settlement and administration of claims represented by the incurred but not reported ("IBNR") claims included in recorded loss and loss adjustment reserves involved especially subjective auditor judgment and an increased extent of effort, including the involvement of our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to reserves for losses and loss expenses included the following, among others:
•We tested the effectiveness of controls over the valuation of the recorded loss and loss expense reserves, including the review and approval process that management has in place for significant actuarial methods and assumptions used and the approval of management’s best estimate of loss and loss expense reserves.
•We tested the completeness and accuracy of the underlying data that served as the basis for the Company’s actuarial analysis, including historical claims data, to test the reasonableness of key inputs to the actuarial estimate.
•With the assistance of our actuarial specialists:
–We independently developed an estimate of the reserves for selected classes of business, compared our estimates to those booked by the Company, and evaluated the differences.
–We evaluated the Company’s methodologies against recognized actuarial practices for the remaining classes. We also evaluated the assumptions used by the Company using our industry knowledge and experience and other analytical procedures.
–We compared the results of the reserve study prepared by third party actuaries to management’s best estimate and evaluated the differences.
| |
– | We independently developed an estimate of the reserves for selected classes of business, compared our estimates to those booked by the Company, and evaluated the differences. |
| |
– | We evaluated the Company’s methodologies against recognized actuarial practices for the remaining classes. We also evaluated the assumptions used by the Company using our industry knowledge and experience and other analytical procedures. |
| |
– | We compared the results of the reserve study prepared by third party actuaries to management’s best estimate and evaluated the differences. |
|
|
|
| /s/ Deloitte Ltd. |
| Hamilton, Bermuda |
February 27, 202026, 2021 |
We have served as the Company's auditor since 2001.
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 20192020 AND 20182019 | | | | 2019 | | 2018 | | 2020 | | 2019 |
| | (in thousands) | | (in thousands) |
| Assets | | | | Assets | |
| Investments: | | | | Investments: | |
Fixed maturities, available for sale, at fair value
(Amortized cost 2019: $12,263,240; 2018: $11,616,312) | $ | 12,468,205 |
| | $ | 11,435,347 |
| |
Equity securities, at fair value
(Cost 2019: $398,956; 2018: $365,905) | 474,207 |
| | 381,633 |
| |
| Mortgage loans, held for investment, at fair value | 432,748 |
| | 298,650 |
| |
Fixed maturities, available for sale, at fair value (Amortized cost 2020: $11,566,930; 2019: $12,263,240 Allowance for expected credit losses 2020: $323) | | Fixed maturities, available for sale, at fair value (Amortized cost 2020: $11,566,930; 2019: $12,263,240 Allowance for expected credit losses 2020: $323) | $ | 12,041,799 | | | $ | 12,468,205 | |
Equity securities, at fair value (Cost 2020: $421,744; 2019: $398,956) | | Equity securities, at fair value (Cost 2020: $421,744; 2019: $398,956) | 518,445 | | | 474,207 | |
Mortgage loans, held for investment, at fair value (Allowance for expected credit losses 2020: $NaN) | | Mortgage loans, held for investment, at fair value (Allowance for expected credit losses 2020: $NaN) | 593,290 | | | 432,748 | |
| Other investments, at fair value | 770,923 |
| | 787,787 |
| Other investments, at fair value | 829,156 | | | 770,923 | |
| Equity method investments | 117,821 |
| | 108,103 |
| Equity method investments | 114,209 | | | 117,821 | |
| Short-term investments, at fair value | 38,471 |
| | 144,040 |
| Short-term investments, at fair value | 161,897 | | | 38,471 | |
| Total investments | 14,302,375 |
| | 13,155,560 |
| Total investments | 14,258,796 | | | 14,302,375 | |
| Cash and cash equivalents | 1,241,109 |
| | 1,232,814 |
| Cash and cash equivalents | 902,831 | | | 1,241,109 | |
| Restricted cash and cash equivalents | 335,348 |
| | 597,206 |
| Restricted cash and cash equivalents | 600,401 | | | 335,348 | |
| Accrued interest receivable | 78,085 |
| | 80,335 |
| Accrued interest receivable | 65,020 | | | 78,085 | |
| Insurance and reinsurance premium balances receivable | 3,071,390 |
| | 3,007,296 |
| |
| Reinsurance recoverable on unpaid losses and loss expenses | 3,877,756 |
| | 3,501,669 |
| |
Insurance and reinsurance premium balances receivable (Allowance for expected credit losses 2020: $8,836) | | Insurance and reinsurance premium balances receivable (Allowance for expected credit losses 2020: $8,836) | 2,738,342 | | | 3,071,390 | |
Reinsurance recoverable on unpaid losses and loss expenses (Allowance for expected credit losses 2020: $23,711) | | Reinsurance recoverable on unpaid losses and loss expenses (Allowance for expected credit losses 2020: $23,711) | 4,496,641 | | | 3,877,756 | |
| Reinsurance recoverable on paid losses and loss expenses | 327,795 |
| | 280,233 |
| Reinsurance recoverable on paid losses and loss expenses | 434,201 | | | 327,795 | |
| Deferred acquisition costs | 492,119 |
| | 566,622 |
| Deferred acquisition costs | 431,439 | | | 492,119 | |
| Prepaid reinsurance premiums | 1,101,889 |
| | 1,013,573 |
| Prepaid reinsurance premiums | 1,194,455 | | | 1,101,889 | |
| Receivable for investments sold | 35,659 |
| | 32,627 |
| Receivable for investments sold | 2,150 | | | 35,659 | |
| Goodwill | 102,003 |
| | 102,003 |
| Goodwill | 100,801 | | | 102,003 | |
| Intangible assets | 230,550 |
| | 241,568 |
| Intangible assets | 219,633 | | | 230,550 | |
| Value of business acquired | 8,992 |
| | 35,714 |
| Value of business acquired | 3,854 | | | 8,992 | |
| Operating lease right-of-use assets | 111,092 |
| | — |
| Operating lease right-of-use assets | 123,579 | | | 111,092 | |
| Other assets | 287,892 |
| | 285,346 |
| Other assets | 305,544 | | | 287,892 | |
| Total assets | $ | 25,604,054 |
| | $ | 24,132,566 |
| Total assets | $ | 25,877,687 | | | $ | 25,604,054 | |
| | | | | |
| Liabilities | | | | Liabilities | | | |
| Reserve for losses and loss expenses | $ | 12,752,081 |
| | $ | 12,280,769 |
| Reserve for losses and loss expenses | $ | 13,926,766 | | | $ | 12,752,081 | |
| Unearned premiums | 3,626,246 |
| | 3,635,758 |
| Unearned premiums | 3,685,886 | | | 3,626,246 | |
| Insurance and reinsurance balances payable | 1,349,082 |
| | 1,338,991 |
| Insurance and reinsurance balances payable | 1,092,042 | | | 1,349,082 | |
| Debt | 1,808,157 |
| | 1,341,961 |
| Debt | 1,309,695 | | | 1,808,157 | |
| Payable for investments purchased | 32,985 |
| | 111,838 |
| Payable for investments purchased | 104,777 | | | 32,985 | |
| Operating lease liabilities | 115,584 |
| | — |
| Operating lease liabilities | 140,263 | | | 115,584 | |
| Other liabilities | 375,911 |
| | 393,178 |
| Other liabilities | 322,564 | | | 375,911 | |
| Total liabilities | 20,060,046 |
| | 19,102,495 |
| Total liabilities | 20,581,993 | | | 20,060,046 | |
| | Commitments and Contingencies |
| |
| Commitments and Contingencies | 0 | | 0 |
| Shareholders' equity | | | | Shareholders' equity | |
| Preferred shares | 775,000 |
| | 775,000 |
| Preferred shares | 550,000 | | | 775,000 | |
Common shares (shares issued 2019: 176,580; 2018: 176,580 shares outstanding 2019: 83,959; 2018: 83,586) | 2,206 |
| | 2,206 |
| |
Common shares (shares issued 2020: 176,580; 2019: 176,580 shares outstanding 2020: 84,353; 2019: 83,959) | | Common shares (shares issued 2020: 176,580; 2019: 176,580 shares outstanding 2020: 84,353; 2019: 83,959) | 2,206 | | | 2,206 | |
| Additional paid-in capital | 2,317,212 |
| | 2,308,583 |
| Additional paid-in capital | 2,330,054 | | | 2,317,212 | |
| Accumulated other comprehensive income (loss) | 171,710 |
| | (177,110 | ) | |
| Accumulated other comprehensive income | | Accumulated other comprehensive income | 414,395 | | | 171,710 | |
| Retained earnings | 6,056,686 |
| | 5,912,812 |
| Retained earnings | 5,763,607 | | | 6,056,686 | |
Treasury shares, at cost (2019: 92,621; 2018: 92,994) | (3,778,806 | ) | | (3,791,420 | ) | |
Treasury shares, at cost (2020: 92,227; 2019: 92,621) | | Treasury shares, at cost (2020: 92,227; 2019: 92,621) | (3,764,568) | | | (3,778,806) | |
| | Total shareholders’ equity | 5,544,008 |
| | 5,030,071 |
| Total shareholders’ equity | 5,295,694 | | | 5,544,008 | |
| | | | | |
| Total liabilities and shareholders’ equity | $ | 25,604,054 |
| | $ | 24,132,566 |
| Total liabilities and shareholders’ equity | $ | 25,877,687 | | | $ | 25,604,054 | |
See accompanying notes to Consolidated Financial Statements.
118114
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019,, 2018, AND 2018
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| | (in thousands, except for per share data) |
| Revenues | | | | | |
| Net premiums earned | $ | 4,371,309 | | | $ | 4,587,178 | | | $ | 4,791,495 | |
| Net investment income | 349,601 | | | 478,572 | | | 438,507 | |
| Other insurance related income (loss) | (8,089) | | | 16,444 | | | 10,622 | |
| Net investment gains (losses): | | | | | |
| Allowance for expected credit losses | (323) | | | 0 | | | 0 | |
| Impairment losses | (1,486) | | | 0 | | | 0 | |
| Other-than-temporary impairment ("OTTI") losses | 0 | | | (6,984) | | | (9,733) | |
| | | | | |
| Other realized and unrealized investment gains (losses) | 130,942 | | | 98,217 | | | (140,485) | |
| Total net investment gains (losses) | 129,133 | | | 91,233 | | | (150,218) | |
| Total revenues | 4,841,954 | | | 5,173,427 | | | 5,090,406 | |
| | | | | |
| Expenses | | | | | |
| Net losses and loss expenses | 3,281,252 | | | 3,044,798 | | | 3,190,287 | |
| Acquisition costs | 929,517 | | | 1,024,582 | | | 968,835 | |
| General and administrative expenses | 579,790 | | | 634,831 | | | 627,389 | |
| Foreign exchange losses (gains) | 81,069 | | | (12,041) | | | (29,165) | |
| Interest expense and financing costs | 75,049 | | | 68,107 | | | 67,432 | |
| Reorganization expenses | 7,881 | | | 37,384 | | | 66,940 | |
| Amortization of value of business acquired | 5,139 | | | 26,722 | | | 172,332 | |
| Amortization of intangible assets | 11,390 | | | 11,597 | | | 13,814 | |
| Total expenses | 4,971,087 | | | 4,835,980 | | | 5,077,864 | |
| | | | | |
| Income (loss) before income taxes and interest in income (loss) of equity method investments | (129,133) | | | 337,447 | | | 12,542 | |
| Income tax (expense) benefit | 12,321 | | | (23,692) | | | 29,486 | |
| Interest in income (loss) of equity method investments | (3,612) | | | 9,718 | | | 993 | |
| | | | | |
| Net income (loss) | (120,424) | | | 323,473 | | | 43,021 | |
| Preferred share dividends | 30,250 | | | 41,112 | | | 42,625 | |
| | | | | |
| Net income (loss) available (attributable) to common shareholders | $ | (150,674) | | | $ | 282,361 | | | $ | 396 | |
| | | | | |
| Per share data | | | | | |
| Earnings (loss) per common share: | | | | | |
Earnings (loss) per common share
| $ | (1.79) | | | $ | 3.37 | | | $ | 0 | |
| Earnings (loss) per diluted common share | $ | (1.79) | | | $ | 3.34 | | | $ | 0 | |
| Weighted average common shares outstanding | 84,262 | | | 83,894 | | | 83,501 | |
| Weighted average diluted common shares outstanding | 84,262 | | | 84,473 | | | 84,007 | |
2017
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| | (in thousands, except for per share data) |
| Revenues | | | | | |
| Net premiums earned | $ | 4,587,178 |
| | $ | 4,791,495 |
| | $ | 4,148,760 |
|
| Net investment income | 478,572 |
| | 438,507 |
| | 400,805 |
|
| Other insurance related income (losses) | 16,444 |
| | 10,622 |
| | (1,240 | ) |
| Bargain purchase gain | — |
| | — |
| | 15,044 |
|
| Net investment gains (losses): | | | | | |
| Other-than-temporary impairment ("OTTI") losses | (6,984 | ) | | (9,733 | ) | | (14,493 | ) |
| Other realized and unrealized investment gains (losses) | 98,217 |
| | (140,485 | ) | | 42,719 |
|
| Total net investment gains (losses) | 91,233 |
| | (150,218 | ) | | 28,226 |
|
| Total revenues | 5,173,427 |
| | 5,090,406 |
| | 4,591,595 |
|
| | | | | | |
| Expenses | | | | | |
| Net losses and loss expenses | 3,044,798 |
| | 3,190,287 |
| | 3,287,772 |
|
| Acquisition costs | 1,024,582 |
| | 968,835 |
| | 823,591 |
|
| General and administrative expenses | 634,831 |
| | 627,389 |
| | 579,428 |
|
| Foreign exchange losses (gains) | (12,041 | ) | | (29,165 | ) | | 134,737 |
|
| Interest expense and financing costs | 68,107 |
| | 67,432 |
| | 54,811 |
|
| Transaction and reorganization expenses | 37,384 |
| | 66,940 |
| | 26,718 |
|
| Amortization of value of business acquired | 26,722 |
| | 172,332 |
| | 50,104 |
|
| Amortization of intangible assets | 11,597 |
| | 13,814 |
| | 2,543 |
|
| Total expenses | 4,835,980 |
| | 5,077,864 |
| | 4,959,704 |
|
| | | | | | |
| Income (loss) before income taxes and interest in income (loss) of equity method investments | 337,447 |
| | 12,542 |
| | (368,109 | ) |
| Income tax (expense) benefit | (23,692 | ) | | 29,486 |
| | 7,542 |
|
| Interest in income (loss) of equity method investments | 9,718 |
| | 993 |
| | (8,402 | ) |
| Net income (loss) | 323,473 |
| | 43,021 |
| | (368,969 | ) |
| Preferred share dividends | 41,112 |
| | 42,625 |
| | 46,810 |
|
| Net income (loss) available (attributable) to common shareholders | $ | 282,361 |
| | $ | 396 |
| | $ | (415,779 | ) |
| | | | | | |
| Per share data | | | | | |
| Earnings (loss) per common share: | | | | | |
Earnings (loss) per common share
| $ | 3.37 |
| | $ | — |
| | $ | (4.94 | ) |
| Earnings (loss) per diluted common share | $ | 3.34 |
| | $ | — |
| | $ | (4.94 | ) |
| Weighted average common shares outstanding | 83,894 |
| | 83,501 |
| | 84,108 |
|
| Weighted average diluted common shares outstanding | 84,473 |
| | 84,007 |
| | 84,108 |
|
See accompanying notes to Consolidated Financial Statements.
119115
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019,, 2018, AND 20172018
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Net income (loss) | $ | (120,424) | | | $ | 323,473 | | | $ | 43,021 | |
| | | | | |
| Other comprehensive income (loss), net of tax: | | | | | |
| Available for sale investments: | | | | | |
| Unrealized gains (losses) arising during the year for which an allowance for expected credit losses has not been recognized | 317,166 | | | 374,615 | | | (291,731) | |
| Unrealized gains (losses) arising during the year for which an allowance for expected credit losses has been recognized | (40) | | | 0 | | | 0 | |
| Adjustment for reclassification of net realized (gains) losses, impairment losses and OTTI losses recognized in net income (loss) | (78,012) | | | (24,729) | | | 100,902 | |
| Unrealized gains (losses) arising during the year, net of reclassification adjustment | 239,114 | | | 349,886 | | | (190,829) | |
| | | | | |
| Foreign currency translation adjustment | 3,571 | | | (1,066) | | | (11,165) | |
| | | | | |
| Total other comprehensive income (loss), net of tax | 242,685 | | | 348,820 | | | (201,994) | |
| Comprehensive income (loss) | $ | 122,261 | | | $ | 672,293 | | | $ | (158,973) | |
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| | (in thousands) |
| Net income (loss) | $ | 323,473 |
| | $ | 43,021 |
| | $ | (368,969 | ) |
| | | | | | |
| Other comprehensive income (loss), net of tax: | | | | | |
| Available for sale investments: | | | | | |
| Unrealized gains (losses) arising during the year | 374,615 |
| | (291,731 | ) | | 205,419 |
|
| Adjustment for reclassification of net realized (gains) losses and OTTI losses recognized in net income (loss) | (24,729 | ) | | 100,902 |
| | (33,134 | ) |
| Unrealized gains (losses) arising during the year, net of reclassification adjustment | 349,886 |
| | (190,829 | ) | | 172,285 |
|
| Foreign currency translation adjustment | (1,066 | ) | | (11,165 | ) | | 41,938 |
|
| Total other comprehensive income (loss), net of tax | 348,820 |
| | (201,994 | ) | | 214,223 |
|
| Comprehensive income (loss) | $ | 672,293 |
| | $ | (158,973 | ) | | $ | (154,746 | ) |
See accompanying notes to Consolidated Financial Statements.
120116
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Preferred shares | | | | | |
| Balance at beginning of year | $ | 775,000 | | | $ | 775,000 | | | $ | 775,000 | |
| | | | | |
| Shares repurchased | (225,000) | | | 0 | | | 0 | |
| Balance at end of year | 550,000 | | | 775,000 | | | 775,000 | |
| | | | | |
| Common shares (par value) | | | | | |
| | | | | |
| | | | | |
| Balance at beginning and end of year | 2,206 | | | 2,206 | | | 2,206 | |
| | | | | |
| Additional paid-in capital | | | | | |
| Balance at beginning of year | 2,317,212 | | | 2,308,583 | | | 2,299,166 | |
| | | | | |
| Treasury shares reissued | (22,732) | | | (21,046) | | | (24,088) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Share-based compensation expense | 35,574 | | | 29,675 | | | 33,505 | |
| Balance at end of year | 2,330,054 | | | 2,317,212 | | | 2,308,583 | |
| | | | | |
| Accumulated other comprehensive income (loss) | | | | | |
| Balance at beginning of year | 171,710 | | | (177,110) | | | 92,382 | |
| Unrealized gains (losses) on available-for-sale investments, net of tax: | | | | | |
| Balance at beginning of year | 181,521 | | | (168,365) | | | 89,962 | |
| Cumulative effect of adoption of ASU No. 2018-02 | — | | | — | | | 2,106 | |
| Cumulative effect of adoption of ASU No. 2016-01, net of taxes | — | | | — | | | (69,604) | |
| Unrealized gains (losses) arising during the year, net of reclassification adjustment | 239,114 | | | 349,886 | | | (190,829) | |
| | | | | |
| Balance at end of year | 420,635 | | | 181,521 | | | (168,365) | |
| Cumulative foreign currency translation adjustments, net of tax: | | | | | |
| Balance at beginning of year | (9,811) | | | (8,745) | | | 2,420 | |
| Foreign currency translation adjustment | 3,571 | | | (1,066) | | | (11,165) | |
| Balance at end of year | (6,240) | | | (9,811) | | | (8,745) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Balance at end of year | 414,395 | | | 171,710 | | | (177,110) | |
| | | | | |
| Retained earnings | | | | | |
| Balance at beginning of year | 6,056,686 | | | 5,912,812 | | | 5,979,666 | |
| Cumulative effect of adoption of ASU No. 2018-02 | — | | | — | | | (2,106) | |
| Cumulative effect of adoption of ASU No. 2016-01, net of taxes | — | | | — | | | 69,604 | |
| Net income (loss) | (120,424) | | | 323,473 | | | 43,021 | |
| | | | | |
Preferred share dividends (1) | (30,250) | | | (41,112) | | | (42,625) | |
| | | | | |
Common share dividends (1) | (142,405) | | | (138,487) | | | (134,748) | |
| Balance at end of year | 5,763,607 | | | 6,056,686 | | | 5,912,812 | |
| | | | | |
| Treasury shares, at cost | | | | | |
| Balance at beginning of year | (3,778,806) | | | (3,791,420) | | | (3,807,156) | |
| Shares repurchased | (10,382) | | | (10,165) | | | (10,080) | |
| Shares reissued | 24,620 | | | 22,779 | | | 25,816 | |
| Balance at end of year | (3,764,568) | | | (3,778,806) | | | (3,791,420) | |
| | | | | |
| | | | | |
| Total shareholders' equity | $ | 5,295,694 | | | $ | 5,544,008 | | | $ | 5,030,071 | |
| | | | | |
(1) Refer to Note 14 2019'Shareholder's Equity', 2018, AND 2017 for details on dividends declared and paid related to the Company's common and preferred shares.
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| | (in thousands) |
| Preferred shares | | | | | |
| Balance at beginning of year | $ | 775,000 |
| | $ | 775,000 |
| | $ | 1,126,074 |
|
| Shares repurchased | — |
| | — |
| | (351,074 | ) |
| Balance at end of year | 775,000 |
| | 775,000 |
| | 775,000 |
|
| | | | | | |
| Common shares (par value) | | | | | |
| Balance at beginning and end of year | 2,206 |
| | 2,206 |
| | 2,206 |
|
| | | | | | |
| Additional paid-in capital | | | | | |
| Balance at beginning of year | 2,308,583 |
| | 2,299,166 |
| | 2,299,857 |
|
| Treasury shares reissued | (21,046 | ) | | (24,088 | ) | | (39,368 | ) |
| Share-based compensation expense | 29,675 |
| | 33,505 |
| | 38,677 |
|
| Balance at end of year | 2,317,212 |
| | 2,308,583 |
| | 2,299,166 |
|
| | | | | | |
| Accumulated other comprehensive income (loss) | | | | | |
| Balance at beginning of year | (177,110 | ) | | 92,382 |
| | (121,841 | ) |
| Unrealized gains (losses) on available-for-sale investments, net of tax: | | | | | |
| Balance at beginning of year | (168,365 | ) | | 89,962 |
| | (82,323 | ) |
| Cumulative effect of adoption of ASU No. 2018-02 | — |
| | 2,106 |
| | — |
|
| Cumulative effect of adoption of ASU No. 2016-01, net of taxes | — |
| | (69,604 | ) | | — |
|
| Unrealized gains (losses) arising during the year, net of reclassification adjustment | 349,886 |
| | (190,829 | ) | | 172,285 |
|
| Balance at end of year | 181,521 |
| | (168,365 | ) | | 89,962 |
|
| Cumulative foreign currency translation adjustments, net of tax: | | | | | |
| Balance at beginning of year | (8,745 | ) | | 2,420 |
| | (39,518 | ) |
| Foreign currency translation adjustment | (1,066 | ) | | (11,165 | ) | | 41,938 |
|
| Balance at end of year | (9,811 | ) | | (8,745 | ) | | 2,420 |
|
| Balance at end of year | 171,710 |
| | (177,110 | ) | | 92,382 |
|
| | | | | | |
| Retained earnings | | | | | |
| Balance at beginning of year | 5,912,812 |
| | 5,979,666 |
| | 6,527,627 |
|
| Cumulative effect of adoption of ASU No. 2018-02 | — |
| | (2,106 | ) | | — |
|
| Cumulative effect of adoption of ASU No. 2016-01, net of taxes | — |
| | 69,604 |
| | — |
|
| Net income (loss) | 323,473 |
| | 43,021 |
| | (368,969 | ) |
| Preferred share dividends | (41,112 | ) | | (42,625 | ) | | (46,810 | ) |
| Common share dividends | (138,487 | ) | | (134,748 | ) | | (132,182 | ) |
| Balance at end of year | 6,056,686 |
| | 5,912,812 |
| | 5,979,666 |
|
| | | | | | |
| Treasury shares, at cost | | | | | |
| Balance at beginning of year | (3,791,420 | ) | | (3,807,156 | ) | | (3,561,553 | ) |
| Shares repurchased | (10,165 | ) | | (10,080 | ) | | (285,858 | ) |
| Shares reissued | 22,779 |
| | 25,816 |
| | 40,255 |
|
| Balance at end of year | (3,778,806 | ) | | (3,791,420 | ) | | (3,807,156 | ) |
| | | | | | |
| Total shareholders' equity | $ | 5,544,008 |
| | $ | 5,030,071 |
| | $ | 5,341,264 |
|
| | | | | | |
See accompanying notes to Consolidated Financial Statements.
121117
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, 2018, AND 20172018
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | (120,424) | | | $ | 323,473 | | | $ | 43,021 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Net investment (gains) losses | (129,133) | | | (91,233) | | | 144,297 | |
| Net realized and unrealized gains on other investments | (16,059) | | | (60,038) | | | (45,153) | |
| Amortization of fixed maturities | 32,893 | | | 18,499 | | | 24,663 | |
| Interest in (income) loss of equity method investments | 3,612 | | | (9,718) | | | 495 | |
| Amortization of value of business acquired | 5,139 | | | 26,722 | | | 172,332 | |
| Other amortization and depreciation | 65,797 | | | 75,229 | | | 9,795 | |
| Share-based compensation expense, net of cash payments | 29,005 | | | 32,491 | | | 34,346 | |
| Non-cash foreign exchange gains | 0 | | | (6,043) | | | 0 | |
| | | | | |
| Changes in: | | | | | |
| Accrued interest receivable | 13,097 | | | 2,140 | | | (3,184) | |
| Reinsurance recoverable on unpaid and paid losses and loss expenses | (723,860) | | | (412,076) | | | (766,690) | |
| Deferred acquisition costs | 60,828 | | | 74,331 | | | (98,329) | |
| Prepaid reinsurance premiums | (94,122) | | | (88,789) | | | (212,654) | |
| Reserve for losses and loss expenses | 1,178,292 | | | 467,428 | | | 442,839 | |
| Unearned premiums | 62,999 | | | (7,958) | | | 29,760 | |
| Insurance and reinsurance balances, net | 72,503 | | | (51,075) | | | 208,783 | |
| Other items | (97,064) | | | (94,379) | | | 26,452 | |
| Net cash provided by operating activities | 343,503 | | | 199,004 | | | 10,773 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Purchases of: | | | | | |
| Fixed maturities | (10,494,198) | | | (9,994,025) | | | (8,464,140) | |
| Equity securities | (117,883) | | | (58,022) | | | (73,107) | |
| Mortgage loans | (199,259) | | | (194,020) | | | (106,171) | |
| Other investments | (166,602) | | | (218,178) | | | (180,126) | |
| | | | | |
| Short-term investments | (365,170) | | | (179,230) | | | (305,670) | |
| Proceeds from the sale of: | | | | | |
| Fixed maturities | 9,784,137 | | | 8,018,658 | | | 7,586,536 | |
| Equity securities | 119,381 | | | 36,016 | | | 246,196 | |
| Other investments | 166,976 | | | 249,129 | | | 361,030 | |
| Short-term investments | 171,976 | | | 266,057 | | | 178,983 | |
| Proceeds from redemption of fixed maturities | 1,526,396 | | | 1,282,796 | | | 1,241,214 | |
| Proceeds from redemption of short-term investments | 69,707 | | | 19,366 | | | 45,831 | |
| Proceeds from the repayment of mortgage loans | 39,121 | | | 60,244 | | | 133,081 | |
| Purchase of other assets | (44,661) | | | (63,106) | | | (25,103) | |
| | | | | |
| | | | | |
| | | | | |
| Net cash provided by (used in) investing activities | 489,921 | | | (774,315) | | | 638,554 | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Net proceeds from issuance of senior notes | 0 | | | 717,509 | | | 0 | |
| Redemption of senior notes | (500,000) | | | (250,000) | | | 0 | |
| Repurchase of preferred shares | (225,000) | | | 0 | | | 0 | |
| | | | | |
| | | | | |
| Taxes paid on withholding shares | (10,382) | | | (10,165) | | | (10,080) | |
| Dividends paid - common shares | (141,590) | | | (137,209) | | | (133,502) | |
| | | | | |
| Dividends paid - preferred shares | (31,831) | | | (42,625) | | | (42,625) | |
| | | | | |
| | | | | |
| | | | | |
| Net cash provided by (used in) financing activities | (908,803) | | | 277,510 | | | (186,207) | |
| | | | | |
| Effect of exchange rate changes on foreign currency cash, cash equivalents and restricted cash | 2,154 | | | 44,238 | | | 3,114 | |
| Increase (decrease) in cash, cash equivalents and restricted cash | (73,225) | | | (253,563) | | | 466,234 | |
| Cash, cash equivalents and restricted cash - beginning of year | 1,576,457 | | | 1,830,020 | | | 1,363,786 | |
| Cash, cash equivalents and restricted cash - end of year | $ | 1,503,232 | | | $ | 1,576,457 | | | $ | 1,830,020 | |
| | | | | |
|
| | | | | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| | (in thousands) |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | 323,473 |
| | $ | 43,021 |
| | $ | (368,969 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Net investment (gains) losses | (91,233 | ) | | 144,297 |
| | (28,226 | ) |
| Net realized and unrealized gains on other investments | (60,038 | ) | | (45,153 | ) | | (72,763 | ) |
| Amortization of fixed maturities | 18,499 |
| | 24,663 |
| | 43,292 |
|
| Interest in (income) loss of equity method investments | (9,718 | ) | | 495 |
| | 8,402 |
|
| Amortization of value of business acquired | 26,722 |
| | 172,332 |
| | 50,104 |
|
| Other amortization and depreciation | 75,229 |
| | 9,795 |
| | 31,367 |
|
| Share-based compensation expense, net of cash payments | 32,491 |
| | 34,346 |
| | 12,667 |
|
| Non-cash foreign exchange losses (gains) | (6,043 | ) | | — |
| | 24,149 |
|
| Bargain purchase gain | — |
| | — |
| | (15,044 | ) |
| Changes in: | | | | | |
| Accrued interest receivable | 2,140 |
| | (3,184 | ) | | (4,353 | ) |
| Reinsurance recoverable on unpaid and paid losses and loss expenses | (412,076 | ) | | (766,690 | ) | | (131,160 | ) |
| Deferred acquisition costs | 74,331 |
| | (98,329 | ) | | (35,076 | ) |
| Prepaid reinsurance premiums | (88,789 | ) | | (212,654 | ) | | (56,377 | ) |
| Reserve for losses and loss expenses | 467,428 |
| | 442,839 |
| | 1,004,578 |
|
| Unearned premiums | (7,958 | ) | | 29,760 |
| | (56,603 | ) |
| Insurance and reinsurance balances, net | (51,075 | ) | | 208,783 |
| | (81,831 | ) |
| Other items | (94,379 | ) | | 26,452 |
| | (64,928 | ) |
| Net cash provided by operating activities | 199,004 |
| | 10,773 |
| | 259,229 |
|
| | | | | | |
| Cash flows from investing activities: | | | | | |
| Purchases of: | | | | | |
| Fixed maturities | (9,994,025 | ) | | (8,464,140 | ) | | (8,714,990 | ) |
| Equity securities | (58,022 | ) | | (73,107 | ) | | (106,136 | ) |
| Mortgage loans | (194,020 | ) | | (106,171 | ) | | (31,077 | ) |
| Other investments | (218,178 | ) | | (180,126 | ) | | (153,150 | ) |
| Equity method investments | — |
| | — |
| | (1,000 | ) |
| Short-term investments | (179,230 | ) | | (305,670 | ) | | (41,609 | ) |
| Proceeds from the sale of: | | | | | |
| Fixed maturities | 8,018,658 |
| | 7,586,536 |
| | 7,004,973 |
|
| Equity securities | 36,016 |
| | 246,196 |
| | 448,058 |
|
| Other investments | 249,129 |
| | 361,030 |
| | 260,943 |
|
| Short-term investments | 266,057 |
| | 178,983 |
| | 49,280 |
|
| Proceeds from redemption of fixed maturities | 1,282,796 |
| | 1,241,214 |
| | 2,009,982 |
|
| Proceeds from redemption of short-term investments | 19,366 |
| | 45,831 |
| | 119,427 |
|
| Proceeds from the repayment of mortgage loans | 60,244 |
| | 133,081 |
| | 56,435 |
|
| Purchase of other assets | (63,106 | ) | | (25,103 | ) | | (42,685 | ) |
| Purchase of subsidiaries, net | — |
| | — |
| | (466,941 | ) |
| Net cash provided by (used in) investing activities | (774,315 | ) | | 638,554 |
| | 391,510 |
|
| | | | | | |
| Cash flows from financing activities: | | | | | |
| Net proceeds from issuance of debt | 717,509 |
| | — |
| | 346,362 |
|
| Repayment of notes payable | (250,000 | ) | | — |
| | (67,242 | ) |
| Repurchase of common shares - open market | — |
| | — |
| | (261,180 | ) |
| Taxes paid on withholding shares | (10,165 | ) | | (10,080 | ) | | (24,678 | ) |
| Dividends paid - common shares | (137,209 | ) | | (133,502 | ) | | (135,032 | ) |
| Repurchase of preferred shares | — |
| | — |
| | (351,074 | ) |
| Dividends paid - preferred shares | (42,625 | ) | | (42,625 | ) | | (52,844 | ) |
| Net cash provided by (used in) financing activities | 277,510 |
| | (186,207 | ) | | (545,688 | ) |
| | | | | | |
| Effect of exchange rate changes on foreign currency cash, cash equivalents and restricted cash | 44,238 |
| | 3,114 |
| | 17,228 |
|
See accompanying notes to Consolidated Financial Statements.
122118
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, 2018, AND 20172018
| | | | | | | | | | | | | | | | | |
| | | | | |
| Supplemental disclosures of cash flow information: | | | | | |
| Income taxes paid | $ | 4,414 | | | $ | 39,949 | | | $ | 15,698 | |
| Interest paid | $ | 54,108 | | | $ | 59,563 | | | $ | 64,822 | |
|
| | | | | | | | | | | |
| Increase (decrease) in cash, cash equivalents and restricted cash | (253,563 | ) | | 466,234 |
| | 122,279 |
|
| Cash, cash equivalents and restricted cash - beginning of year | 1,830,020 |
| | 1,363,786 |
| | 1,241,507 |
|
| Cash, cash equivalents and restricted cash - end of year | $ | 1,576,457 |
| | $ | 1,830,020 |
| | $ | 1,363,786 |
|
| | | | | | |
| Supplemental disclosures of cash flow information: | | | | | |
| Income taxes paid | $ | 39,949 |
| | $ | 15,698 |
| | $ | — |
|
| Interest paid | $ | 59,563 |
| | $ | 64,822 |
| | $ | 49,945 |
|
Supplemental disclosures of cash flow information:
In 2019, non-cash foreign exchange gains were attributable to the reclassification of the cumulative translation adjustment balance related to Aviabel Re S.A. from accumulated other comprehensive income in the consolidated balance sheet to foreign exchange losses (gains) in the consolidated statement of operations due to the liquidation of that entity (refer to Note 8 'Reserve for Losses and Loss Expenses' and Note 20 'Other Comprehensive Income (Loss)').
In 2018, total consideration paid for an agreement for the Reinsurance to Close ("RITC") of the 2015 and prior years of account of Syndicate 2007 was $819 million of which $600 million was settled by way of a transfer of securities and was treated as a non-cash activity in the consolidated statement of cash flows (refer to Note 8 'Reserve for Losses and Loss Expenses').
In 2017, non-cash foreign exchange losses were attributable to the reclassification of the cumulative translation adjustment balance related to AXIS Specialty Australia from accumulated other comprehensive income in the consolidated balance sheet to foreign exchange losses (gains) in the consolidated statement of operations due to the wind-down of that operation which was substantially complete at March 31, 2017 (refer to Note 8 'Reserve for Losses and Loss Expenses' and Note 20 'Other Comprehensive Income (Loss)').
See accompanying notes to Consolidated Financial Statements.
123119
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 2018 AND 20172018
| |
19. | INCOME TAXES (CONTINUED) |
1. ORGANIZATION
AXIS Capital Holdings Limited ("AXIS Capital" and together with its wholly owned subsidiaries the "Company"), was incorporated on December 9, 2002, under the laws of Bermuda. The Company provides a broad range of insurance and reinsurance products on a worldwide basis. The Company's principal operating subsidiaries, located in Bermuda, the United States ("U.S."), Europe, Singapore and Canada are described below:
•AXIS Specialty Limited ("AXIS Specialty Bermuda"), a Bermuda domiciled company is licensed to provide specialty insurance and treaty reinsurance products on a worldwide basis. In addition, AXIS Specialty Bermuda conducts insurance and reinsurance business through its branch in Singapore, AXIS Specialty Limited (Singapore Branch).
•AXIS Insurance Company, domiciled in Illinois and AXIS Reinsurance Company, domiciled in New York, together with AXIS Reinsurance Company (Canadian Branch) are licensed to offer a range of specialty insurance and treaty reinsurance products to a variety of niche markets on a worldwide basis. AXIS Surplus Insurance Company, domiciled in the state of Illinois, is eligible to write insurance on a surplus lines basis.
•AXIS Specialty Europe SE ("AXIS Specialty Europe") is a European public limited liability company, incorporated as a non-life insurer under the laws of Ireland. It is a Societas Europaea (SE), or European society company and has been registered in accordance with company law of the E.U. AXIS Specialty Europe also conducts insurance business through its branch in the United Kingdom ("U.K."), AXIS Specialty Europe SE ("UK Branch"). Pursuant to the U.K.'s withdrawal from the European Union on January 31, 2020, AXIS Specialty Europe expects to be fully regulated by the Prudential Regulation Authority ("PRA") as a third-country branch in the U.K. once the transitional arrangements have expired on December 31, 2021. Until AXIS Specialty Europe's application to the PRA for authorization of a third-country branch in the U.K. is approved, AXIS Specialty Europe will continue to trade in the U.K. under the PRA and the U.K. Financial Conduct Authority ("FCA") Temporary Permissions Regime. Effective January 1, 2019, the shares of Compagnie Belge d’Assurances Aviation NV/SA ("Aviabel") were transferred to AXIS Specialty Europe from AXIS Specialty Holdings Ireland Limited and Aviabel was merged into AXIS Specialty Europe by way of merger by absorption and dissolved without going into liquidation (the "Aviabel Merger"). In connection with the Aviabel Merger, AXIS Specialty Europe established new branches in Belgium and the Netherlands, AXIS Specialty Europe SE (Belgium Branch) and AXIS Specialty Europe SE (Netherlands Branch), respectively. Effective January 1, 2019, AXIS Specialty Europe conducts insurance business through its new branches in Belgium and the Netherlands.
•AXIS Re SE is a European public limited liability company, incorporated as a reinsurer under the laws of Ireland. AXIS Re SE is also a Societas Europaea (SE). AXIS Re SE also conducts reinsurance business through its branch in Switzerland, AXIS Re SE, Dublin (Zurich Branch).
•The Company operates in the Lloyd's of London ("Lloyd's") market through its corporate members AXIS Corporate Capital UK Limited and AXIS Corporate Capital UK II Limited, (formerly Novae Corporate Underwriting Limited), which provide 70% and 30%, respectively of AXIS Syndicate 1686's ("Syndicate 1686") capital support. AXIS Corporate Capital UK Limited was the sole corporate member of Syndicate 1686 until December 31, 2018. AXIS Syndicate 1686 is managed by AXIS Managing Agency Ltd. ("AXIS Managing Agency").
•On October 2, 2017, AXIS Specialty UK Holdings Limited, a wholly owned subsidiary of the Company, acquired a 100% ownership interest in Novae Group plc ("Novae"). AXIS Corporate Capital UK II Limited is the sole corporate member of Novae Syndicate 2007 ("Syndicate 2007"). Novae Syndicates Limited ("NSL") managed Syndicate 2007 untilEffective January 1, 2018, when the Company received authorization from Lloyd’s for AXIS Managing Agency to commencecommenced management and oversight of Syndicate 2007. Effective January 1, 2019, Syndicate 2007 ceased accepting new business and was placed into run-off.
•AXIS Ventures Limited ("AXIS Ventures") and AXIS Reinsurance Managers Limited ("AXIS Reinsurance Managers"), regulated by the BMA as an insurance manager, generatesmanagers, generate fee income from services provided to strategic capital partners.
Effective September 23, 2020, AXIS Ventures deregistered as an insurance manager with the BMA.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 2018 AND 20172018
| |
2. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") and include AXIS Capital Holdings Limited and its wholly-owned subsidiaries.
All inter-company accounts and transactions have been eliminated.
During the three months ended March 31, 2018, the Company realigned its accident and health business by integrating this business and its operations into the Company's insurance and reinsurance segments. Through this realignment, the Company's accident and health business benefited from the greater scale and market presence of the Company's property and casualty insurance and reinsurance businesses and operations. Financial results relating to the Company's accident and health lines of business were previously included in the Company's insurance segment. Effective January 1, 2018, accident and health results are included in the results of both the insurance and reinsurance segments of the Company. As a result of the realignment, gross premiums written for the year ended December 31, 2017 of $313 million and underwriting income for the year ended December 31, 2017 of $14 million were reclassified from the Company's insurance segment to the Company's reinsurance segment.
At December 31, 2018 the Company represented reinsurance recoverable on unpaid losses separately from reinsurance recoverable on paid losses in the consolidated balance sheets. This presentation was adopted to facilitate comparison to the reconciliation of beginning and ending net reserves for unpaid losses and loss expenses (refer to Note 8 'Reserve for Losses and Loss Expenses').
These reclassifications did not impact results of operations, financial condition or liquidity.eliminated.0
Tabular dollar and share amounts are in thousands, with the exception of per share amounts. All amounts are reported in U.S. dollars.
UseEquity Method Investments
During 2016, we paid $108 million including direct transactions costs to acquire 19% of Estimatesthe common equity of Harrington Reinsurance Holdings Limited ("Harrington"), the parent company of Harrington Re Ltd. ("Harrington Re"), an independent reinsurance company jointly sponsored by the Company and The Blackstone Group L.P. ("Blackstone"). Harrington is not a variable interest entity that is required to be included in the consolidated financial statements. We account for our ownership interest in Harrington under the equity method of accounting.
In our consolidated results, our ownership interest in Harrington is reported in interest in income (loss) of equity method investments. Interest in income (loss) of equity method investments was $(4) million in 2020, compared to $10 million in 2019. The decrease was attributable to negative investment returns realized by Harrington.
Restricted Assets
Refer to Item 8, Note 5(g) to the Consolidated Financial Statements 'Investments'.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity is a measure of a company’s ability to generate cash flows sufficient to meet the short-term and long-term cash requirements of its business operations. We manage liquidity at the holding company and operating subsidiary level.
Holding Company
As a holding company, AXIS Capital has no operations of its own and its assets consist primarily of investments in its subsidiaries. Accordingly, AXIS Capital’s future cash flows depend on the availability of dividends or other statutorily permissible distributions, such as returns of capital, from its subsidiaries. The ability to pay such dividends and/or distributions is limited by the applicable laws and regulations of the various countries and states in which AXIS Capital’s subsidiaries operate (refer to Item 8, Note 21 to the Consolidated Financial Statements 'Statutory Financial Information' for further details), as well as the need to maintain capital levels to adequately support insurance and reinsurance operations, and to preserve financial strength ratings issued by independent rating agencies. During 2020, AXIS Capital received $350 million (2019: $250 million) of distributions from its subsidiaries. AXIS Capital’s primary uses of funds are dividend payments to common and preferred shareholders, interest and principal payments on debt, capital investments in subsidiaries, and payment of corporate operating expenses. We believe the dividend/distribution capacity of AXIS Capital’s subsidiaries, which was $0.9 billion at December 31, 2020, will provide AXIS Capital with sufficient liquidity for the foreseeable future.
Operating Subsidiaries
AXIS Capital’s operating subsidiaries primarily derive cash from the net inflow of premiums less claim payments related to underwriting activities and from net investment income. Historically, these cash receipts have been sufficient to fund the operating expenses of these subsidiaries, as well as to fund dividend payments to AXIS Capital. The subsidiaries’ remaining cash flows are generally invested in our investment portfolio. The remaining cash flows have also been used to fund common share repurchases and to fund acquisitions in recent periods.
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 losses are paid. However, the amount of cash required to fund loss payments can fluctuate significantly from period to period, due to the low frequency/high severity nature of certain types of business we write.
Consolidated cash flows from operating, investing and financing activities in the last three years were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Total cash provided by (used in)(1) | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Operating activities | $ | 343,503 | | | $ | 199,004 | | | $ | 10,773 | | |
| Investing activities | 489,921 | | | (774,315) | | | 638,554 | | |
| Financing activities | (908,803) | | | 277,510 | | | (186,207) | | |
| Effect of exchange rate changes on cash | 2,154 | | | 44,238 | | | 3,114 | | |
| Increase (decrease) in cash and cash equivalents | $ | (73,225) | | | $ | (253,563) | | | $ | 466,234 | | |
| | | | | | | |
(1) Refer to Item 8, 'Consolidated Statements of Cash Flows' for further details.
•Net cash provided by operating activities was $344 million in 2020 compared to $199 million in 2019. Cash inflows from insurance and reinsurance operations typically include premiums, net of acquisition costs, and reinsurance recoverables. Cash outflows principally include payments of losses and loss expenses together with payments of premiums to reinsurers and operating expenses. Cash provided by operating activities can fluctuate due to timing differences between the collection of premiums and reinsurance recoverables and the payment of losses and loss expenses, and the payment of premiums to reinsurers. Operating cash inflows increased in 2020 compared to 2019, primarily attributable to an increase in premiums received, a decrease in operating expenses, and a decrease in paid income taxes, partially offset by an increase in payments of losses and loss expenses, and a decrease in interest and dividends received from our fixed income portfolio.
•Investing cash inflows in 2020 principally related to the net proceeds from the sale and redemption of fixed maturities of $816 million, partially offset by net purchases of mortgage loans of $160 million, short-term investments of $123 million, and other assets of $45 million. Investing cash inflows in 2019 principally related to the net purchases of fixed maturities of $693 million, net purchases of equity securities of $22 million, partially offset by net proceeds from the sale of other investments of $31 million.
•Financing cash outflows were due to the repayment of $500 million 5.875% Senior Notes, the redemption of $225 million Series D preferred shares, and dividends paid to common and preferred shareholders of $173 million in 2020 (2019: $180 million). In 2019, financing cash inflows were due to net proceeds from the issuance of $300 million 3.900% Senior Notes and $425 million of Junior Subordinated Notes, and financing cash outflows primarily related to the repayment of $250 million 2.650% Senior Notes. Cash outflows also included common share repurchases associated with the vesting of share-settled restricted stock units of $10 million in 2020 (2019: $10 million). The declaration and payment of future dividends and share repurchases is at the discretion of our Board of Directors and will depend on many factors including, but not limited to, our net income, financial condition giving due consideration to the impact of the COVID-19 pandemic, business needs, capital and surplus requirements of our operating subsidiaries and regulatory and contractual restrictions, including those set forth in our credit facilities (refer to 'Capital Resources – Share Repurchases' below for further details).
We have generated positive operating cash flows in all years since 2003, with the exception of 2009 which was impacted by the global financial crisis. These positive cash flows were generated even with the recognition of significant catastrophe and weather-related losses including the impact of the COVID-19 pandemic in 2020.
Net losses and loss expenses, gross of reinstatement premiums, included estimates of ultimate losses for catastrophe and weather-related losses of $773 million in 2020, $351 million in 2019 and $440 million in 2018. There remains significant uncertainty associated with estimates of ultimate losses for certain of these events (refer to 'Underwriting Results – Insurance segment – Current Accident Year Loss' and 'Underwriting Results – Reinsurance segment – Current Accident Year Loss Ratio' for further details), as well as the timing of the associated cash outflows.
Should claim payment obligations accelerate beyond our ability to fund payments from operating cash flows, we would utilize cash and cash equivalent balances and/or liquidate a portion of our investment portfolio. Our investment portfolio is heavily weighted towards conservative, high quality and highly liquid securities. We expect that, if necessary, approximately $13.0 billion of cash and invested assets at December 31, 2020 could be available in one to three business days under normal market conditions; of this amount, $4.9 billion related to restricted assets, which primarily support our obligations in regulatory jurisdictions where we operate as a non-admitted carrier (refer to Item 8, Note 5(g) to the Consolidated Financial Statements 'Investments' for further details). For context, at January 1, 2021. our largest 1-in-250 year return period, single occurrence, single-zone modeled probable maximum loss (Southeast U.S. Hurricane) was approximately $0.4 billion, net of reinsurance. Claim payments pertaining to such an event would be paid out over a period spanning many months. Our internal risk tolerance framework aims to limit the loss of capital due to a single event, and the loss of capital that would occur from multiple but perhaps smaller events, in any year (refer to Item 1 'Risk and Capital Management' for further details).
We expect that cash flows generated from operations, combined with the liquidity provided by our investment portfolio, to be sufficient to cover required cash outflows and other contractual commitments through the foreseeable future (refer to 'Contractual Obligations and Commitments' below for further details).
Capital Resources
In addition to common equity, we have utilized other external sources of financing, including debt, preferred shares, and letter of credit facilities to support our business operations. We believe that we hold sufficient capital to allow us to take advantage of market opportunities and to maintain our financial strength ratings, as well as to comply with various local statutory regulations. We monitor capital adequacy on a regular basis and will seek to adjust our capital base (up or down) according to the needs of our business (refer to Item 1 'Risk and Capital Management' for further details).
The following table summarizes consolidated capital:
| | | | | | | | | | | | | | | | | |
| | | | | |
| At December 31, | 2020 | | 2019 | |
| | | | | |
| Debt | $ | 1,309,695 | | | $ | 1,808,157 | | |
| | | | | |
| Preferred shares | 550,000 | | | 775,000 | | |
| Common equity | 4,745,694 | | | 4,769,008 | | |
| Shareholders’ equity | 5,295,694 | | | 5,544,008 | | |
| Total capital | $ | 6,605,389 | | | $ | 7,352,165 | | |
| | | | | |
| Ratio of debt to total capital | 19.8 | % | | 24.6 | % | |
| Ratio of debt and preferred equity to total capital | 28.2 | % | | 35.1 | % | |
| | | | | |
We finance our operations with a combination of debt and equity capital. Debt to total capital, and debt and preferred equity to total capital ratios, provide an indication of our capital structure, along with some insight into our financial strength.
While the impact of the COVID-19 pandemic and catastrophe and weather-related losses have reduced common shareholders' equity, we believe that our financial flexibility remains strong, and adjustments are made if there are developments that are different from previous expectations.
Debt
Debt represents the 5.150% Senior Notes issued in 2014, which will mature in 2045, the 4.000% Senior Notes issued in 2017, which will mature in 2027, the 3.900% Senior Notes issued in 2019, which will mature in 2029, and the 4.900% Junior Subordinated Notes issued in 2019, which will mature in 2040 (refer to Item 8, Note 10(a) to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details).
The preparation3.900% Senior Notes and the 4.900% Junior Subordinated Notes were issued to finance the repayment of unsecured senior notes of $500 million that matured in June 2020 and to finance the redemption of Series D preferred shares on January 17, 2020 (refer to 'Preferred Shares' below for further details).
Preferred Shares
Series D Preferred Shares
On May 20, 2013, we issued $225 million of 5.50% Series D preferred shares with a liquidation preference of $25.00 per share. Dividends on the Series D preferred shares were non-cumulative. To the extent declared, dividends accumulated, with respect to each dividend period, in an amount per share equal to 5.50% of the liquidation preference per annum. On January 17, 2020, we redeemed all outstanding Series D preferred shares, for an aggregate liquidation preference of $225 million (refer to Item 8, Note 14 to the Consolidated Financial Statements 'Shareholder's Equity' for further details).
Series E Preferred Shares
On November 7, 2016, we issued $550 million of 5.50% Series E preferred shares with a liquidation preference of $2,500 per share (equivalent to $25 per depositary share). Dividends on the Series E preferred shares are non-cumulative. To the extent declared, dividends accumulate, with respect to each dividend period, in an amount per share equal to 5.50% of the liquidation preference per annum (equivalent to $137.50 per Series E preferred share and $1.375 per depositary share). We may redeem these shares on or after November 7, 2021 at a redemption price of $2,500 per Series E preferred share (equivalent to $25 per depositary share).
Secured Letter of Credit Facilities
We routinely enter into agreements with financial institutions to obtain secured letter of credit facilities. These facilities are primarily used for the issuance of letters of credit, in the normal course of operations, to certain insurance and reinsurance entities that purchase reinsurance protection from us. These letters of credit allow those operations to take credit, under local insurance regulations, for reinsurance obtained in jurisdictions where AXIS Capital’s subsidiaries are not licensed or otherwise admitted as an insurer. The value of our letters of credit outstanding is driven by, among other factors, the amount of unearned premiums, development of loss reserves, the payment patterns of loss reserves, the expansion of our business and the loss experience of that business. A portion of these facilities may also be used for liquidity purposes.
On March 28, 2020, certain of AXIS Capital's operating subsidiaries (the "Participating Subsidiaries") amended an existing $250 million secured letter of credit facility with Citibank Europe plc (the "$250 million Facility") to extend the expiration date to March 31, 2021.
On December 24, 2019, the Participating Subsidiaries amended an existing $500 million secured letter of credit facility with Citibank Europe plc (the "$500 million Facility") to extend the expiration date to December 31, 2023.
Letters of credit issued under the $250 million Facility and the $500 million Facility are principally to be used to support the reinsurance obligations of the Participating Subsidiaries. These facilities are subject to certain covenants, including the requirement to maintain sufficient collateral to cover the obligations outstanding under the facilities. Such obligations include contingent reimbursement obligations for outstanding letters of credit and fees payable to Citibank. In the event of default, Citibank may exercise certain remedies, including the exercise of control over pledged collateral and the termination of the facility to any or all of the Participating Subsidiaries.
At December 31, 2020, letters of credit outstanding were $339 million (refer to Item 8, Note 10 to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details).
Common Equity
During the year ended December 31, 2020, common equity decreased by $23 million. The following table reconciles opening and closing common equity positions:
| | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Year ended December 31, | | 2020 | | 2019 | |
| | | | | | |
| Common equity - opening | | $ | 4,769,008 | | | $ | 4,255,071 | | |
| Net income (loss) | | (120,424) | | | 323,473 | | |
| Change in unrealized gains on available for sale investments, net of tax | | 239,114 | | | 349,886 | | |
| Share repurchases | | (10,382) | | | (10,165) | | |
| Common share dividends | | (142,405) | | | (138,487) | | |
| Preferred share dividends | | (30,250) | | | (41,112) | | |
| Share-based compensation expense | | 35,574 | | | 29,675 | | |
| Foreign currency translation adjustment | | 3,571 | | | (1,066) | | |
| | | | | | |
| | | | | | |
| Other | | 1,888 | | | 1,733 | | |
| Common equity - closing | | $ | 4,745,694 | | | $ | 4,769,008 | | |
| | | | | | |
Share Repurchases
During 2020, we repurchased 194,000 common shares from employees to satisfy withholding tax liabilities related to the vesting of share-settled restricted stock units granted under our 2007 and 2017 Long-Term Equity Compensation Plans for a total cost of $10 million. A common share repurchase plan has not yet been authorized for 2021.
Shelf Registrations
On November 19, 2019, we filed an unallocated universal shelf registration statement with the SEC, which became effective on filing. Pursuant to the shelf registration, we may issue an unlimited amount of equity, debt, warrants, purchase contracts or a combination of these securities. Our intent and ability to issue securities pursuant to this registration statement will depend on market conditions at the time of any proposed offering.
Financial Strength Ratings
Our principal insurance and reinsurance operating subsidiaries are assigned financial strength ratings from internationally recognized rating agencies, including Standard & Poor’s, A.M. Best, and Moody’s Investors Service. These ratings are publicly announced and are available directly from the agencies, as well as on our website.
Financial strength ratings represent the opinions of the rating agencies on the overall financial strength of a company and its capacity to meet the obligations of its insurance and reinsurance contracts. Independent ratings are one of the important factors that establish a competitive position in insurance and reinsurance markets. The rating agencies consider many factors in determining the financial strength rating of an insurance company, including the relative level of statutory surplus necessary to support the business operations of the company. These ratings are based on factors considered by the rating agencies to be relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Ratings are not recommendations to buy, sell or hold securities.
The following are the most recent financial strength ratings from internationally recognized agencies in relation to our principal insurance and insurance operating subsidiaries:
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| Rating agency | | Agency’s description of rating | | Rating and outlook | | Agency’s rating
definition | | Ranking of rating | |
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| Standard & Poor’s | | An "opinion about the financial security characteristics of an insurance organization, with respect to its ability to pay under its insurance policies and contracts, in accordance with their terms". | | A+ (Negative) (1) | | "Strong capacity to meet its financial commitments" | | The ‘A’ category is the third highest out of ten major rating categories. The second through eighth major rating categories may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. | |
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| A.M. Best | | An "opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations". | | A (Stable) (2) | | "Excellent ability to meet ongoing insurance obligations" | | The ‘A’ category is the third highest rating out of fourteen. Ratings outlooks (‘Positive’, ‘Negative’ and ‘Stable’) are assigned to indicate a rating’s potential direction over an intermediate term, generally defined as 36 months. | |
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| Moody’s Investors Service | | "Opinions of the ability of insurance companies to pay punctually senior policyholder claims and obligations." | | A2 (Negative) (3)
| | "Offers good financial security" | | The ‘A’ category 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. | |
(1) On May 11, 2020, Standard & Poor's revised its outlook from stable to negative due to unfavorable trends in operating performance.
(2) On May 5, 2020, A.M. Best revised its rating and outlook from A+ and negative to A and stable, respectively. The revised rating was based on unfavorable trends in operating performance over the past five years, particularly emanating from the insurance segment. The revised outlook continues to reflect our strong balance sheet, favorable business profile and appropriate risk management practices.
(3) In April 2019, Moody's Investor Service revised its outlook from stable to negative reflecting higher operational and financial leverage and lower capitalization relative to peers.
Contractual Obligations and Commitments
At December 31, 2020, contractual obligations and commitments by period due were:
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| | | Payment due by period | |
| Contractual obligations and commitments | | Total | | Less than 1
year | | 1-3 years | | 3-5 years | | More than
5 years | |
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| Operating activities | | | | | | | | | | | |
| Estimated gross losses and loss expenses payments(1) | | $ | 13,926,766 | | | $ | 3,839,180 | | | $ | 4,618,273 | | | $ | 2,400,797 | | | $ | 3,068,516 | | |
| Operating lease obligations(2) | | 140,263 | | | 17,215 | | | 35,044 | | | 21,990 | | | 66,014 | | |
| Investing activities | | | | | | | | | | | |
| Unfunded investment commitments(3) | | 634,206 | | | 249,609 | | | 112,109 | | | 125,563 | | | 146,925 | | |
| Financing activities | | | | | | | | | | | |
| Debt (principal payments)(4) | | 1,325,000 | | | — | | | — | | | — | | | 1,325,000 | | |
| Debt (interest payments)(4)(5) | | 863,561 | | | 60,680 | | | 121,539 | | | 121,796 | | | 559,546 | | |
| Total | | $ | 16,889,796 | | | $ | 4,166,684 | | | $ | 4,886,965 | | | $ | 2,670,146 | | | $ | 5,166,001 | | |
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(1)We are obligated to pay claims for specified loss events covered by the insurance and reinsurance contracts that we write. Loss payments represent our most significant future payment obligation. In contrast to our other contractual obligations, cash payments are not determinable from the terms specified within the underlying contracts. Our best estimate of reserve for losses and loss expenses is reflected in the table above. Actual amounts and timing may differ materially from our best estimate (refer to ‘Critical Accounting Estimates – Reserve for Losses and Loss Expenses’ for further details). We have not taken into account corresponding reinsurance recoverable on unpaid amounts that would be due to us.
(2)In the ordinary course of business, we renew and enter into new leases for office space which expire at various dates (refer to Item 8, Note 12 to the Consolidated Financial Statements 'Leases' for further details).
(3)We have $588 million of unfunded investment commitments related to our other investments portfolio, which are callable by our investment managers (refer to Item 8, Note 5(c) to the Consolidated Financial Statements 'Investments' for further details). In addition, we have $46 million of unfunded commitments related to our commercial mortgage loans portfolio.
(4)Refer to Item 8, Note 10(a) to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details.
(5)Debt (interest payments) includes $15 million of unamortized discount and debt issuance expenses.
CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements requires managementinclude certain amounts that are inherently uncertain and judgmental in nature. As a result, we are required to make assumptions and best estimates and assumptions that affectin order to determine the reported amountvalues. We consider an accounting estimate to be critical if: (1) it requires that significant assumptions be made in order to deal with uncertainties and (2) changes in the estimate could have a material impact on our results of operations, financial condition or liquidity.
We believe that the material items requiring such subjective and complex estimates are:
•reserves for losses and loss expenses;
•reinsurance recoverable on unpaid losses and loss expenses, including the allowance for expected credit losses;
•gross premiums written and net premiums earned;
•fair value measurements of financial assets and liabilitiesliabilities; and disclosure of contingent assets and liabilities at
•the date ofallowance for credit losses associated with available for sale securities.
Significant accounting policies are also important to understanding the consolidated financial statements (refer to Item 8, Note 2 to the Consolidated Financial Statements 'Basis of Presentation and the reported amounts of revenues and expenses during the reporting period. While management believesSignificant Accounting Policies' for further details).
We believe that the amounts included in the consolidated financial statements reflect itsmanagement's best estimates and assumptions, actual results could differ fromjudgment. However, factors such as those estimates. The Company’s principal estimates include:described in Item 1A 'Risk Factors' could cause actual events or results to differ materially from the underlying assumptions and estimates which could lead to a material adverse impact on our results of operations, financial condition or liquidity.
Reserve for Losses and Loss Expenses
Overview
We believe the most significant accounting judgment we make is the estimate of reserve for losses and loss expenses;expenses ("loss reserves"). Loss reserves represent management’s estimate of the unpaid portion of our ultimate liability for losses and loss expenses ("ultimate losses") for insured and reinsured events that have occurred at or before the balance sheet date. Loss reserves reflect claims that have been reported ("case reserves") to us and claims that have been incurred but not reported ("IBNR") to us. Loss reserves represent our best estimate of what the ultimate settlement and administration of claims will cost, based on our assessment of facts and circumstances known at that particular point in time.
Loss reserves are not an exact calculation of the liability but instead, are complex estimates. The process of estimating loss reserves involves a number of variables (refer to 'Selection of Reported Reserves – Management's Best Estimate' below for further details). We review estimates of loss reserves each reporting period and consider all significant facts and circumstances known at that particular point in time. As additional experience and other data become available and/or laws and legal interpretations change, we may adjust previous estimates of loss reserves. Adjustments are recognized in the period in which they are determined, therefore they can impact that period's underwriting results either favorably (indicating that current estimates are lower than previous estimates) or adversely (indicating that current estimates are higher than previous estimates).
Case Reserves
With respect to insurance business, we are generally notified of losses by our insureds and/or their brokers. Based on this information, our claims personnel estimate ultimate losses arising from the claim, including the cost of administering the claims settlement process. These estimates reflect the judgment of our claims personnel based on general reserving practices, the experience and knowledge of such personnel regarding the nature of the specific claim and, where appropriate, the advice of legal counsel, loss adjusters and other relevant consultants.
With respect to reinsurance business, we are generally notified of losses by ceding companies and/or their brokers. For excess of loss contracts, we are typically notified of insured losses on specific contracts and record a case reserve for the estimated ultimate liability arising from the claim. For contracts written on a proportional basis, we typically receive aggregated claims information and record a case reserve for the estimated ultimate liability arising from the claim based on that information. Proportional reinsurance contracts typically require that losses in excess of pre-defined amounts be separately notified so we can adequately evaluate them. Our claims department evaluates each specific loss notification we receive and records additional case reserves when a ceding company’s reserve for a claim is not considered adequate. We also undertake an extensive program of cedant audits, using outsourced legal and industry experience where necessary. This allows us to review cedants’ claims administration practices to ensure that reserves are consistent with exposures, adequately established, and properly reported in a timely manner.
IBNR
The estimation of IBNR is necessary due to potential development on reported claims and the time lag between when a loss event occurs and when it is actually reported, which is referred to as a reporting lag. Reporting lags may arise from a number of factors, including but not limited to, the nature of the loss, the use of intermediaries and complexities in the claims adjusting process. As we do not have specific information on IBNR, it must be estimated. IBNR is calculated by deducting incurred losses (i.e. paid losses and case reserves) from management’s best estimate of ultimate losses. In contrast to case reserves, which are established at the contract level, IBNR reserves are generally estimated at an aggregate level and cannot be identified as reserves for a particular loss event or contract (refer to 'Reserving for Significant Catastrophic Events' below for further details).
Reserving Methodology
Sources of Information
Our quarterly loss reserving process begins with the collection and analysis of paid and incurred claim data for each of the segments. The segmental data is disaggregated by reserve class and further disaggregated by underwriting year and accident year. Underwriting year or accident year information is used to analyze our business and to estimate loss reserves. Reserve classes are selected to ensure that the underlying contracts have homogeneous loss development characteristics, while remaining large enough to make the estimation of trends credible. Reserve classes are reviewed on a regular basis and adjusted over time as our business evolves. The paid and incurred claim data, in addition to industry benchmarks, serves as a key input to many of the methods employed by our actuaries. The relative weights assigned to our historical loss data versus industry
data vary based on a number of factors including our historical track record and the development profile for the reserve class being evaluated (refer to 'Claim Tail Analysis' below for further details).
Actuarial Analysis
Multiple actuarial methods are available to estimate ultimate losses. Each method has its own assumptions and its own advantages and disadvantages, with no single estimation method being better than the others in all situations and no one set of assumption variables being meaningful for all reserve classes. The relative strengths and weaknesses of the particular estimation methods when applied to a particular group of claims can also change over time.
The following is a brief description of the reserve estimation methods commonly employed by our actuaries including a discussion of their particular strengths and weaknesses:
•Expected Loss Ratio Method ("ELR Method"): This method estimates ultimate losses for an accident year or underwriting year by applying an expected loss ratio to the earned or written premium for that year. Generally, expected loss ratios are based on one or more of (a) an analysis of historical loss experience to date, (b) pricing information and (c) industry data, adjusted as appropriate, to reflect changes in rates, loss and exposure trends, and terms and conditions. This method is insensitive to actual incurred losses for the accident year or underwriting year in question and is, therefore, often useful in the early stages of development when very few losses have been incurred. Conversely, the lack of sensitivity to incurred/paid losses for the accident year or underwriting year in question means that this method is usually inappropriate in later stages of an accident year or underwriting year’s development.
•Loss Development Method (also referred to as the "Chain Ladder Method" or "Link Ratio Method"): This method assumes that the losses incurred/paid for each accident year or underwriting year at a particular development stage follow a relatively similar pattern. It assumes that on average, every accident year or underwriting year will display the same percentage of ultimate losses incurred/paid at the same point in time after the inception of that year. The percentages incurred/paid are established for each development stage (e.g. 12 months, 24 months, etc.) after examining averages from historical loss development data and/or external industry benchmark information. Ultimate losses are then estimated by multiplying the actual incurred/paid losses by the reciprocal of the established incurred/paid percentage. The strengths of this method are that it reacts to loss emergence/payments and that it makes full use of historical claim emergence/payment experience. However, this method has weaknesses when the underlying assumption of stable loss development/payment patterns is not valid. This could be the consequence of changes in business mix, claim inflation trends or claim reporting practices and/or the presence of large claims, among other things. Furthermore, this method tends to produce volatile estimates of ultimate losses where there is volatility in the underlying incurred/paid patterns. In particular, where the expected percentage of incurred/paid losses is low, small deviations between actual and expected claims can lead to very volatile estimates of ultimate losses. As a result, this method is often unsuitable at early development stages for an accident year or underwriting year.
•Bornhuetter-Ferguson Method ("BF Method"): This method can be seen as a combination of the ELR and Loss Development Methods, under which the Loss Development Method is given progressively more weight as an accident year or underwriting year matures. The main advantage of the BF Method is that it provides a more stable estimate of ultimate losses than the Loss Development Method at earlier stages of development, while remaining more responsive to emerging loss development than the ELR Method. In addition, the BF Method allows for the incorporation of external market information through the use of expected loss ratios, whereas the Loss Development Method does not incorporate such information.
As part of our quarterly loss reserving process, our actuaries employ the estimation method(s) that they believe will produce the most reliable estimate of ultimate losses, at that particular evaluation date, for each reserve class and accident year or underwriting year combination. Often, this is a blend (i.e. weighted average) of the results of two or more appropriate actuarial methods. These ultimate loss estimates are generally utilized to evaluate the adequacy of ultimate loss estimates for previous accident or underwriting years, established in the prior reporting period. For the initial estimate of the current accident or underwriting year, the available claim data is typically insufficient to produce a reliable estimate of ultimate losses. As a result, initial estimates for an accident or underwriting year is generally based on the ELR Method for longer tailed lines and a BF method for shorter tailed lines. The initial ELR for each reserve class is established collaboratively by our actuaries, underwriters and management at the start of the year as part of the planning process, taking into consideration prior accident years’ or underwriting years' experience and industry benchmarks, adjusted after considering factors such as loss and exposure trends, rate differences, changes in contract terms and conditions, business mix changes and other known differences between the current year and prior accident or underwriting years. The initial expected loss ratios for a given accident or underwriting year may be modified over time if the underlying assumptions, such as loss development or premium rate changes, differ from the original assumptions.
Key Actuarial Assumptions
The use of the above actuarial methods requires us to make certain explicit assumptions, the most significant of which are: (1) expected loss ratios and (2) loss development patterns.
In earlier years, we placed significant reliance on industry benchmarks in establishing expected loss ratios and selecting loss development patterns. Over time, we have placed more reliance on our historical loss experience in establishing these ratios and selecting these patterns where we believe the weight of our experience has become sufficiently credible for consideration. The weight given to our experience differs for each of the three claim tail classes (refer to 'Claim Tail Analysis' below for further details). In establishing expected loss ratios for the insurance segment, we give consideration to a number of other factors, including exposure trends, rate adequacy on new and renewal business, ceded reinsurance costs, changes in claims emergence and our underwriters’ view of terms and conditions in the market environment. For the reinsurance segment, expected loss ratios are based on a contract-by-contract review, which considers information provided by clients together with estimates provided by our underwriters and actuaries about the impact of changes in pricing, terms and conditions and coverage. We also have considered the market experience of some classes of business as compiled and analyzed by an independent actuarial firm, as appropriate.
Claim Tail Analysis
Gross loss reserves for each of the reportable segments, segregated between case reserves and IBNR and by reserve class were as shown below. Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for mapping of the Company's lines of business to reserve classes and the expected claim tails.
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| | 2020 | | 2019 | |
| At December 31, | Case reserves | | IBNR | | Total | | Case reserves | | IBNR | | Total | |
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| Insurance segment: | | | | | | | | | | | | |
| Property and other | $ | 704,107 | | | $ | 642,413 | | | $ | 1,346,520 | | | $ | 655,262 | | | $ | 327,475 | | | $ | 982,737 | | |
| Marine | 221,243 | | | 317,869 | | | 539,112 | | | 235,549 | | | 281,677 | | | 517,226 | | |
| Aviation | 132,613 | | | 38,018 | | | 170,631 | | | 116,932 | | | 31,445 | | | 148,377 | | |
| Credit and political risk | 8,917 | | | 152,134 | | | 161,051 | | | 5,905 | | | 124,109 | | | 130,014 | | |
| Professional lines | 801,565 | | | 2,279,712 | | | 3,081,277 | | | 806,780 | | | 2,041,317 | | | 2,848,097 | | |
| Liability | 376,486 | | | 1,635,421 | | | 2,011,907 | | | 396,837 | | | 1,473,280 | | | 1,870,117 | | |
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| Total Insurance | 2,244,931 | | | 5,065,567 | | | 7,310,498 | | | 2,217,265 | | | 4,279,303 | | | 6,496,568 | | |
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| Reinsurance segment: | | | | | | | | | | | | |
| Property and other | 1,086,265 | | | 1,027,316 | | | 2,113,581 | | | 879,301 | | | 1,186,655 | | | 2,065,958 | | |
| Credit and surety | 149,778 | | | 157,196 | | | 306,974 | | | 125,029 | | | 190,368 | | | 315,397 | | |
| Professional lines | 516,011 | | | 673,082 | | | 1,189,093 | | | 429,576 | | | 688,439 | | | 1,118,015 | | |
| Motor | 809,389 | | | 540,623 | | | 1,350,012 | | | 778,534 | | | 516,148 | | | 1,294,681 | | |
| Liability | 525,526 | | | 1,131,082 | | | 1,656,608 | | | 431,211 | | | 1,030,252 | | | 1,461,462 | | |
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| Total Reinsurance | 3,086,969 | | | 3,529,299 | | | 6,616,268 | | | 2,643,651 | | | 3,611,862 | | | 6,255,513 | | |
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| Total | $ | 5,331,900 | | | $ | 8,594,866 | | | $ | 13,926,766 | | | $ | 4,860,916 | | | $ | 7,891,165 | | | $ | 12,752,081 | | |
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In order to capture the key dynamics of loss reserve development and potential volatility, reserve classes should be considered according to their potential expected length of loss emergence and settlement, generally referred to as the "tail". We consider our business to consist of three claim tail classes, short-tail, medium-tail and long-tail. Favorable development on prior accident year reserves indicates that current estimates are lower than previous estimates, while adverse development on prior accident year reserves indicates that current estimates are higher than previous estimates. Below is a discussion of the specifics of our loss reserve process as it applies to each claim tail class, as well as commentary on the factors contributing to our historical loss reserve development for each class.
Short-tail Business
Short-tail business generally includes exposures for which losses are usually known and paid within a relatively short period of time after the underlying loss event has occurred. Our short-tail business primarily relates to property coverages and includes terrorism, accident and health, discontinued lines - Novae, marine, and aviation hull and war business in the insurance segment, together with the catastrophe, property, engineering, agriculture, marine and aviation, accident and health, and discontinued lines - Novae business in the reinsurance segment.
The key actuarial assumptions for short-tail business in early accident years were primarily developed with reference to industry benchmarks for expected loss ratios and loss development patterns. As our historical loss experience amassed, it gained credibility and became relevant for consideration in establishing these key actuarial assumptions. As a result, we gradually increased the weighting assigned to our historical loss experience in selecting the expected loss ratios and loss development patterns utilized to establish estimates of ultimate losses for an accident year. Due to the relatively short reporting and settlement patterns for short-tail business, we generally place more weight on experience-based methods and other qualitative considerations in establishing reserves for recent and more mature accident years (refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for detail on the reserve classes, the expected claim tails, and prior year development).
Although estimates of ultimate losses for short-tail business are inherently more certain than for medium and long-tail business, significant judgment is still required. For example, much of our excess insurance and excess of loss reinsurance business has high attachment points, therefore, it is often difficult to estimate whether claims will exceed those attachment points. In addition, the inherent uncertainties relating to catastrophe events further add to the complexity of estimating potential exposure. Further, we use managing general agents ("MGAs") and other producers for certain business in the insurance segment which can delay the reporting of loss information to us. We expect that the majority of development for an accident year or underwriting year will be recognized in the subsequent one to three years.
Medium-tail Business
Medium-tail business generally has claim reporting and settlement periods that are longer than those of short-tail reserve classes. Our medium-tail business primarily consists of insurance and reinsurance professional lines, reinsurance credit and surety, aviation liability business in the insurance and discontinued lines - Novae in the insurance segment. We also consider insurance credit and political risk business to have a medium tail, due to the complex nature of claims and the potential additional time that may be required to realize subrogation assets.
For our earliest accident and underwriting years, initial key actuarial expected loss ratio and loss development assumptions were established utilizing industry benchmarks. Due to the longer claim tail, the length of time required to develop credible loss history for use in the loss reserving process is greater for medium-tail business than for short-tail business. Our reserving approach for medium-tail business is tailored by line of business, with significant lines of business being specifically addressed below:
•Insurance and Reinsurance Professional Lines
For professional lines business and discontinued lines - Novae, claim payment and reporting patterns are typically medium to long-tail in nature. This business is predominantly written on a claims-made basis.
With respect to key actuarial assumptions, we rely on our loss experience when establishing expected loss ratios and selected loss development patterns. 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 or underwriting year matures. Consequently, initial loss reserves for an accident year or underwriting year are generally based on 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 experience until selections are based almost exclusively on experience-based methods. We evaluate the appropriateness of the transition to experience-based methods at the reserve class level, commencing this transition when we believe that our incurred loss development is sufficient to produce meaningful actuarial indications. The rate at which we transition fully to sole reliance on experience-based methods can vary by reserve class and by year, depending on our assessment of the stability and relevance of such indications. For some professional lines in the insurance segment, we also rely on the evaluation of the open claim inventory in addition to the commonly employed actuarial methods when establishing reserves.
Our transition from the ELR method to experience-based methods began in 2008, when we commenced gradual transition for the 2004 and prior accident years. As our loss history continued to develop, the transition was expanded to include additional accident years (refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for detail on the reserve classes, the expected claim tails, and prior year development).
•Reinsurance Credit and Surety
For reinsurance credit and surety business, initial and most recent underwriting year loss projections are generally based on the ELR method, with consideration given to qualitative factors. Given that there is a quicker and more stable reporting pattern for trade credit and mortgage business, we generally commence the transition to experience-based methods for these lines of business sooner than for surety business.
•Insurance Credit and Political Risk
Refer to 'Reserving for Credit and Political Risk Business' below for a more detailed discussion of specific loss reserve issues related to this business. When considering prior year reserve development for this line of business, it is important to note that the multi-year nature of the credit business distorts loss ratios when a single accident year is considered in isolation. In recent years, the average term of these contracts has been four to five years. Premiums for these contracts generally earn evenly over the contract term, therefore, are reflected in multiple accident years. In contrast, losses incurred on these contracts, which can be characterized as low in frequency and high in severity, are reflected in a single accident year.
The estimation of the value of recoveries on credit and political risk business requires significant management judgment. At December 31, 2020, estimated recoveries on credit and political risk business were $52 million (2019: $35 million).
Long-tail Business
In contrast to short and medium-tail business, the claim tail for long-tail business is expected to be notably longer, as claims are often reported and ultimately paid or settled years, or even decades, after the related loss events occur. Our long-tail business primarily relates to liability business written in the insurance and reinsurance segments, and reinsurance motor business, and discontinued lines - Novae in the insurance and reinsurance segments.
As a general rule, estimates of accident year or underwriting year ultimate losses for long-tail business are notably more uncertain than those for short and medium-tail business. Factors that contribute additional uncertainty to estimates for long-tail business include, but are not limited to:
•more significant weight given to industry benchmarks in forming our key actuarial assumptions;
•potential volatility of actuarial estimates, given the number of years of development it takes to produce a meaningful incurred loss as a percentage of ultimate losses;
•inherent uncertainties about loss trends, claims inflation (e.g. medical, judicial, social) and general economic conditions; and
•the possibility of future litigation, legislative or judicial change that may impact future loss experience relative to the prior industry loss experience relied on in reserve estimation.
To date, key actuarial assumptions for long-tail business have been derived from a combination of industry benchmarks supplemented by our historical loss experience. While we consider industry benchmarks that we believe reflect the nature and coverage of our business, actual loss experience may differ from the benchmarks based on industry averages.
Due to the length of the development tail for this business, reserve estimates for most accident years and underwriting years are predominantly based on the BF or ELR method and the consideration of qualitative factors. As part of our quarterly loss reserving process, we monitor actual paid and incurred loss emergence relative to expected loss emergence based on selected loss development patterns. The drivers of any unfavorable loss emergence are investigated and, as a result, have led to an immediate recognition of adverse development in some instances.
Prior to the fourth quarter of 2012, we did not recognize any favorable loss emergence. As a result, during some periods, we recognized net adverse prior year reserve development for insurance liability business in light of unfavorable loss emergence for certain reserve class and accident year combinations.
Commencing with the fourth quarter 2012 loss reserving process, we began to give weight to actuarial methods that reflect our experience for liability business as we believed that our oldest accident years were at a stage of expected development where such methods would produce meaningful actuarial indications.
In 2020, we continued to give weight to experience-based methods on the earlier years for insurance and reinsurance liability lines of business.
Reserving for Credit and Political Risk Business
Our insurance credit and political risk business provides credit and political risk insurance products for banks, commodity traders, corporations and multilateral and export credit agencies. Cover is provided for a range of risks including sovereign default, credit default, political violence, currency inconvertibility and non-transfer, expropriation, aircraft non-repossession and contract frustration due to political events.
Claims for this business tend to be characterized by their severity risk, as opposed to their frequency risk therefore, claim payment and reporting patterns are anticipated to be volatile. Under the notification provisions of our credit insurance policies, we anticipate being advised of an insured event within a relatively short time period. Consequently, we generally estimate ultimate losses based on a contract-by-contract analysis which considers the contracts’ terms, the facts and circumstances of underlying loss events and qualitative input from claims managers.
An important and distinguishing feature of many of these contracts is the contractual right, subsequent to payment of a claim to an insured, to be subrogated to, or otherwise have an interest in, the insured’s rights of recovery under an insured loan or facility agreement. These estimated recoveries are recorded as an offset to credit and political risk loss reserves. The lag between the date of a claim payment and the ultimate recovery from the corresponding security can result in negative case reserves at a point in time (as was the case at December 31, 2020 and 2019). The nature of the underlying collateral is specific to each transaction therefore we estimate the value of this collateral on a contract-by-contract basis. This valuation process is inherently subjective and involves the application of management’s judgment because active markets for the collateral often do not exist. Estimates of values are based on numerous inputs, including information provided by our insureds, as well as third-party sources including rating agencies, asset valuation specialists and other publicly available information. We also assess any post-event circumstances, including restructurings, liquidations and possession of asset proposals/agreements.
In some instances, on becoming aware of a loss event related to credit and political risk business, we negotiate a final settlement of all of our policy liabilities for a fixed amount. In most circumstances, this occurs when the insured moves to realize the benefit of the collateral that underlies the insured loan or facility and presents us with a net settlement proposal that represents a full and final payment by us under the terms of the policy. In consideration for this payment, we secure a cancellation of the policy, or a release of all claims, and waive our right to pursue a recovery of these settlement payments against the security that may have been available to us under the insured loan or facility agreement. In certain circumstances, cancellation by way of net settlement or full payment can result in an adjustment to the premium associated with the policy.
Reserving for Significant Catastrophic Events
We cannot estimate losses from widespread catastrophic events, such as hurricanes and earthquakes, using the traditional actuarial methods described above. The magnitude and complexity of losses associated with certain of these events inherently increase the level of uncertainty and, therefore, the level of management judgment involved in arriving at loss reserve estimates. As a result, actual losses for these events may ultimately differ materially from current estimates.
Loss reserves related to the COVID-19 pandemic represent our best estimate of losses and loss expenses that have been incurred at the balance sheet date. The determination of loss reserves is based on a ground-up assessment of coverage from individual contracts and treaties across all lines of business, and includes a review of modeling analyses and market information, where appropriate. In addition, we consider information received from clients, brokers and loss adjusters, together with global shelter-in-place orders and the outcomes of recent court judgments, including the UK Supreme Court ruling.
The estimate of loss reserves related to the COVID-19 pandemic is subject to significant uncertainty. This uncertainty is driven by the inherent difficulty in making assumptions around the impact of the COVID-19 pandemic due to the lack of comparable events, the ongoing nature of the event, and its far-reaching impacts on world-wide economies and the health of the population. These assumptions include:
•the nature and the duration of the pandemic;
•the effects on human health, the economy and our customers;
•the response of government bodies including legislative, regulatory or judicial actions and social influences that could alter the interpretation of the our contracts;
•the coverage provided under our contracts;
•the coverage provided by our ceded reinsurance; and
•the evaluation of the loss and impact of loss mitigation actions.
While we believe our estimate of loss reserves is adequate for losses and loss expenses that have been incurred at the balance sheet date based on current facts and circumstances, we continue to monitor the appropriateness of these assumptions as new information comes to light and adjustments are made to our estimate of ultimate losses related to the COVID-19 pandemic if there are developments that are different from previous expectations. Adjustments are recorded in the period in which they are identified. Actual losses for this event may ultimately differ materially from current estimates.
Loss reserves related to catastrophes other than the COVID-19 pandemic represent our best estimate of losses and loss expenses that have been incurred at the balance sheet date. The determination of these loss reserves is estimated by management after a catastrophe occurs by completing an in-depth analysis of individual contracts which may potentially have been impacted by the catastrophic event. This in-depth analysis may rely on several sources of information including:
•estimates of the size of insured industry losses from the catastrophic event and our corresponding market share;
•a review of our portfolio of contracts to identify those contracts which may be exposed to the catastrophic event;
•a review of modeled loss estimates based on information previously reported by customers and brokers, including exposure data obtained during the underwriting process;
•discussions of the impact of the event with our customers and brokers; and
•catastrophe bulletins published by various independent statistical reporting agencies.
We generally use a blend of these information sources to arrive at aggregate estimates of the ultimate losses arising from the catastrophic event.
There are additional risks that affect our ability to accurately estimate ultimate losses for catastrophic events. For example, the estimates 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 or 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 loss reserves for that reporting period.
While we believe our estimate of loss reserves is adequate for losses and loss expenses that have been incurred at the balance sheet date based on current facts and circumstances, we monitor changes in paid and incurred losses in relation to each significant catastrophe in subsequent reporting periods, and adjustments are made to estimates of ultimate losses for each event if there are developments that are different from previous expectations. Adjustments are recorded in the period in which they are identified. Actual losses for these event may ultimately differ materially from current estimates.
Results of operations for 2020 and 2019 were impacted by natural catastrophe activity (refer to 'Underwriting Results – Insurance segment – Current Accident Year Loss Ratio' and 'Underwriting Results – Reinsurance segment – Current Accident Year Loss Ratio' for further details).
Selection of Reported Reserves – Management’s Best Estimate
Our quarterly loss reserving process involves the collaboration of our underwriting, claims, actuarial, legal, ceded reinsurance and finance departments, includes various segmental committee meetings and culminates with the approval of a single point best estimate by our Group Reserving Committee, which comprises senior management. In selecting this best estimate, management considers actuarial estimates and applies informed judgment regarding qualitative factors that may not be fully captured in these actuarial estimates. Such factors include, but are not limited to, the timing of the emergence of claims, volume and complexity of claims, social and judicial trends, potential severity of individual claims and the extent of our historical loss data versus industry information. While these qualitative factors are considered in arriving at the point estimate, no specific provisions for qualitative factors are established.
With regard to establishing the fair value of reserves for losses and loss expenses for Novae at the acquisition date, weight was given to the observable value of these reserves based on the RITC transaction of the 2015 and prior years of account of Syndicate 2007, which was completed prior to the allocation of purchase price. Management made no change to the initial estimate when establishing its best estimate of reserves for losses and loss expenses at December 31, 2017. This is consistent with our general approach of recognizing all or part of the anticipated cost of third-party liability commutations if the transaction has either completed or is considered sufficiently likely to be completed in the near term.
Beginning in 2013, we significantly enhanced the capabilities and resources dedicated to the actuarial reserving function. Consequently, from the first quarter of 2014, management began to rely on its internal actuarial reserving function for its quarterly loss reserving process rather than utilizing the services of an independent actuarial firm. On an annual basis, we use an independent actuarial firm to provide an actuarial opinion on the reasonableness of loss reserves for each of our operating subsidiaries and statutory reporting entities as these actuarial opinions are required to meet various insurance regulatory requirements. The actuarial firm also discusses its conclusions from the annual review with management and presents its findings to the Audit Committee of the Board of Directors.
Sensitivity Analysis
While we believe that loss reserves at December 31, 2020 are adequate, new information, events or circumstances may result in ultimate losses that are materially greater or less than provided for in our loss reserves. As previously noted, there are many factors that may cause reserves to increase or decrease, particularly those related to catastrophe losses and long-tail lines of business.
Expected loss ratios are a key assumption in estimates of ultimate losses for business at an early stage of development. A higher expected loss ratio results in a higher ultimate loss estimate, and vice versa. Assumed loss development patterns are another significant assumption in estimating loss reserves. Accelerating a loss reporting pattern (i.e. shortening the claim tail) results in lower ultimate losses, as the estimated proportion of losses already incurred would be higher. The uncertainty in the timing of the emergence of claims (i.e. the length of the development pattern) is generally greater for a company with a relatively limited operating history, therefore, we rely on industry benchmarks to a certain extent when establishing loss reserve estimates.
The effect on estimates of gross loss reserves of reasonably likely changes in the two key assumptions used to estimate gross loss reserves at December 31, 2020 was as follows:
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| | | | | | | |
| INSURANCE | |
| Development pattern | Expected loss ratio | |
| Property and other | 5% lower | | Unchanged | | 5% higher | |
| | | | | | | |
| 3 months shorter | $ | (57,199) | | | $ | (50,476) | | | $ | (43,738) | | |
| Unchanged | (9,188) | | | — | | | 9,172 | | |
| 3 months longer | 44,366 | | | 56,197 | | | 68,014 | | |
| | | | | | | |
| Marine | 5% lower | | Unchanged | | 5% higher | |
| | | | | | | |
| 3 months shorter | $ | (47,269) | | | $ | (36,735) | | | $ | (26,215) | | |
| Unchanged | (12,303) | | | — | | | 12,293 | | |
| 3 months longer | 15,612 | | | 29,302 | | | 42,988 | | |
| | | | | | | |
| Aviation | 5% lower | | Unchanged | | 5% higher | |
| | | | | | | |
| 3 months shorter | $ | (11,765) | | | $ | (10,282) | | | $ | (8,799) | | |
| Unchanged | (1,997) | | | — | | | 1,997 | | |
| 3 months longer | 19,663 | | | 22,800 | | | 25,937 | | |
| | | | | | | |
| Credit and political risk | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 3 months shorter | $ | (10,793) | | | $ | (40) | | | $ | 16,612 | | |
| Unchanged | (10,763) | | | — | | | 16,663 | | |
| 3 months longer | (10,714) | | | 59 | | | 16,731 | | |
| | | | | | | |
| Professional lines | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (425,931) | | | $ | (117,973) | | | $ | 191,070 | | |
| Unchanged | (320,129) | | | — | | | 320,504 | | |
| 6 months longer | (174,634) | | | 162,369 | | | 499,595 | | |
| | | | | | | |
| Liability | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (254,234) | | | $ | (47,019) | | | $ | 160,201 | | |
| Unchanged | (211,750) | | | — | | | 211,752 | | |
| 6 months longer | (157,773) | | | 59,784 | | | 277,338 | | |
| | | | | | | |
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| REINSURANCE | |
| Development pattern | Expected loss ratio | |
| Property and other | 5% lower | | Unchanged | | 5% higher | |
| | | | | | | |
| 3 months shorter | $ | (112,472) | | | $ | (53,558) | | | $ | 5,654 | | |
| Unchanged | (64,593) | | | — | | | 55,802 | | |
| 3 months longer | (6,530) | | | 55,296 | | | 117,196 | | |
| | | | | | | |
| Credit and surety | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (33,479) | | | $ | (20,454) | | | $ | (7,198) | | |
| Unchanged | (11,616) | | | — | | | 13,995 | | |
| 6 months longer | 30,774 | | | 43,182 | | | 57,935 | | |
| | | | | | | |
| Professional lines | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (121,004) | | | $ | (51,246) | | | $ | 21,768 | | |
| Unchanged | (65,076) | | | — | | | 70,517 | | |
| 6 months longer | 105 | | | 71,519 | | | 142,065 | | |
| | | | | | | |
| Motor | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (74,686) | | | $ | (31,742) | | | $ | 13,676 | | |
| Unchanged | (44,892) | | | — | | | 46,875 | | |
| 6 months longer | 12,492 | | | 61,015 | | | 110,035 | | |
| | | | | | | |
| Liability | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (201,254) | | | $ | (75,630) | | | $ | 72,860 | | |
| Unchanged | (119,751) | | | — | | | 129,118 | | |
| 6 months longer | (20,305) | | | 107,362 | | | 229,220 | | |
| | | | | | | |
The results show the cumulative increase (decrease) in loss reserves across all accident years. For example, if assumed loss development pattern for insurance property and other business was three months shorter with no accompanying change in ELR assumption, loss reserves may decrease by approximately $50 million. Each of the impacts set forth in the tables is estimated individually, without consideration for any correlation among key assumptions or among reserve classes. Therefore, it would be inappropriate to take each of the amounts and add them together in an attempt to estimate total volatility. While we believe the variations in the expected loss ratios and loss development patterns presented could be reasonably expected, our historical loss data regarding variability is generally limited and actual variations may be greater or less than these amounts. It is also important to note that the variations are not meant to be a "best-case" or "worst-case" series of scenarios and, therefore, it is possible that future variations in loss reserves may be more or less than the amounts presented. While we believe that these are reasonably likely scenarios, we do not believe this sensitivity analysis should be considered an actual reserve range.
Reinsurance Recoverable on Unpaid Losses and Loss Expenses
In the normal course of business, we purchase treaty and facultativereinsurance protection to limit ultimate losses from catastrophic events and to reduce loss aggregation risk. To the extent that reinsurers do not meet their obligations under the reinsurance agreements, we remain liable. Consequently, we are exposed to credit risk associated with reinsurance recoverable balances to the extent that any of our reinsurers are unable or unwilling to pay claims.
Reinsurance recoverable on unpaid losses and loss expenses including("reinsurance recoverable") for each of the reportable segments, segregated between case reserves and IBNR and by reserve class was as shown below. Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for mapping of the Company's lines of business to reserve classes and the expected claim tails.
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| | 2020 | | 2019 | |
| At December 31, | Case
reserves | | IBNR | | Total | | Case
reserves | | IBNR | | Total | |
| | | | | | | | | | | | | |
| Insurance segment: | | | | | | | | | | | | |
| Property and other | $ | 232,796 | | | $ | 275,429 | | | $ | 508,225 | | | $ | 241,029 | | | $ | 117,165 | | | $ | 358,194 | | |
| Marine | 74,065 | | | 88,331 | | | 162,396 | | | 70,927 | | | 93,078 | | | 164,005 | | |
| Aviation | 60,955 | | | 3,297 | | | 64,252 | | | 34,298 | | | 1,796 | | | 36,094 | | |
| Credit and political risk | 7,239 | | | 44,428 | | | 51,667 | | | 9,730 | | | 24,885 | | | 34,615 | | |
| Professional lines | 317,600 | | | 909,583 | | | 1,227,183 | | | 318,850 | | | 786,834 | | | 1,105,684 | | |
| Liability | 185,453 | | | 997,191 | | | 1,182,644 | | | 215,203 | | | 893,178 | | | 1,108,381 | | |
| | | | | | | | | | | | | |
| Total Insurance | 878,108 | | | 2,318,259 | | | 3,196,367 | | | 890,037 | | | 1,916,936 | | | 2,806,973 | | |
| | | | | | | | | | | | | |
| Reinsurance segment: | | | | | | | | | | | | |
| Property and other * | 235,508 | | | 261,703 | | | 497,211 | | | 171,741 | | * | 277,144 | | * | 448,885 | | |
| Credit and surety | 29,138 | | | 41,005 | | | 70,143 | | | 18,490 | | | 45,985 | | | 64,475 | | |
| Professional lines | 58,646 | | | 127,599 | | | 186,245 | | | 23,968 | | | 111,537 | | | 135,505 | | |
| Motor | 105,793 | | | 122,660 | | | 228,453 | | | 99,730 | | | 109,765 | | | 209,495 | | |
| Liability | 76,352 | | | 241,870 | | | 318,222 | | | 39,722 | | | 172,701 | | | 212,423 | | |
| | | | | | | | | | | | | |
| Total Reinsurance | 505,437 | | | 794,837 | | | 1,300,274 | | | 353,651 | | | 717,132 | | | 1,070,783 | | |
| | | | | | | | | | | | | |
| Total | $ | 1,383,545 | | | $ | 3,113,096 | | | $ | 4,496,641 | | | $ | 1,243,688 | | | $ | 2,634,068 | | | $ | 3,877,756 | | |
| | | | | | | | | | | | | |
*To facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform to the current year's presentation. These reclassifications did not impact the results of operations, financial condition or liquidity.
At December 31, 2020, reinsurance recoverables as a percentage of loss reserves was 32% (2019: 30%). At December 31, 2020, reinsurance recoverables (excluding the allowance for expected credit losses) that were collectible from reinsurers rated A- or better by A.M Best were 87.6% (2019: 89.1%). Refer to Item 8, Note 11 to the Consolidated Financial Statements 'Commitments and Contingencies' for an analysis of the credit risk associated with reinsurance recoverable on unpaid and paid losses and loss expenses at December 31, 2020.
The recognition of reinsurance recoverable balances requires two key estimates. The first estimate is the amount of loss reserves to be ceded to our reinsurers. This amount consists of amounts related to case reserves and amounts related to IBNR.
Reinsurance recoverable related to case reserves is estimated on a case-by-case basis by applying the terms of applicable reinsurance cover to individual case reserve estimates. Reinsurance recoverable related to IBNR is generally developed as part of our loss reserving process, therefore, its estimation is subject to similar risks and uncertainties as the estimation of IBNR. Estimates of amounts to be ceded under excess of loss reinsurance contracts also take into account pricing information for those contracts and require greater judgment than estimates for proportional contracts.
The second estimate is the amount of the reinsurance recoverable balance that we believe ultimately will not be collected from reinsurers. We are selective in choosing reinsurers, buying reinsurance principally from reinsurers with a strong financial condition and industry ratings. The amount we ultimately collect may differ from our estimate due to the ability and willingness of reinsurers to pay claims, which may be negatively impacted by factors such as insolvency, contractual disputes over contract language or coverage and/or other reasons. In addition, economic conditions and/or operational performance of a
particular reinsurer may deteriorate, and this could also affect the ability and willingness of a reinsurer to meet their contractual obligations.
Consequently, we review reinsurance recoverable balances at least quarterly to estimate an allowance for expected credit losses.
We estimate a case-specific allowance for expected credit losses against reinsurance recoverable balances that we deem are unlikely to be collected in full. In addition, we estimate an allowance for expected credit losses on the remainder of the reinsurance recoverable balance using a default analysis. The principal components of the default analysis are reinsurance recoverable balances by reinsurer and default factors applied to estimate uncollectible amounts based on reinsurers’ credit ratings and the length of collection periods. The default factors are based on a model developed by a major rating agency. The default analysis considers current and forecasted economic conditions.
The allowance for expected credit losses is recognized in net income (loss). Any adjustment to the allowance for expected credit losses is recognized in the period in which it is determined. Write-offs of reinsurance recoverable balances, together with associated allowances for expected credit losses, are recognized in the period in which balances are deemed uncollectible.
At December 31, 2020 the allowance for expected credit losses was $24 million and at December 31, 2019, the provision for uncollectible amounts;amounts was $18 million. We have not written off any significant reinsurance recoverable balances in the last three years.
At December 31, 2020, the use of different assumptions could have a material effect on the allowance for expected credit losses. To the extent the creditworthiness of our reinsurers deteriorates due to an adverse event affecting the reinsurance industry, such as a large number of catastrophes, uncollectible amounts could be significantly greater than the allowance for expected credit losses. Given the various considerations used to estimate the allowance for expected credit losses, we cannot precisely quantify the effect a specific industry event may have on the allowance for expected credit losses.
Gross Premiums Written
Revenues primarily relate to premiums generated by our underwriting operations. The basis for recognizing gross premiums written varies by policy or contract type.
Insurance Segment
Insurance premiums written are recorded in accordance with the terms of the underlying policies.
For the majority of our insurance business, a fixed premium which is identified in the policy is recorded at the inception of the policy. This premium is adjusted if underlying insured values change. We actively monitor underlying insured values and any adjustments to premiums are recognized in the period in which they are determined. Gross premiums written on a fixed premium basis accounted for 86% and 87% of the segment’s gross premiums written for the years ended December 31, 2020 and 2019, respectively. Some of this business is written through MGAs, third parties granted authority to bind risks on our behalf in accordance with our underwriting guidelines. For this business, premiums are recorded based on monthly statements received from MGAs or best estimates based on historical experience.
A limited amount of our insurance business is written on a line slip or proportional basis, where we assume an agreed proportion of the premiums and losses of a particular risk or group of risks along with other unrelated insurers. As premiums for this business are not identified in the policy, premiums are recognized at the inception of the policy based on estimates provided by clients through brokers (refer to 'Reinsurance Segment' below for further details). We review these premium estimates on a quarterly basis and any adjustments to premium estimates are recognized in the period in which they are determined. Gross premiums written on a line slip or proportional basis accounted for 14% and 13% of the segment’s gross premiums written for the years ended December 31, 2020 and 2019, respectively, therefore the impact of these premium estimates on pre-tax net income was immaterial.
For the credit and political risk line of business, we write certain policies on a multi-year basis. Premiums in respect of these policies are recorded at the inception of the policy based on management’s best estimate of premiums to be received, including assumptions relating to prepayments/refinancing. At December 31, 2020, the average duration of unearned premiums for credit and political risk line of business was 5.3 years (2019: 5.9 years).
Reinsurance Segment
Reinsurance premiums are recorded at the inception of the contract based on estimates received from ceding companies.
The reinsurance segment provides cover to cedants (i.e. insurance companies) on an excess of loss and proportional basis. In most cases, cedants seek protection from us for business that they have not yet written at the time they enter into agreements with us, therefore, cedants must estimate their underlying premiums when purchasing reinsurance cover from us.
For multi-year contracts premiums are recorded at the inception of the contract based on management’s best estimate of premiums to be received. Premiums are recognized on an annual basis for multi-year contracts where the cedant has the ability to unilaterally commute or cancel coverage within the term of the contract.
Excess of loss reinsurance contracts with cedants typically include minimum or deposit premium provisions. For excess of loss reinsurance contracts, minimum or deposit premiums are generally considered to be the best estimate of premiums at the inception of the contract. The minimum or deposit premium is normally adjusted at the end of the contract period to reflect changes in the underlying risks in force during the contract period. Any adjustments to minimum or deposit premiums are recognized in the period in which they are determined. Gross premiums written for excess of loss reinsurance contracts accounted for 52% and 48% of the reinsurance segment’s gross premiums written for the years ended December 31, 2020 and 2019, respectively.
Many of our excess of loss reinsurance contracts also include provisions that require an automatic reinstatement of coverage in the event of a loss. In a year of significant loss events, reinstatement premiums will be higher than in a year in which there are no large loss events. Reinstatement premiums are recognized and earned at the time a loss event occurs and losses are recorded. While the reinstatement premium amount is defined by contract terms, recognition of reinstatement premiums is based on estimates of losses and loss expenses, which reflect management’s judgment (refer to 'Critical Accounting Estimates – Reserve for Losses and Loss Expenses' above for further details).
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:
•changes in renewal rates or rates of new business accepted by cedants (changes could result from changes in the relevant insurance market that could affect more than one of our cedants or could be a consequence of changes in the marketing strategy or risk appetite of an individual cedant);
•changes in underlying exposure values; and/or
•changes in rates being charged by cedants.
As a result of this review process, any adjustments to premium estimates are recognized in the period in which they are determined. Changes in premium estimates could be material to gross premiums written in the period. Changes in premium estimates could be also material to net premiums earned in the period in which they are determined as any adjustment may be substantially or fully earned. Gross premiums written for proportional reinsurance contracts, including adjustments to premium estimates established in prior years, accounted for 48% and 52% of the reinsurance segment’s gross premiums written for the years ended December 31, 2020 and 2019, respectively.
Gross premiums written for proportional reinsurance contracts incepting during the year were as follows:
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| | | | | | | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Catastrophe | $ | 13,863 | | | $ | 17,149 | | | $ | 12,944 | | |
| Property | 135,312 | | | 184,552 | | | 237,527 | | |
| Credit and surety | 91,940 | | | 162,948 | | | 221,260 | | |
| Professional lines | 156,643 | | | 159,234 | | | 174,126 | | |
| Motor | 228,754 | | | 194,871 | | | 361,471 | | |
| Liability | 265,358 | | | 251,515 | | | 246,554 | | |
| Engineering | 15,472 | | | 51,052 | | | 48,692 | | |
| Agriculture | 52,682 | | | 194,379 | | | 205,116 | | |
| Accident and health | 300,646 | | | 335,538 | | | 284,675 | | |
| Marine and Aviation | 19,065 | | | 22,697 | | | 11,360 | | |
| Total estimated premiums | $ | 1,279,735 | | | $ | 1,573,935 | | | $ | 1,803,725 | | |
| | | | | | | |
| Gross premiums written (reinsurance segment) | $ | 2,808,539 | | | $ | 3,222,927 | | | $ | 3,112,473 | | |
| As a % of total gross premiums written | 46 | % | | 49 | % | | 58 | % | |
| | | | | | | |
Historical experience has shown that cumulative adjustments to initial premium estimates for proportional reinsurance contracts have ranged from 0% to 5% over the last 5 years. Giving more weight to recent years where premium volume was comparable to current levels, we believe that a reasonably likely change to 2020 initial premium estimates for proportional reinsurance contracts would be 3% in either direction. A change in initial premium estimates of this magnitude would result in a change in gross premiums written of approximately $39 million. A change in initial premium estimates of this magnitude would not have a material impact on pre-tax net income, after considering current losses and loss expenses ratios. However, larger variations, positive or negative, are possible.
Net Premiums Earned
Premiums are earned evenly over the period during which we are exposed to the underlying risk. Changes in circumstances subsequent to the inception of contracts can impact the earning periods. For example, when exposure limits for a contract are reached, any associated unearned premiums are fully earned. This can have a significant impact on net premiums earned;earned, particularly for multi-year contracts such as those in the credit and political risk line of business.
Fixed premium insurance policies and excess of loss reinsurance contracts are generally written on a "losses occurring" or "claims made" basis over the term of the contract. Consequently, premiums are earned evenly over the contract term, which is generally 12 months.
Line slip or proportional insurance policies and proportional reinsurance contracts are generally written on a "risks attaching" basis, covering claims that relate to the underlying policies written during the terms of these contracts. As the underlying business incepts throughout the contract term which is typically one year, and the underlying business typically has a one year coverage period, these premiums are generally earned evenly over a 24-month period.
Fair Value Measurements of Financial Assets and Liabilities
Fair value is defined as the price to sell an asset or transfer a liability (i.e. the "exit price") in an orderly transaction between market participants. U.S. GAAP prescribes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement. The hierarchy is broken down into three levels as follows:
•Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.
•Level 2 – Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
•Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect our judgments about assumptions that market participants might use.
Refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value Measurements' for further information on the valuation techniques including significant inputs and assumptions generally used in estimating the fair values of our financial instruments.
Our estimated fair value of a financial instrument may differ from the amount that could be realized if the financial instrument was sold in an immediate sale, e.g., a forced transaction. In addition, the valuation of financial instruments is more subjective when markets are less liquid due to the lack of available market based inputs, as was the case during the global financial market crisis in late 2008 and early 2009. This may lead us to change the selection of valuation technique (from market to cash flow approach) or may cause us to use multiple valuation techniques to estimate the fair value of a financial instrument. This circumstance may require significant management judgment and could cause a financial instrument to be reclassified between levels of the fair value hierarchy.
Fixed Maturities and Equity Securities
At December 31, 2020, the fair values of 95% (2019: 95%) of total fixed maturities and equity securities were based on prices provided by globally recognized independent pricing services where we have a current and detailed understanding of how their prices were derived. The remaining securities were priced by either non-binding broker quotes or internal valuation models.
Generally, we obtain quotes directly from broker-dealers who are active in the corresponding markets when prices are unavailable from independent pricing services. This may also be the case if the pricing from pricing services is not reflective of current market levels, as detected by our pricing control tolerance procedures. Generally, broker-dealers value securities through their trading desks based on observable market inputs. Their pricing methodologies include mapping securities based on trade data, bids or offers, observed spreads and performance on newly issued securities. They may also establish pricing through observing secondary trading of similar securities.
At December 31, 2020 and 2019, we have not adjusted any pricing provided by independent pricing services (refer to 'Management Pricing Validation' below). In addition, total Level 3 fixed maturities and equity securities amounted to $15 million (2019: $8 million), less than 1% of total fixed maturities and equity securities (refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value Measurements' for further information).
Management Pricing Validation
While we obtain pricing from pricing services and/or broker-dealers, management is ultimately responsible for determining the fair value measurements of financial assetsall securities. To ensure fair value measurement is applied consistently and liabilities;in accordance with U.S. GAAP, we annually update our understanding of the pricing methodologies used by the pricing services and broker-dealers.
other-than-temporary impairments ("OTTI")We also challenge any prices we believe may not be representative of fair value under current market conditions. Our review process includes, but is not limited to: (i) initial and ongoing evaluation of the pricing methodologies and valuation models used by outside parties to calculate fair value; (ii) quantitative analysis; (iii) a review of multiple quotes obtained in the carryingpricing process and the range of resulting fair values for each security, if available, and (iv) randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates provided by the independent pricing sources and broker-dealers.
Other Investments
Hedge Funds, Direct Lending Funds, Private Equity Funds and Real Estate Funds
The fair values of hedge funds, direct lending funds, private equity funds and real estate funds are estimated using net asset values (NAVs) as advised by external fund managers or third-party administrators (refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value Measurements' for further information).
CLO-Equity Securities
At December 31, 2020 and 2019, we had invested indirectly, through a fund structure in CLO-Equities, also known as "cash flow CLOs" in the industry. During 2020, the CLO-Equity market continued to be relatively inactive with only a small number of transactions being observed, particularly related to transactions involving our CLO-Equities. Our indirect investment in CLO-Equities is valued using a discounted cash flow model prepared by an external manager. At December 31, 2020 and 2019, the estimated fair value of available-for-sale securities. our indirect investment in CLO-Equities was $6 million (2019: $14 million).
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
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2. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
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| At December 31, | 2020 | | 2019 | |
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| Default rates | 4.5% | | 3.5% | |
| Loss severity rate | 50.0% | | 35.0% | |
| Collateral spreads | 3.0% | | 3.0% | |
| Estimated maturity dates | 5 years | | 7 years | |
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The Company'sdefault and loss severity rates are the most judgmental unobservable market inputs to the discounted cash flow model to which the valuation of our indirect investment in CLO-Equities is most sensitive.
As the significant accounting policiesinputs used to price this security are unobservable, the fair value of the indirect investment in CLO-Equities is classified as Level 3.
Other Privately Held Investments
Other privately held investments include convertible preferred shares, common shares, convertible notes and a variable yield security. These investments are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these investments are generally determined using capital statements obtained from each investee. In 2020, the fair value of the variable yield security was determined using an externally developed discounted cash flow model.
Significant inputs used in discounted cash flow models were as follows:
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| At December 31, | 2020 | | 2019 | |
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| Discount rate | 1.3% | | — | |
| Default rate | 0.5% | | — | |
| Loss absorption yield | 1.0% | | — | |
| Estimated maturity date | 5 years | | — | |
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As the significant inputs used to price these investments are unobservable, the fair values of other privately held investments are classified as Level 3.
Overseas Deposits
Overseas deposits include investments in private funds held by Syndicate 2007 where the underlying investments are primarily U.S. government, non-U.S. government and corporate debt securities. The funds do not trade on an exchange, therefore, are not included in available for sale investments. As the significant inputs used to price the underlying investments are observable market inputs, the fair values of overseas deposits are classified as Level 2.
Impairment Losses and the Allowance for Expected Credit Losses - Fixed Maturities Available-for-sale, at Fair ValueAvailable for Sale
The following discussion provides details regarding our processes for identification of impairments of fixed maturities, available for sale following the adoption of ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments," and the recognition of the related impairment losses.
During 2020, we recorded an allowance for expected credit losses of $0.3 million and an impairment loss of $1 million (refer to 'Net Investment Income and Net Investment Gains (Losses)' for further details).
Fixed maturities classified as available for sale are reported at fair value (referat the balance sheet date. Our available for sale ("AFS") investment portfolio is the largest component of consolidated total assets and it is a multiple of shareholders’ equity. As a result, impairment losses could be material to Note 6 'Fair Value Measurements'). The changeour financial condition and operating results particularly during periods of dislocation in fair values of fixed maturities, net of tax is recognized in accumulated other comprehensive income (loss) ("AOCI") in the consolidated statement of changes in shareholders’ equity.financial markets.
Net investment income includes interest 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 fixed maturities are recorded on a trade-date basis and realized investment gains (losses) on sales of fixed maturities are determined based on the specific identification method. Realized investment gains (losses) on fixed maturities are included in net investment gains (losses) in the consolidated statements of operations.
The Company recognizes investment income from fixed maturities based on the constant effective yield method, which includes an adjustmentAn available for estimated principal repayments, if applicable. The effective yield used to determine the amortization of fixed maturities subject to prepayment risk (e.g. asset-backed, mortgage-backed and other structured securities) is recalculated and adjusted periodically based on historical and/or projected future cash flows. Adjustments to the yield for highly rated prepayable fixed maturities are accounted for using the retrospective method. Adjustments to the yield for other prepayable fixed maturities are accounted for using the prospective method.
Asale fixed maturity is impaired if the fair value of the investment is below amortized cost. On a quarterly basis, the Company assesses whether unrealized losses on fixed maturities represent impairments that are other-than-temporary. The Company's impairment review process begins with a quantitative analysis to identify securities to be evaluated for potential OTTI. For identified securities, fundamental analysis is performed that considers the following quantitative and qualitative factors:
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a. | the duration and the extent of the decline; |
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b. | the financial condition, near-term and long-term prospects of the issuer of the security; |
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c. | the reason for the decline (e.g. credit spread widening, credit event, foreign exchange rate movements); |
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d. | the historical and implied future volatility of the fair value; and |
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e. | the collateral structure and credit support of the security, if applicable. |
If a fixed maturity is impaired and the Company intendswe intend to sell the security or it is more likely than not that the Companywe 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 loss is charged to net income and is included in net investment gains (losses) in the consolidated statements of operations. The new cost basis for the security is the amortized cost basis less the impairment charge recognized in net income. The new cost basis is not adjusted for subsequent increases in fair value.
From time to time, we may sell fixed maturities subsequent to the balance sheet date that we did not intend to sell at the balance sheet date. Conversely, we may not sell fixed maturities that we intended to sell at the balance sheet date. These changes in intent may arise due to events occurring subsequent to the balance sheet date. The types of events that may result in a change in intent include, but are not limited to, significant changes in the economic facts and circumstances related to the specific issuer, changes in liquidity needs, or changes in tax laws or the regulatory environment.
In instances where we intend to hold the impaired fixed maturity, we determine whether the decline in fair value below the amortized cost basis has resulted from a credit loss or other factors. If we do not anticipate to fully recover the amortized cost based on projected cash flows to be collected from the security (i.e. a credit loss exists), an allowance for expected credit losses is established. The allowance for expected credit losses is limited to the difference between a security's amortized cost basis and its fair value. At December 31, 2020, the allowance for expected credit losses was $0.3 million. The allowance for expected credit loss is charged to net income and is included in net investment gains (losses) in the consolidated statements of operations.
In instances whereOn a quarterly basis, we assess whether unrealized losses on fixed maturities represent credit impairments by considering the Company intendsbelow factors:
a.the extent to holdwhich the impaired fixed maturity,fair value is less than amortized cost;
b.adverse conditions related to the Company estimatessecurity, industry, or geographical area;
c.downgrades in the anticipatedsecurity's credit rating by a credit rating agency; and
d.failure of the issuer to make scheduled principal or interest payments.
The length of time a security has been in an unrealized loss position no longer impacts the determination of whether a credit loss onexists.
If a security is assessed to be credit impaired, it is subject to a discounted cash flow analysis by comparing the securitypresent value of expected future cash flows with the amortized cost basis. If the present value of expected cash flows is less than the amortized cost, a credit loss exists and this componentan allowance for expected credit losses is recognized. If the present value of the impairmentexpected future cash flows is chargedequal to net income and is included in net investment gains (losses) in the consolidated statements of operations. On recognition of an OTTI charge, the new cost basis for the security isor greater than the amortized cost basis, lessan expected credit loss does not exist.
The non-credit component (e.g. interest rates, market conditions, etc.) of the OTTI chargeloss is recognized in other comprehensive income.
Our credit impairment review process excludes fixed maturities guaranteed, either explicitly or implicitly, by the U.S. government and its agencies (U.S. Government, U.S. Agency and U.S. Agency RMBS) because we anticipate these securities will not be settled below amortized cost. These securities are evaluated for intention to sell at a loss.
The allowance for expected credit losses recognized in net income. The new cost basisincome is not adjusted for subsequent increases in fair value. Thecalculated based on the difference between the newamortized cost basisof the security and the net present value of projected future cash flows expected to be collected from the security. The significant inputs and the methodology used to estimate the allowance for expected credit losses are disclosed in Item 8, Note 5 (f) to the Consolidated Financial Statements 'Investments'.
RECENT ACCOUNTING PRONOUNCEMENTS
At December 31, 2020, there were no recently issued accounting pronouncements that we have not yet adopted that we expect could have a material impact on our results of operations, financial condition or liquidity.
OFF-BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS
At December 31, 2020, we were 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 accreteda party that management believes is reasonably likely to have a current or amortizedfuture effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that we believe is material to investors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the risk that our financial instruments may be negatively impacted by movements in financial market prices or rates such as equity prices, interest rates, credit spreads and foreign exchange rates (refer to Item 1 'Risk and Capital Management' for further details).
We own a substantial amount of assets whose fair values are subject to market risks. Our fixed maturities are classified as available for sale, therefore changes in fair values caused by changes in interest rates and foreign currency exchange rates have an immediate impact on other comprehensive income, total shareholders’ equity and book value per common share but may not have an immediate impact on net income. Changes in these market risks impact net income when, and if, securities are sold, or an impairment charge or an allowance for expected credit losses is recorded. Equity securities are reported at fair value, with changes in fair values recognized in net income. At December 31, 2020 and 2019, we also invested in alternative investments including hedge funds, direct lending funds, private equity funds, real estate funds, CLO-Equities, other privately held investments and overseas deposits. These investments are also exposed to market risks, with the changes in fair values immediately reported in net income.
Sensitivity Analysis
The following is a sensitivity analysis of our primary market risk exposures at December 31, 2020 and 2019.
Our policies to address these risks in 2020 were not materially different from 2019. We do not currently anticipate significant changes in our primary market risk exposures or in how those exposures are managed in future reporting periods based on what is known or expected to be in effect in future reporting periods.
Interest Rate and Credit Spread Risk
Interest rate risk includes fluctuations in interest rates and credit spreads that have a direct impact on the fair values of fixed maturities. As interest rates rise and credit spreads widen, the fair value of fixed maturities falls, and the converse is also true.
We monitor sensitivity to interest rate and credit spread changes by revaluing fixed maturities using a variety of different interest rates (inclusive of credit spreads). We use duration and convexity at the security level to estimate the change in fair value that would result from a change in each security’s yield. Duration measures the price sensitivity of an asset to changes in yield rates. Convexity measures how the duration of the security changes with interest rates. The duration and convexity analysis take into account changes in prepayment expectations for MBS and ABS. The analysis is performed at the security level and aggregated to the asset category levels.
The following table presents the estimated pre-tax impact on the fair value of fixed maturities due to an instantaneous increase in the U.S. yield curve of 100 basis points and an additional 100 basis point credit spread widening for corporate debt, non-agency residential and commercial MBS, ABS and municipal bond securities.
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| | Fair value | | Potential adverse change in fair value | |
Increase in
interest rate
by 100
basis points | | Widening of
credit spreads
by 100
basis points | | Total | |
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| At December 31, 2020 | | | | | | | | |
| U.S. government and agency | $ | 1,918,699 | | | $ | (67,495) | | | $ | — | | | $ | (67,495) | | |
| Non-U.S. government | 671,273 | | | (23,491) | | | — | | | (23,491) | | |
| Agency RMBS | 1,286,209 | | | (41,345) | | | — | | | (41,345) | | |
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| Securities exposed to credit spreads: | | | | | | | | |
| Corporate debt | 4,655,951 | | | (169,961) | | | (174,114) | | | (344,075) | | |
| CMBS | 1,353,587 | | | (64,430) | | | (68,978) | | | (133,408) | | |
| Non-agency RMBS | 140,104 | | | (2,137) | | | (4,022) | | | (6,159) | | |
| ABS | 1,720,078 | | | (15,460) | | | (53,007) | | | (68,467) | | |
| Municipals | 295,898 | | | (15,314) | | | (15,375) | | | (30,689) | | |
| | $ | 12,041,799 | | | $ | (399,633) | | | $ | (315,496) | | | $ | (715,129) | | |
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| At December 31, 2019 | | | | | | | | |
| U.S. government and agency | $ | 2,112,881 | | | $ | (78,364) | | | $ | — | | | $ | (78,364) | | |
| Non-U.S. government | 576,592 | | | (20,430) | | | — | | | (20,430) | | |
| Agency RMBS | 1,592,584 | | | (54,850) | | | — | | | (54,850) | | |
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| Securities exposed to credit spreads: | | | | | | | | |
| Corporate debt | 4,930,254 | | | (154,282) | | | (162,741) | | | (317,023) | | |
| CMBS | 1,365,052 | | | (69,922) | | | (74,549) | | | (144,471) | | |
| Non-agency RMBS | 84,922 | | | (1,766) | | | (3,205) | | | (4,971) | | |
| ABS | 1,598,693 | | | (10,951) | | | (47,745) | | | (58,696) | | |
| Municipals | 207,227 | | | (9,045) | | | (9,399) | | | (18,444) | | |
| | $ | 12,468,205 | | | $ | (399,610) | | | $ | (297,639) | | | $ | (697,249) | | |
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U.S. government agencies have a limited range of spread widening, therefore, 100 basis points of spread widening for these securities is highly improbable in normal market conditions. Our non-U.S. government debt obligations are highly-rated and we believe the potential for future widening of credit spreads would also be limited for these securities. Certain of our holdings in non-agency RMBS and ABS have floating interest rates, which mitigate interest rate risk exposure.
The above sensitivity analysis reflects our view of changes that are reasonably possible over a one-year period. Note this should not be construed as our prediction of future market events, but rather an illustration of the impact of such events.
Our investment in CLO-Equities is also exposed to interest rate risk, but an increase in the risk free yield curve of 100 basis points would have an insignificant impact on its fair value.
In addition, our investment in bond mutual funds is exposed to interest rate risk, however, this exposure is largely mitigated by the short duration of the underlying securities.
Equity Price Risk
Our portfolio of equity securities, excluding the bond mutual funds, has exposure to equity price risk. This risk is defined as the potential loss in fair value resulting from adverse changes in stock prices. The global equity portfolio is managed to a benchmark composite index, which consists of a blend of the S&P 500 and MSCI World indices. Changes in the underlying indices have a corresponding impact on the overall portfolio. At December 31, 2020, the fair value of equity securities was $241 million (2019: $298 million). At December 31, 2020, the impact of a 20% decline in the overall market prices of our equity exposures would be $48 million (2019: $60 million), on a quarterlypre-tax basis.
Our investment in hedge funds has significant exposure to equity strategies with net long positions. At December 31, 2020, the impact of an instantaneous 15% decline in the fair value of our investment in hedge funds would be $22 million (2019: $25 million), on a pre-tax basis.
Foreign Currency Risk
The following table presents a sensitivity analysis of total net foreign currency exposures.
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| | AUD | | NZD | | CAD | | EUR | | GBP | | JPY | | Other | | Total | |
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| At December 31, 2020 | | | | | | | | | | | | | | | | |
| Net managed assets (liabilities), excluding derivatives | $ | 7,100 | | | $ | 2,067 | | | $ | 231,382 | | | $ | (527,046) | | | $ | (412,049) | | | $ | (125,523) | | | $ | 70,496 | | | $ | (753,573) | | |
| Foreign currency derivatives, net | (769) | | | 5,752 | | | (205,005) | | | 466,006 | | | 329,055 | | | 122,459 | | | 9,097 | | | 726,595 | | |
| Net managed foreign currency exposure | 6,331 | | | 7,819 | | | 26,377 | | | (61,040) | | | (82,994) | | | (3,064) | | | 79,593 | | | (26,978) | | |
| Other net foreign currency exposure | 1 | | | — | | | 118 | | | (2,369) | | | (1,245) | | | — | | | 38,631 | | | 35,136 | | |
| Total net foreign currency exposure | $ | 6,332 | | | $ | 7,819 | | | $ | 26,495 | | | $ | (63,409) | | | $ | (84,239) | | | $ | (3,064) | | | $ | 118,224 | | | $ | 8,158 | | |
| Net foreign currency exposure as a percentage of total shareholders’ equity | 0.1 | % | | 0.1 | % | | 0.5 | % | | (1.2 | %) | | (1.6 | %) | | (0.1 | %) | | 2.2 | % | | 0.2 | % | |
| Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement(1) | $ | 633 | | | $ | 782 | | | $ | 2,650 | | | $ | (6,341) | | | $ | (8,424) | | | $ | (306) | | | $ | 11,822 | | | $ | 816 | | |
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| At December 31, 2019 | | | | | | | | | | | | | | | | |
| Net managed assets (liabilities), excluding derivatives | $ | 42,435 | | | $ | (2,247) | | | $ | 157,512 | | | $ | (442,481) | | | $ | (198,535) | | | $ | (160,737) | | | $ | 114,073 | | | $ | (489,980) | | |
| Foreign currency derivatives, net | (23,881) | | | 6,407 | | | (125,019) | | | 356,501 | | | 144,866 | | | 204,918 | | | 4,366 | | | 568,158 | | |
| Net managed foreign currency exposure | 18,554 | | | 4,160 | | | 32,493 | | | (85,980) | | | (53,669) | | | 44,181 | | | 118,439 | | | 78,178 | | |
| Other net foreign currency exposure | 1 | | | — | | | 116 | | | (319) | | | (316) | | | — | | | 51,323 | | | 50,805 | | |
| Total net foreign currency exposure | $ | 18,555 | | | $ | 4,160 | | | $ | 32,609 | | | $ | (86,299) | | | $ | (53,985) | | | $ | 44,181 | | | $ | 169,762 | | | $ | 128,983 | | |
| Net foreign currency exposure as a percentage of total shareholders’ equity | 0.3 | % | | 0.1 | % | | 0.6 | % | | (1.6 | %) | | (1.0 | %) | | 0.8 | % | | 3.1 | % | | 2.3 | % | |
| Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement(1) | $ | 1,856 | | | $ | 416 | | | $ | 3,261 | | | $ | (8,630) | | | $ | (5,399) | | | $ | 4,418 | | | $ | 16,976 | | | $ | 12,898 | | |
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(1)Assumes 10% change in underlying currencies relative to the U.S. dollar.
Net Managed Foreign Currency Exposure
Our net managed foreign currency exposure is subject to internal risk tolerance standards. For significant foreign currency exposures, defined as those where net asset/liability position exceeds the greater of 1% of total shareholders' equity or $53 million the value of assets denominated in those currencies should fall within a range of 90 - 110% of liabilities denominated in the same currency. In addition, aggregate foreign currency exposure is subject to the same tolerance range. We may use derivative instruments to maintain net managed foreign currency exposures within our risk tolerance levels.
Other Net Foreign Currency Exposure
Other net foreign currency exposure includes those assets managed by specific investment managers who have the discretion to hold foreign currency exposures as part of their total return strategy. At December 31, 2020, other net foreign currency exposure primarily consisted of our emerging market debt securities portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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| Index to Consolidated Financial Statements and Accompanying Notes | Page |
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| Report of Independent Registered Public Accounting Firm | |
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| Consolidated Balance Sheets at December 31, 2020 and 2019 | |
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| Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018 | |
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| Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2020, 2019 and 2018 | |
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| Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2020, 2019 and 2018 | |
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| Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 | |
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| Notes to Consolidated Financial Statements | |
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| Note 1 – Organization | |
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| Note 2 – Basis of Presentation and Significant Accounting Policies | |
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| Note 3 – Segment Information | |
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| Note 4 – Goodwill and Intangible Assets | |
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| Note 5 – Investments | |
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| Note 6 – Fair Value Measurements | |
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| Note 7 – Derivative Instruments | |
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| Note 8 – Reserve for Losses and Loss Expenses | |
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| Note 9 – Reinsurance | |
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| Note 10 – Debt and Financing Arrangements | |
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| Note 11 – Commitments and Contingencies | |
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| Note 12 – Leases | |
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| Note 13 – Earnings Per Common Share | |
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| Note 14 – Shareholders’ Equity | |
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| Note 15 – Retirement Plans | |
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| Note 16 – Share-Based Compensation | |
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| Note 17 – Related Party Transactions | |
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| Note 18 – Reorganization Expenses | |
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| Note 19 – Income Taxes | |
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| Note 20 – Other Comprehensive Income (Loss) | |
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| Note 21 – Statutory Financial Information | |
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| Note 22 – Unaudited Condensed Quarterly Financial Data | |
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| Note 23 – Subsequent Events | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of AXIS Capital Holdings Limited
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AXIS Capital Holdings Limited and subsidiaries (the "Company") as of December 31, 2020 and 2019, 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, 2020, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2021 expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to net investment incomebe communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Reserve for losses and loss expenses - Refer to Notes 2 and 8 to the consolidated financial statements
Critical Audit Matter Description
The Company’s estimate of loss and loss expense reserves is derived using expected trends in claim severity and frequency and other factors that may vary significantly as claims are settled. The estimate is sensitive to significant assumptions, including the initial expected loss ratio and loss development factors. The estimate is also sensitive to the selection of actuarial methods and weighting of these methods applied to project the ultimate losses, the estimation of ultimate reserves associated with catastrophic events, and other factors. Further, not all catastrophic events can be modeled using traditional actuarial methodologies, which increases the degree of judgment needed in estimating loss reserves for such events.
Auditing the Company’s methods, assumptions and best estimate of the cost of the ultimate settlement and administration of claims represented by the incurred but not reported ("IBNR") claims included in recorded loss and loss adjustment reserves involved especially subjective auditor judgment and an increased extent of effort, including the involvement of our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to reserves for losses and loss expenses included the following, among others:
•We tested the effectiveness of controls over the remaining lifevaluation of the fixed maturity.recorded loss and loss expense reserves, including the review and approval process that management has in place for significant actuarial methods and assumptions used and the approval of management’s best estimate of loss and loss expense reserves.
The Company recognizes•We tested the non-credit componentcompleteness and accuracy of the impairment (i.e.underlying data that served as the basis for the Company’s actuarial analysis, including historical claims data, to test the reasonableness of key inputs to the actuarial estimate.
•With the assistance of our actuarial specialists:
–We independently developed an estimate of the reserves for selected classes of business, compared our estimates to those booked by the Company, and evaluated the differences.
–We evaluated the Company’s methodologies against recognized actuarial practices for the remaining classes. We also evaluated the assumptions used by the Company using our industry knowledge and experience and other analytical procedures.
–We compared the results of the reserve study prepared by third party actuaries to management’s best estimate and evaluated the differences.
| | |
|
| /s/ Deloitte Ltd. |
| Hamilton, Bermuda |
| February 26, 2021 |
We have served as the Company's auditor since 2001.
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2020 AND 2019
| | | | | | | | | | | |
| 2020 | | 2019 |
| | (in thousands) |
| Assets | | | |
| Investments: | | | |
Fixed maturities, available for sale, at fair value (Amortized cost 2020: $11,566,930; 2019: $12,263,240 Allowance for expected credit losses 2020: $323) | $ | 12,041,799 | | | $ | 12,468,205 | |
Equity securities, at fair value (Cost 2020: $421,744; 2019: $398,956) | 518,445 | | | 474,207 | |
Mortgage loans, held for investment, at fair value (Allowance for expected credit losses 2020: $NaN) | 593,290 | | | 432,748 | |
| Other investments, at fair value | 829,156 | | | 770,923 | |
| Equity method investments | 114,209 | | | 117,821 | |
| Short-term investments, at fair value | 161,897 | | | 38,471 | |
| Total investments | 14,258,796 | | | 14,302,375 | |
| Cash and cash equivalents | 902,831 | | | 1,241,109 | |
| Restricted cash and cash equivalents | 600,401 | | | 335,348 | |
| Accrued interest receivable | 65,020 | | | 78,085 | |
Insurance and reinsurance premium balances receivable (Allowance for expected credit losses 2020: $8,836) | 2,738,342 | | | 3,071,390 | |
Reinsurance recoverable on unpaid losses and loss expenses (Allowance for expected credit losses 2020: $23,711) | 4,496,641 | | | 3,877,756 | |
| Reinsurance recoverable on paid losses and loss expenses | 434,201 | | | 327,795 | |
| Deferred acquisition costs | 431,439 | | | 492,119 | |
| Prepaid reinsurance premiums | 1,194,455 | | | 1,101,889 | |
| Receivable for investments sold | 2,150 | | | 35,659 | |
| Goodwill | 100,801 | | | 102,003 | |
| Intangible assets | 219,633 | | | 230,550 | |
| Value of business acquired | 3,854 | | | 8,992 | |
| Operating lease right-of-use assets | 123,579 | | | 111,092 | |
| Other assets | 305,544 | | | 287,892 | |
| Total assets | $ | 25,877,687 | | | $ | 25,604,054 | |
| Liabilities | | | |
| Reserve for losses and loss expenses | $ | 13,926,766 | | | $ | 12,752,081 | |
| Unearned premiums | 3,685,886 | | | 3,626,246 | |
| Insurance and reinsurance balances payable | 1,092,042 | | | 1,349,082 | |
| Debt | 1,309,695 | | | 1,808,157 | |
| Payable for investments purchased | 104,777 | | | 32,985 | |
| Operating lease liabilities | 140,263 | | | 115,584 | |
| Other liabilities | 322,564 | | | 375,911 | |
| Total liabilities | 20,581,993 | | | 20,060,046 | |
| | | |
| | | |
| | | |
| Commitments and Contingencies | 0 | | 0 |
| Shareholders' equity | | | |
| Preferred shares | 550,000 | | | 775,000 | |
Common shares (shares issued 2020: 176,580; 2019: 176,580 shares outstanding 2020: 84,353; 2019: 83,959) | 2,206 | | | 2,206 | |
| Additional paid-in capital | 2,330,054 | | | 2,317,212 | |
| Accumulated other comprehensive income | 414,395 | | | 171,710 | |
| Retained earnings | 5,763,607 | | | 6,056,686 | |
Treasury shares, at cost (2020: 92,227; 2019: 92,621) | (3,764,568) | | | (3,778,806) | |
| | | |
| | | |
| Total shareholders’ equity | 5,295,694 | | | 5,544,008 | |
| Total liabilities and shareholders’ equity | $ | 25,877,687 | | | $ | 25,604,054 | |
See accompanying notes to Consolidated Financial Statements.
114
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| | (in thousands, except for per share data) |
| Revenues | | | | | |
| Net premiums earned | $ | 4,371,309 | | | $ | 4,587,178 | | | $ | 4,791,495 | |
| Net investment income | 349,601 | | | 478,572 | | | 438,507 | |
| Other insurance related income (loss) | (8,089) | | | 16,444 | | | 10,622 | |
| Net investment gains (losses): | | | | | |
| Allowance for expected credit losses | (323) | | | 0 | | | 0 | |
| Impairment losses | (1,486) | | | 0 | | | 0 | |
| Other-than-temporary impairment ("OTTI") losses | 0 | | | (6,984) | | | (9,733) | |
| | | | | |
| Other realized and unrealized investment gains (losses) | 130,942 | | | 98,217 | | | (140,485) | |
| Total net investment gains (losses) | 129,133 | | | 91,233 | | | (150,218) | |
| Total revenues | 4,841,954 | | | 5,173,427 | | | 5,090,406 | |
| | | | | |
| Expenses | | | | | |
| Net losses and loss expenses | 3,281,252 | | | 3,044,798 | | | 3,190,287 | |
| Acquisition costs | 929,517 | | | 1,024,582 | | | 968,835 | |
| General and administrative expenses | 579,790 | | | 634,831 | | | 627,389 | |
| Foreign exchange losses (gains) | 81,069 | | | (12,041) | | | (29,165) | |
| Interest expense and financing costs | 75,049 | | | 68,107 | | | 67,432 | |
| Reorganization expenses | 7,881 | | | 37,384 | | | 66,940 | |
| Amortization of value of business acquired | 5,139 | | | 26,722 | | | 172,332 | |
| Amortization of intangible assets | 11,390 | | | 11,597 | | | 13,814 | |
| Total expenses | 4,971,087 | | | 4,835,980 | | | 5,077,864 | |
| | | | | |
| Income (loss) before income taxes and interest in income (loss) of equity method investments | (129,133) | | | 337,447 | | | 12,542 | |
| Income tax (expense) benefit | 12,321 | | | (23,692) | | | 29,486 | |
| Interest in income (loss) of equity method investments | (3,612) | | | 9,718 | | | 993 | |
| | | | | |
| Net income (loss) | (120,424) | | | 323,473 | | | 43,021 | |
| Preferred share dividends | 30,250 | | | 41,112 | | | 42,625 | |
| | | | | |
| Net income (loss) available (attributable) to common shareholders | $ | (150,674) | | | $ | 282,361 | | | $ | 396 | |
| | | | | |
| Per share data | | | | | |
| Earnings (loss) per common share: | | | | | |
Earnings (loss) per common share
| $ | (1.79) | | | $ | 3.37 | | | $ | 0 | |
| Earnings (loss) per diluted common share | $ | (1.79) | | | $ | 3.34 | | | $ | 0 | |
| Weighted average common shares outstanding | 84,262 | | | 83,894 | | | 83,501 | |
| Weighted average diluted common shares outstanding | 84,262 | | | 84,473 | | | 84,007 | |
See accompanying notes to Consolidated Financial Statements.
115
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Net income (loss) | $ | (120,424) | | | $ | 323,473 | | | $ | 43,021 | |
| | | | | |
| Other comprehensive income (loss), net of tax: | | | | | |
| Available for sale investments: | | | | | |
| Unrealized gains (losses) arising during the year for which an allowance for expected credit losses has not been recognized | 317,166 | | | 374,615 | | | (291,731) | |
| Unrealized gains (losses) arising during the year for which an allowance for expected credit losses has been recognized | (40) | | | 0 | | | 0 | |
| Adjustment for reclassification of net realized (gains) losses, impairment losses and OTTI losses recognized in net income (loss) | (78,012) | | | (24,729) | | | 100,902 | |
| Unrealized gains (losses) arising during the year, net of reclassification adjustment | 239,114 | | | 349,886 | | | (190,829) | |
| | | | | |
| Foreign currency translation adjustment | 3,571 | | | (1,066) | | | (11,165) | |
| | | | | |
| Total other comprehensive income (loss), net of tax | 242,685 | | | 348,820 | | | (201,994) | |
| Comprehensive income (loss) | $ | 122,261 | | | $ | 672,293 | | | $ | (158,973) | |
See accompanying notes to Consolidated Financial Statements.
116
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Preferred shares | | | | | |
| Balance at beginning of year | $ | 775,000 | | | $ | 775,000 | | | $ | 775,000 | |
| | | | | |
| Shares repurchased | (225,000) | | | 0 | | | 0 | |
| Balance at end of year | 550,000 | | | 775,000 | | | 775,000 | |
| | | | | |
| Common shares (par value) | | | | | |
| | | | | |
| | | | | |
| Balance at beginning and end of year | 2,206 | | | 2,206 | | | 2,206 | |
| | | | | |
| Additional paid-in capital | | | | | |
| Balance at beginning of year | 2,317,212 | | | 2,308,583 | | | 2,299,166 | |
| | | | | |
| Treasury shares reissued | (22,732) | | | (21,046) | | | (24,088) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Share-based compensation expense | 35,574 | | | 29,675 | | | 33,505 | |
| Balance at end of year | 2,330,054 | | | 2,317,212 | | | 2,308,583 | |
| | | | | |
| Accumulated other comprehensive income (loss) | | | | | |
| Balance at beginning of year | 171,710 | | | (177,110) | | | 92,382 | |
| Unrealized gains (losses) on available-for-sale investments, net of tax: | | | | | |
| Balance at beginning of year | 181,521 | | | (168,365) | | | 89,962 | |
| Cumulative effect of adoption of ASU No. 2018-02 | — | | | — | | | 2,106 | |
| Cumulative effect of adoption of ASU No. 2016-01, net of taxes | — | | | — | | | (69,604) | |
| Unrealized gains (losses) arising during the year, net of reclassification adjustment | 239,114 | | | 349,886 | | | (190,829) | |
| | | | | |
| Balance at end of year | 420,635 | | | 181,521 | | | (168,365) | |
| Cumulative foreign currency translation adjustments, net of tax: | | | | | |
| Balance at beginning of year | (9,811) | | | (8,745) | | | 2,420 | |
| Foreign currency translation adjustment | 3,571 | | | (1,066) | | | (11,165) | |
| Balance at end of year | (6,240) | | | (9,811) | | | (8,745) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Balance at end of year | 414,395 | | | 171,710 | | | (177,110) | |
| | | | | |
| Retained earnings | | | | | |
| Balance at beginning of year | 6,056,686 | | | 5,912,812 | | | 5,979,666 | |
| Cumulative effect of adoption of ASU No. 2018-02 | — | | | — | | | (2,106) | |
| Cumulative effect of adoption of ASU No. 2016-01, net of taxes | — | | | — | | | 69,604 | |
| Net income (loss) | (120,424) | | | 323,473 | | | 43,021 | |
| | | | | |
Preferred share dividends (1) | (30,250) | | | (41,112) | | | (42,625) | |
| | | | | |
Common share dividends (1) | (142,405) | | | (138,487) | | | (134,748) | |
| Balance at end of year | 5,763,607 | | | 6,056,686 | | | 5,912,812 | |
| | | | | |
| Treasury shares, at cost | | | | | |
| Balance at beginning of year | (3,778,806) | | | (3,791,420) | | | (3,807,156) | |
| Shares repurchased | (10,382) | | | (10,165) | | | (10,080) | |
| Shares reissued | 24,620 | | | 22,779 | | | 25,816 | |
| Balance at end of year | (3,764,568) | | | (3,778,806) | | | (3,791,420) | |
| | | | | |
| | | | | |
| Total shareholders' equity | $ | 5,295,694 | | | $ | 5,544,008 | | | $ | 5,030,071 | |
| | | | | |
(1) Refer to Note 14 'Shareholder's Equity' for details on dividends declared and paid related to interest rates, market conditions, etc.) inthe Company's common and preferred shares.
See accompanying notes to Consolidated Financial Statements.
117
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | (120,424) | | | $ | 323,473 | | | $ | 43,021 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Net investment (gains) losses | (129,133) | | | (91,233) | | | 144,297 | |
| Net realized and unrealized gains on other investments | (16,059) | | | (60,038) | | | (45,153) | |
| Amortization of fixed maturities | 32,893 | | | 18,499 | | | 24,663 | |
| Interest in (income) loss of equity method investments | 3,612 | | | (9,718) | | | 495 | |
| Amortization of value of business acquired | 5,139 | | | 26,722 | | | 172,332 | |
| Other amortization and depreciation | 65,797 | | | 75,229 | | | 9,795 | |
| Share-based compensation expense, net of cash payments | 29,005 | | | 32,491 | | | 34,346 | |
| Non-cash foreign exchange gains | 0 | | | (6,043) | | | 0 | |
| | | | | |
| Changes in: | | | | | |
| Accrued interest receivable | 13,097 | | | 2,140 | | | (3,184) | |
| Reinsurance recoverable on unpaid and paid losses and loss expenses | (723,860) | | | (412,076) | | | (766,690) | |
| Deferred acquisition costs | 60,828 | | | 74,331 | | | (98,329) | |
| Prepaid reinsurance premiums | (94,122) | | | (88,789) | | | (212,654) | |
| Reserve for losses and loss expenses | 1,178,292 | | | 467,428 | | | 442,839 | |
| Unearned premiums | 62,999 | | | (7,958) | | | 29,760 | |
| Insurance and reinsurance balances, net | 72,503 | | | (51,075) | | | 208,783 | |
| Other items | (97,064) | | | (94,379) | | | 26,452 | |
| Net cash provided by operating activities | 343,503 | | | 199,004 | | | 10,773 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Purchases of: | | | | | |
| Fixed maturities | (10,494,198) | | | (9,994,025) | | | (8,464,140) | |
| Equity securities | (117,883) | | | (58,022) | | | (73,107) | |
| Mortgage loans | (199,259) | | | (194,020) | | | (106,171) | |
| Other investments | (166,602) | | | (218,178) | | | (180,126) | |
| | | | | |
| Short-term investments | (365,170) | | | (179,230) | | | (305,670) | |
| Proceeds from the sale of: | | | | | |
| Fixed maturities | 9,784,137 | | | 8,018,658 | | | 7,586,536 | |
| Equity securities | 119,381 | | | 36,016 | | | 246,196 | |
| Other investments | 166,976 | | | 249,129 | | | 361,030 | |
| Short-term investments | 171,976 | | | 266,057 | | | 178,983 | |
| Proceeds from redemption of fixed maturities | 1,526,396 | | | 1,282,796 | | | 1,241,214 | |
| Proceeds from redemption of short-term investments | 69,707 | | | 19,366 | | | 45,831 | |
| Proceeds from the repayment of mortgage loans | 39,121 | | | 60,244 | | | 133,081 | |
| Purchase of other assets | (44,661) | | | (63,106) | | | (25,103) | |
| | | | | |
| | | | | |
| | | | | |
| Net cash provided by (used in) investing activities | 489,921 | | | (774,315) | | | 638,554 | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Net proceeds from issuance of senior notes | 0 | | | 717,509 | | | 0 | |
| Redemption of senior notes | (500,000) | | | (250,000) | | | 0 | |
| Repurchase of preferred shares | (225,000) | | | 0 | | | 0 | |
| | | | | |
| | | | | |
| Taxes paid on withholding shares | (10,382) | | | (10,165) | | | (10,080) | |
| Dividends paid - common shares | (141,590) | | | (137,209) | | | (133,502) | |
| | | | | |
| Dividends paid - preferred shares | (31,831) | | | (42,625) | | | (42,625) | |
| | | | | |
| | | | | |
| | | | | |
| Net cash provided by (used in) financing activities | (908,803) | | | 277,510 | | | (186,207) | |
| | | | | |
| Effect of exchange rate changes on foreign currency cash, cash equivalents and restricted cash | 2,154 | | | 44,238 | | | 3,114 | |
| Increase (decrease) in cash, cash equivalents and restricted cash | (73,225) | | | (253,563) | | | 466,234 | |
| Cash, cash equivalents and restricted cash - beginning of year | 1,576,457 | | | 1,830,020 | | | 1,363,786 | |
| Cash, cash equivalents and restricted cash - end of year | $ | 1,503,232 | | | $ | 1,576,457 | | | $ | 1,830,020 | |
| | | | | |
See accompanying notes to Consolidated Financial Statements.
118
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
| | | | | | | | | | | | | | | | | |
| | | | | |
| Supplemental disclosures of cash flow information: | | | | | |
| Income taxes paid | $ | 4,414 | | | $ | 39,949 | | | $ | 15,698 | |
| Interest paid | $ | 54,108 | | | $ | 59,563 | | | $ | 64,822 | |
Supplemental disclosures of cash flow information:
In 2019, non-cash foreign exchange gains were attributable to the reclassification of the cumulative translation adjustment balance related to Aviabel Re S.A. from accumulated other comprehensive income.income in the consolidated balance sheet to foreign exchange losses (gains) in the consolidated statement of operations due to the liquidation of that entity (refer to Note 8 'Reserve for Losses and Loss Expenses' and Note 20 'Other Comprehensive Income (Loss)').
In 2018, total consideration paid for an agreement for the Reinsurance to Close ("RITC") of the 2015 and prior years of account of Syndicate 2007 was $819 million of which $600 million was settled by way of a transfer of securities and was treated as a non-cash activity in the consolidated statement of cash flows (refer to Note 8 'Reserve for Losses and LossExpenses').
See accompanying notes to Consolidated Financial Statements.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 2018 AND 20172018
| |
2. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Equity Securities, at Fair Value
1. ORGANIZATION
Equity securities
AXIS Capital Holdings Limited ("AXIS Capital" and together with its wholly owned subsidiaries the "Company"), was incorporated on December 9, 2002, under the laws of Bermuda. The Company provides a broad range of insurance and reinsurance products on a worldwide basis. The Company's principal operating subsidiaries, located in Bermuda, the United States ("U.S."), Europe, Singapore and Canada are reported at fair value (referdescribed below:
•AXIS Specialty Limited ("AXIS Specialty Bermuda"), a Bermuda domiciled company is licensed to Note 6 'provide specialty insurance and treaty reinsurance products on a worldwide basis. In addition, AXIS Specialty Bermuda conducts insurance and reinsurance business through its branch in Singapore, AXIS Specialty Limited (Singapore Branch).
•Fair Value MeasurementsAXIS Insurance Company, domiciled in Illinois and AXIS Reinsurance Company, domiciled in New York, together with AXIS Reinsurance Company (Canadian Branch) are licensed to offer a range of specialty insurance and treaty reinsurance products to a variety of niche markets on a worldwide basis. AXIS Surplus Insurance Company, domiciled in the state of Illinois, is eligible to write insurance on a surplus lines basis.
•'AXIS Specialty Europe SE ("AXIS Specialty Europe") is a European public limited liability company, incorporated as a non-life insurer under the laws of Ireland. It is a Societas Europaea (SE), or European society company registered in accordance with company law of the E.U. AXIS Specialty Europe also conducts insurance business through its branch in the United Kingdom ("U.K."), AXIS Specialty Europe SE ("UK Branch"). SubsequentPursuant to the adoptionU.K.'s withdrawal from the European Union on January 31, 2020, AXIS Specialty Europe expects to be fully regulated by the Prudential Regulation Authority ("PRA") as a third-country branch in the U.K. once the transitional arrangements have expired on December 31, 2021. Until AXIS Specialty Europe's application to the PRA for authorization of Accounting Standards Updatea third-country branch in the U.K. is approved, AXIS Specialty Europe will continue to trade in the U.K. under the PRA and the U.K. Financial Conduct Authority ("ASU"FCA") 2016-01, "Financial Instruments - Overall (Subtopic 825-10) - Temporary Permissions Regime. Effective January 1, 2019, Compagnie Belge d’Assurances Aviation NV/SA ("Aviabel") was merged into AXIS Specialty Europe by way of merger by absorption and dissolved without going into liquidation (the "Aviabel Merger"). In connection with the Aviabel Merger, AXIS Specialty Europe established new branches in Belgium and the Netherlands, AXIS Specialty Europe SE (Belgium Branch) and AXIS Specialty Europe SE (Netherlands Branch), respectively. Effective January 1, 2019, AXIS Specialty Europe conducts insurance business through its new branches in Belgium and the Netherlands.
•RecognitionAXIS Re SE is a European public limited liability company, incorporated as a reinsurer under the laws of Ireland. AXIS Re SE is also a Societas Europaea (SE). AXIS Re SE also conducts reinsurance business through its branch in Switzerland, AXIS Re SE, Dublin (Zurich Branch).
•The Company operates in the Lloyd's of London ("Lloyd's") market through its corporate members AXIS Corporate Capital UK Limited and MeasurementAXIS Corporate Capital UK II Limited, which provide 70% and 30%, respectively of Financial Assets and Financial Liabilities,AXIS Syndicate 1686's ("Syndicate 1686") capital support. AXIS Syndicate 1686 is managed by AXIS Managing Agency Ltd. ("AXIS Managing Agency").
•" onOn October 2, 2017, AXIS Specialty UK Holdings Limited, a wholly owned subsidiary of the Company, acquired a 100% ownership interest in Novae Group plc ("Novae"). AXIS Corporate Capital UK II Limited is the sole corporate member of Novae Syndicate 2007 ("Syndicate 2007"). Effective January 1, 2018, AXIS Managing Agency commenced management and oversight of Syndicate 2007. Effective January 1, 2019, Syndicate 2007 ceased accepting new business and was placed into run-off.
•AXIS Ventures Limited ("AXIS Ventures") and AXIS Reinsurance Managers Limited ("AXIS Reinsurance Managers"), regulated by the changeBMA as insurance managers, generate fee income from services provided to strategic capital partners. Effective September 23, 2020, AXIS Ventures deregistered as an insurance manager with the BMA.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 AND 2018
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the fair valuesUnited States of equity securities, netAmerica ("U.S. GAAP") and the rules and regulations of tax is recognizedthe U.S. Securities and Exchange Commission ("SEC") and include AXIS Capital Holdings Limited and its wholly-owned subsidiaries.
All inter-company accounts and transactions have been eliminated.0
Tabular dollar and share amounts are in net investment gains (losses) inthousands, with the consolidated statementsexception of operations.
Net investment income includes dividend income and is presented net of investment expenses. Investment income is recognized when earned. Purchases and sales of equity securities are recorded on a trade-date basis and realized gains (losses) on sales of equity securities are determined based on the specific identification method. Realized gains (losses) on equity securities are included in net investment gains (losses) in the consolidated statements of operations.
Prior to the Adoption of ASU 2016-01
Equity securitiesper share amounts. All amounts are reported at fair value. Prior to the adoption of ASU 2016-01, the change in the fair values of equity securities, net of tax was recognized in AOCI in the consolidated statement of changes in shareholders’ equity. An equity security is impaired if the fair value of the investment is below cost. On a quarterly basis, the Company assessed whether unrealized losses on equity securities represented impairments that were other-than-temporary and recognized impairments on equity securities in an unrealized loss position when the Company did not have the ability and intent to hold the security for a reasonable period of time to allow for a full recovery. The full amount of the impairment was charged to net income and was included in net investment gains (losses) in the consolidated statements of operations.On recognition of an OTTI charge, the new cost basis for the equity security was the cost for an equity security less the OTTI charge recognized in net income. The new cost basis was not adjusted for subsequent increases in fair value.U.S. dollars.
Mortgage Loans Held-for-investment
Mortgage loans held-for-investment are reported at amortized cost which is calculated as the unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, and is net of valuation allowances. Interest income and prepayment fees are recognized when earned. Interest income is recognized based on an effective yield method which gives effect to the amortization of premiums and accretion of discounts.
Other Investments
Other investments are recorded at fair value (refer to Note 6 'Fair Value Measurements'), with changes in fair value and realized gains (losses) reported in net investment income in the consolidated statements of operations.
Equity Method Investments
During 2016, we paid $108 million including direct transactions costs to acquire 19% of the common equity of Harrington Reinsurance Holdings Limited ("Harrington"), the parent company of Harrington Re Ltd. ("Harrington Re"), an independent reinsurance company jointly sponsored by the Company and The Blackstone Group L.P. ("Blackstone"). Harrington is not a variable interest entity that is required to be included in the consolidated financial statements. We account for our ownership interest in Harrington under the equity method of accounting.
In our consolidated results, our ownership interest in Harrington is reported in interest in income (loss) of equity method investments. Interest in income (loss) of equity method investments was $(4) million in 2020, compared to $10 million in 2019. The decrease was attributable to negative investment returns realized by Harrington.
Restricted Assets
Refer to Item 8, Note 5(g) to the Consolidated Financial Statements 'Investments'.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity is a measure of a company’s ability to generate cash flows sufficient to meet the short-term and long-term cash requirements of its business operations. We manage liquidity at the holding company and operating subsidiary level.
Holding Company
As a holding company, AXIS Capital has no operations of its own and its assets consist primarily of investments in its subsidiaries. Accordingly, AXIS Capital’s future cash flows depend on the availability of dividends or other statutorily permissible distributions, such as returns of capital, from its subsidiaries. The ability to pay such dividends and/or distributions is limited by the applicable laws and regulations of the various countries and states in which AXIS Capital’s subsidiaries operate (refer to Item 8, Note 21 to the Consolidated Financial Statements 'Statutory Financial Information' for further details), as well as the need to maintain capital levels to adequately support insurance and reinsurance operations, and to preserve financial strength ratings issued by independent rating agencies. During 2020, AXIS Capital received $350 million (2019: $250 million) of distributions from its subsidiaries. AXIS Capital’s primary uses of funds are dividend payments to common and preferred shareholders, interest and principal payments on debt, capital investments in subsidiaries, and payment of corporate operating expenses. We believe the dividend/distribution capacity of AXIS Capital’s subsidiaries, which was $0.9 billion at December 31, 2020, will provide AXIS Capital with sufficient liquidity for the foreseeable future.
Operating Subsidiaries
AXIS Capital’s operating subsidiaries primarily derive cash from the net inflow of premiums less claim payments related to underwriting activities and from net investment income. Historically, these cash receipts have been sufficient to fund the operating expenses of these subsidiaries, as well as to fund dividend payments to AXIS Capital. The subsidiaries’ remaining cash flows are generally invested in our investment portfolio. The remaining cash flows have also been used to fund common share repurchases and to fund acquisitions in recent periods.
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 losses are paid. However, the amount of cash required to fund loss payments can fluctuate significantly from period to period, due to the low frequency/high severity nature of certain types of business we write.
Consolidated cash flows from operating, investing and financing activities in the last three years were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Total cash provided by (used in)(1) | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Operating activities | $ | 343,503 | | | $ | 199,004 | | | $ | 10,773 | | |
| Investing activities | 489,921 | | | (774,315) | | | 638,554 | | |
| Financing activities | (908,803) | | | 277,510 | | | (186,207) | | |
| Effect of exchange rate changes on cash | 2,154 | | | 44,238 | | | 3,114 | | |
| Increase (decrease) in cash and cash equivalents | $ | (73,225) | | | $ | (253,563) | | | $ | 466,234 | | |
| | | | | | | |
(1) Refer to Item 8, 'Consolidated Statements of Cash Flows' for further details.
•Net cash provided by operating activities was $344 million in 2020 compared to $199 million in 2019. Cash inflows from insurance and reinsurance operations typically include premiums, net of acquisition costs, and reinsurance recoverables. Cash outflows principally include payments of losses and loss expenses together with payments of premiums to reinsurers and operating expenses. Cash provided by operating activities can fluctuate due to timing differences between the collection of premiums and reinsurance recoverables and the payment of losses and loss expenses, and the payment of premiums to reinsurers. Operating cash inflows increased in 2020 compared to 2019, primarily attributable to an increase in premiums received, a decrease in operating expenses, and a decrease in paid income taxes, partially offset by an increase in payments of losses and loss expenses, and a decrease in interest and dividends received from our fixed income portfolio.
•Investing cash inflows in 2020 principally related to the net proceeds from the sale and redemption of fixed maturities of $816 million, partially offset by net purchases of mortgage loans of $160 million, short-term investments of $123 million, and other assets of $45 million. Investing cash inflows in 2019 principally related to the net purchases of fixed maturities of $693 million, net purchases of equity securities of $22 million, partially offset by net proceeds from the sale of other investments of $31 million.
•Financing cash outflows were due to the repayment of $500 million 5.875% Senior Notes, the redemption of $225 million Series D preferred shares, and dividends paid to common and preferred shareholders of $173 million in 2020 (2019: $180 million). In 2019, financing cash inflows were due to net proceeds from the issuance of $300 million 3.900% Senior Notes and $425 million of Junior Subordinated Notes, and financing cash outflows primarily related to the repayment of $250 million 2.650% Senior Notes. Cash outflows also included common share repurchases associated with the vesting of share-settled restricted stock units of $10 million in 2020 (2019: $10 million). The declaration and payment of future dividends and share repurchases is at the discretion of our Board of Directors and will depend on many factors including, but not limited to, our net income, financial condition giving due consideration to the impact of the COVID-19 pandemic, business needs, capital and surplus requirements of our operating subsidiaries and regulatory and contractual restrictions, including those set forth in our credit facilities (refer to 'Capital Resources – Share Repurchases' below for further details).
We have generated positive operating cash flows in all years since 2003, with the exception of 2009 which was impacted by the global financial crisis. These positive cash flows were generated even with the recognition of significant catastrophe and weather-related losses including the impact of the COVID-19 pandemic in 2020.
Net losses and loss expenses, gross of reinstatement premiums, included estimates of ultimate losses for catastrophe and weather-related losses of $773 million in 2020, $351 million in 2019 and $440 million in 2018. There remains significant uncertainty associated with estimates of ultimate losses for certain of these events (refer to 'Underwriting Results – Insurance segment – Current Accident Year Loss' and 'Underwriting Results – Reinsurance segment – Current Accident Year Loss Ratio' for further details), as well as the timing of the associated cash outflows.
Should claim payment obligations accelerate beyond our ability to fund payments from operating cash flows, we would utilize cash and cash equivalent balances and/or liquidate a portion of our investment portfolio. Our investment portfolio is heavily weighted towards conservative, high quality and highly liquid securities. We expect that, if necessary, approximately $13.0 billion of cash and invested assets at December 31, 2020 could be available in one to three business days under normal market conditions; of this amount, $4.9 billion related to restricted assets, which primarily support our obligations in regulatory jurisdictions where we operate as a non-admitted carrier (refer to Item 8, Note 5(g) to the Consolidated Financial Statements 'Investments' for further details). For context, at January 1, 2021. our largest 1-in-250 year return period, single occurrence, single-zone modeled probable maximum loss (Southeast U.S. Hurricane) was approximately $0.4 billion, net of reinsurance. Claim payments pertaining to such an event would be paid out over a period spanning many months. Our internal risk tolerance framework aims to limit the loss of capital due to a single event, and the loss of capital that would occur from multiple but perhaps smaller events, in any year (refer to Item 1 'Risk and Capital Management' for further details).
We expect that cash flows generated from operations, combined with the liquidity provided by our investment portfolio, to be sufficient to cover required cash outflows and other contractual commitments through the foreseeable future (refer to 'Contractual Obligations and Commitments' below for further details).
Capital Resources
In addition to common equity, we have utilized other external sources of financing, including debt, preferred shares, and letter of credit facilities to support our business operations. We believe that we hold sufficient capital to allow us to take advantage of market opportunities and to maintain our financial strength ratings, as well as to comply with various local statutory regulations. We monitor capital adequacy on a regular basis and will seek to adjust our capital base (up or down) according to the needs of our business (refer to Item 1 'Risk and Capital Management' for further details).
The following table summarizes consolidated capital:
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| | | | | |
| At December 31, | 2020 | | 2019 | |
| | | | | |
| Debt | $ | 1,309,695 | | | $ | 1,808,157 | | |
| | | | | |
| Preferred shares | 550,000 | | | 775,000 | | |
| Common equity | 4,745,694 | | | 4,769,008 | | |
| Shareholders’ equity | 5,295,694 | | | 5,544,008 | | |
| Total capital | $ | 6,605,389 | | | $ | 7,352,165 | | |
| | | | | |
| Ratio of debt to total capital | 19.8 | % | | 24.6 | % | |
| Ratio of debt and preferred equity to total capital | 28.2 | % | | 35.1 | % | |
| | | | | |
We finance our operations with a combination of debt and equity capital. Debt to total capital, and debt and preferred equity to total capital ratios, provide an indication of our capital structure, along with some insight into our financial strength.
While the impact of the COVID-19 pandemic and catastrophe and weather-related losses have reduced common shareholders' equity, we believe that our financial flexibility remains strong, and adjustments are made if there are developments that are different from previous expectations.
Debt
Debt represents the 5.150% Senior Notes issued in 2014, which will mature in 2045, the 4.000% Senior Notes issued in 2017, which will mature in 2027, the 3.900% Senior Notes issued in 2019, which will mature in 2029, and the 4.900% Junior Subordinated Notes issued in 2019, which will mature in 2040 (refer to Item 8, Note 10(a) to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details).
The 3.900% Senior Notes and the 4.900% Junior Subordinated Notes were issued to finance the repayment of unsecured senior notes of $500 million that matured in June 2020 and to finance the redemption of Series D preferred shares on January 17, 2020 (refer to 'Preferred Shares' below for further details).
Preferred Shares
Series D Preferred Shares
On May 20, 2013, we issued $225 million of 5.50% Series D preferred shares with a liquidation preference of $25.00 per share. Dividends on the Series D preferred shares were non-cumulative. To the extent declared, dividends accumulated, with respect to each dividend period, in an amount per share equal to 5.50% of the liquidation preference per annum. On January 17, 2020, we redeemed all outstanding Series D preferred shares, for an aggregate liquidation preference of $225 million (refer to Item 8, Note 14 to the Consolidated Financial Statements 'Shareholder's Equity' for further details).
Series E Preferred Shares
On November 7, 2016, we issued $550 million of 5.50% Series E preferred shares with a liquidation preference of $2,500 per share (equivalent to $25 per depositary share). Dividends on the Series E preferred shares are non-cumulative. To the extent declared, dividends accumulate, with respect to each dividend period, in an amount per share equal to 5.50% of the liquidation preference per annum (equivalent to $137.50 per Series E preferred share and $1.375 per depositary share). We may redeem these shares on or after November 7, 2021 at a redemption price of $2,500 per Series E preferred share (equivalent to $25 per depositary share).
Secured Letter of Credit Facilities
We routinely enter into agreements with financial institutions to obtain secured letter of credit facilities. These facilities are primarily used for the issuance of letters of credit, in the normal course of operations, to certain insurance and reinsurance entities that purchase reinsurance protection from us. These letters of credit allow those operations to take credit, under local insurance regulations, for reinsurance obtained in jurisdictions where AXIS Capital’s subsidiaries are not licensed or otherwise admitted as an insurer. The value of our letters of credit outstanding is driven by, among other factors, the amount of unearned premiums, development of loss reserves, the payment patterns of loss reserves, the expansion of our business and the loss experience of that business. A portion of these facilities may also be used for liquidity purposes.
On March 28, 2020, certain of AXIS Capital's operating subsidiaries (the "Participating Subsidiaries") amended an existing $250 million secured letter of credit facility with Citibank Europe plc (the "$250 million Facility") to extend the expiration date to March 31, 2021.
On December 24, 2019, the Participating Subsidiaries amended an existing $500 million secured letter of credit facility with Citibank Europe plc (the "$500 million Facility") to extend the expiration date to December 31, 2023.
Letters of credit issued under the $250 million Facility and the $500 million Facility are principally to be used to support the reinsurance obligations of the Participating Subsidiaries. These facilities are subject to certain covenants, including the requirement to maintain sufficient collateral to cover the obligations outstanding under the facilities. Such obligations include contingent reimbursement obligations for outstanding letters of credit and fees payable to Citibank. In the event of default, Citibank may exercise certain remedies, including the exercise of control over pledged collateral and the termination of the facility to any or all of the Participating Subsidiaries.
At December 31, 2020, letters of credit outstanding were $339 million (refer to Item 8, Note 10 to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details).
Common Equity
During the year ended December 31, 2020, common equity decreased by $23 million. The following table reconciles opening and closing common equity positions:
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| | | | | | |
| Year ended December 31, | | 2020 | | 2019 | |
| | | | | | |
| Common equity - opening | | $ | 4,769,008 | | | $ | 4,255,071 | | |
| Net income (loss) | | (120,424) | | | 323,473 | | |
| Change in unrealized gains on available for sale investments, net of tax | | 239,114 | | | 349,886 | | |
| Share repurchases | | (10,382) | | | (10,165) | | |
| Common share dividends | | (142,405) | | | (138,487) | | |
| Preferred share dividends | | (30,250) | | | (41,112) | | |
| Share-based compensation expense | | 35,574 | | | 29,675 | | |
| Foreign currency translation adjustment | | 3,571 | | | (1,066) | | |
| | | | | | |
| | | | | | |
| Other | | 1,888 | | | 1,733 | | |
| Common equity - closing | | $ | 4,745,694 | | | $ | 4,769,008 | | |
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Share Repurchases
During 2020, we repurchased 194,000 common shares from employees to satisfy withholding tax liabilities related to the vesting of share-settled restricted stock units granted under our 2007 and 2017 Long-Term Equity Compensation Plans for a total cost of $10 million. A common share repurchase plan has not yet been authorized for 2021.
Shelf Registrations
On November 19, 2019, we filed an unallocated universal shelf registration statement with the SEC, which became effective on filing. Pursuant to the shelf registration, we may issue an unlimited amount of equity, debt, warrants, purchase contracts or a combination of these securities. Our intent and ability to issue securities pursuant to this registration statement will depend on market conditions at the time of any proposed offering.
Financial Strength Ratings
Our principal insurance and reinsurance operating subsidiaries are assigned financial strength ratings from internationally recognized rating agencies, including Standard & Poor’s, A.M. Best, and Moody’s Investors Service. These ratings are publicly announced and are available directly from the agencies, as well as on our website.
Financial strength ratings represent the opinions of the rating agencies on the overall financial strength of a company and its capacity to meet the obligations of its insurance and reinsurance contracts. Independent ratings are one of the important factors that establish a competitive position in insurance and reinsurance markets. The rating agencies consider many factors in determining the financial strength rating of an insurance company, including the relative level of statutory surplus necessary to support the business operations of the company. These ratings are based on factors considered by the rating agencies to be relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Ratings are not recommendations to buy, sell or hold securities.
The following are the most recent financial strength ratings from internationally recognized agencies in relation to our principal insurance and insurance operating subsidiaries:
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| Rating agency | | Agency’s description of rating | | Rating and outlook | | Agency’s rating
definition | | Ranking of rating | |
| | | | | | |
| Standard & Poor’s | | An "opinion about the financial security characteristics of an insurance organization, with respect to its ability to pay under its insurance policies and contracts, in accordance with their terms". | | A+ (Negative) (1) | | "Strong capacity to meet its financial commitments" | | The ‘A’ category is the third highest out of ten major rating categories. The second through eighth major rating categories may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. | |
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| A.M. Best | | An "opinion of an insurer’s financial strength and ability to meet its ongoing insurance policy and contract obligations". | | A (Stable) (2) | | "Excellent ability to meet ongoing insurance obligations" | | The ‘A’ category is the third highest rating out of fourteen. Ratings outlooks (‘Positive’, ‘Negative’ and ‘Stable’) are assigned to indicate a rating’s potential direction over an intermediate term, generally defined as 36 months. | |
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| Moody’s Investors Service | | "Opinions of the ability of insurance companies to pay punctually senior policyholder claims and obligations." | | A2 (Negative) (3)
| | "Offers good financial security" | | The ‘A’ category 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. | |
(1) On May 11, 2020, Standard & Poor's revised its outlook from stable to negative due to unfavorable trends in operating performance.
(2) On May 5, 2020, A.M. Best revised its rating and outlook from A+ and negative to A and stable, respectively. The revised rating was based on unfavorable trends in operating performance over the past five years, particularly emanating from the insurance segment. The revised outlook continues to reflect our strong balance sheet, favorable business profile and appropriate risk management practices.
(3) In April 2019, Moody's Investor Service revised its outlook from stable to negative reflecting higher operational and financial leverage and lower capitalization relative to peers.
Contractual Obligations and Commitments
At December 31, 2020, contractual obligations and commitments by period due were:
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| | | | | | | | | | | | |
| | | Payment due by period | |
| Contractual obligations and commitments | | Total | | Less than 1
year | | 1-3 years | | 3-5 years | | More than
5 years | |
| | | | | | | | | | | | |
| Operating activities | | | | | | | | | | | |
| Estimated gross losses and loss expenses payments(1) | | $ | 13,926,766 | | | $ | 3,839,180 | | | $ | 4,618,273 | | | $ | 2,400,797 | | | $ | 3,068,516 | | |
| Operating lease obligations(2) | | 140,263 | | | 17,215 | | | 35,044 | | | 21,990 | | | 66,014 | | |
| Investing activities | | | | | | | | | | | |
| Unfunded investment commitments(3) | | 634,206 | | | 249,609 | | | 112,109 | | | 125,563 | | | 146,925 | | |
| Financing activities | | | | | | | | | | | |
| Debt (principal payments)(4) | | 1,325,000 | | | — | | | — | | | — | | | 1,325,000 | | |
| Debt (interest payments)(4)(5) | | 863,561 | | | 60,680 | | | 121,539 | | | 121,796 | | | 559,546 | | |
| Total | | $ | 16,889,796 | | | $ | 4,166,684 | | | $ | 4,886,965 | | | $ | 2,670,146 | | | $ | 5,166,001 | | |
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(1)We are obligated to pay claims for specified loss events covered by the insurance and reinsurance contracts that we write. Loss payments represent our most significant future payment obligation. In contrast to our other contractual obligations, cash payments are not determinable from the terms specified within the underlying contracts. Our best estimate of reserve for losses and loss expenses is reflected in the table above. Actual amounts and timing may differ materially from our best estimate (refer to ‘Critical Accounting Estimates – Reserve for Losses and Loss Expenses’ for further details). We have not taken into account corresponding reinsurance recoverable on unpaid amounts that would be due to us.
(2)In the ordinary course of business, we renew and enter into new leases for office space which expire at various dates (refer to Item 8, Note 12 to the Consolidated Financial Statements 'Leases' for further details).
(3)We have $588 million of unfunded investment commitments related to our other investments portfolio, which are callable by our investment managers (refer to Item 8, Note 5(c) to the Consolidated Financial Statements 'Investments' for further details). In addition, we have $46 million of unfunded commitments related to our commercial mortgage loans portfolio.
(4)Refer to Item 8, Note 10(a) to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details.
(5)Debt (interest payments) includes $15 million of unamortized discount and debt issuance expenses.
CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements include certain amounts that are inherently uncertain and judgmental in nature. As a result, we are required to make assumptions and best estimates in order to determine the reported values. We consider an accounting estimate to be critical if: (1) it requires that significant assumptions be made in order to deal with uncertainties and (2) changes in the estimate could have a material impact on our results of operations, financial condition or liquidity.
We believe that the material items requiring such subjective and complex estimates are:
•reserves for losses and loss expenses;
•reinsurance recoverable on unpaid losses and loss expenses, including the allowance for expected credit losses;
•gross premiums written and net premiums earned;
•fair value measurements of financial assets and liabilities; and
•the allowance for credit losses associated with available for sale securities.
Significant accounting policies are also important to understanding the consolidated financial statements (refer to Item 8, Note 2 to the Consolidated Financial Statements 'Basis of Presentation and Significant Accounting Policies' for further details).
We believe that the amounts included in the consolidated financial statements reflect management's best judgment. However, factors such as those described in Item 1A 'Risk Factors' could cause actual events or results to differ materially from the underlying assumptions and estimates which could lead to a material adverse impact on our results of operations, financial condition or liquidity.
Reserve for Losses and Loss Expenses
Overview
We believe the most significant accounting judgment we make is the estimate of reserve for losses and loss expenses ("loss reserves"). Loss reserves represent management’s estimate of the unpaid portion of our ultimate liability for losses and loss expenses ("ultimate losses") for insured and reinsured events that have occurred at or before the balance sheet date. Loss reserves reflect claims that have been reported ("case reserves") to us and claims that have been incurred but not reported ("IBNR") to us. Loss reserves represent our best estimate of what the ultimate settlement and administration of claims will cost, based on our assessment of facts and circumstances known at that particular point in time.
Loss reserves are not an exact calculation of the liability but instead, are complex estimates. The process of estimating loss reserves involves a number of variables (refer to 'Selection of Reported Reserves – Management's Best Estimate' below for further details). We review estimates of loss reserves each reporting period and consider all significant facts and circumstances known at that particular point in time. As additional experience and other data become available and/or laws and legal interpretations change, we may adjust previous estimates of loss reserves. Adjustments are recognized in the period in which they are determined, therefore they can impact that period's underwriting results either favorably (indicating that current estimates are lower than previous estimates) or adversely (indicating that current estimates are higher than previous estimates).
Case Reserves
With respect to insurance business, we are generally notified of losses by our insureds and/or their brokers. Based on this information, our claims personnel estimate ultimate losses arising from the claim, including the cost of administering the claims settlement process. These estimates reflect the judgment of our claims personnel based on general reserving practices, the experience and knowledge of such personnel regarding the nature of the specific claim and, where appropriate, the advice of legal counsel, loss adjusters and other relevant consultants.
With respect to reinsurance business, we are generally notified of losses by ceding companies and/or their brokers. For excess of loss contracts, we are typically notified of insured losses on specific contracts and record a case reserve for the estimated ultimate liability arising from the claim. For contracts written on a proportional basis, we typically receive aggregated claims information and record a case reserve for the estimated ultimate liability arising from the claim based on that information. Proportional reinsurance contracts typically require that losses in excess of pre-defined amounts be separately notified so we can adequately evaluate them. Our claims department evaluates each specific loss notification we receive and records additional case reserves when a ceding company’s reserve for a claim is not considered adequate. We also undertake an extensive program of cedant audits, using outsourced legal and industry experience where necessary. This allows us to review cedants’ claims administration practices to ensure that reserves are consistent with exposures, adequately established, and properly reported in a timely manner.
IBNR
The estimation of IBNR is necessary due to potential development on reported claims and the time lag between when a loss event occurs and when it is actually reported, which is referred to as a reporting lag. Reporting lags may arise from a number of factors, including but not limited to, the nature of the loss, the use of intermediaries and complexities in the claims adjusting process. As we do not have specific information on IBNR, it must be estimated. IBNR is calculated by deducting incurred losses (i.e. paid losses and case reserves) from management’s best estimate of ultimate losses. In contrast to case reserves, which are established at the contract level, IBNR reserves are generally estimated at an aggregate level and cannot be identified as reserves for a particular loss event or contract (refer to 'Reserving for Significant Catastrophic Events' below for further details).
Reserving Methodology
Sources of Information
Our quarterly loss reserving process begins with the collection and analysis of paid and incurred claim data for each of the segments. The segmental data is disaggregated by reserve class and further disaggregated by underwriting year and accident year. Underwriting year or accident year information is used to analyze our business and to estimate loss reserves. Reserve classes are selected to ensure that the underlying contracts have homogeneous loss development characteristics, while remaining large enough to make the estimation of trends credible. Reserve classes are reviewed on a regular basis and adjusted over time as our business evolves. The paid and incurred claim data, in addition to industry benchmarks, serves as a key input to many of the methods employed by our actuaries. The relative weights assigned to our historical loss data versus industry
data vary based on a number of factors including our historical track record and the development profile for the reserve class being evaluated (refer to 'Claim Tail Analysis' below for further details).
Actuarial Analysis
Multiple actuarial methods are available to estimate ultimate losses. Each method has its own assumptions and its own advantages and disadvantages, with no single estimation method being better than the others in all situations and no one set of assumption variables being meaningful for all reserve classes. The relative strengths and weaknesses of the particular estimation methods when applied to a particular group of claims can also change over time.
The following is a brief description of the reserve estimation methods commonly employed by our actuaries including a discussion of their particular strengths and weaknesses:
•Expected Loss Ratio Method ("ELR Method"): This method estimates ultimate losses for an accident year or underwriting year by applying an expected loss ratio to the earned or written premium for that year. Generally, expected loss ratios are based on one or more of (a) an analysis of historical loss experience to date, (b) pricing information and (c) industry data, adjusted as appropriate, to reflect changes in rates, loss and exposure trends, and terms and conditions. This method is insensitive to actual incurred losses for the accident year or underwriting year in question and is, therefore, often useful in the early stages of development when very few losses have been incurred. Conversely, the lack of sensitivity to incurred/paid losses for the accident year or underwriting year in question means that this method is usually inappropriate in later stages of an accident year or underwriting year’s development.
•Loss Development Method (also referred to as the "Chain Ladder Method" or "Link Ratio Method"): This method assumes that the losses incurred/paid for each accident year or underwriting year at a particular development stage follow a relatively similar pattern. It assumes that on average, every accident year or underwriting year will display the same percentage of ultimate losses incurred/paid at the same point in time after the inception of that year. The percentages incurred/paid are established for each development stage (e.g. 12 months, 24 months, etc.) after examining averages from historical loss development data and/or external industry benchmark information. Ultimate losses are then estimated by multiplying the actual incurred/paid losses by the reciprocal of the established incurred/paid percentage. The strengths of this method are that it reacts to loss emergence/payments and that it makes full use of historical claim emergence/payment experience. However, this method has weaknesses when the underlying assumption of stable loss development/payment patterns is not valid. This could be the consequence of changes in business mix, claim inflation trends or claim reporting practices and/or the presence of large claims, among other things. Furthermore, this method tends to produce volatile estimates of ultimate losses where there is volatility in the underlying incurred/paid patterns. In particular, where the expected percentage of incurred/paid losses is low, small deviations between actual and expected claims can lead to very volatile estimates of ultimate losses. As a result, this method is often unsuitable at early development stages for an accident year or underwriting year.
•Bornhuetter-Ferguson Method ("BF Method"): This method can be seen as a combination of the ELR and Loss Development Methods, under which the Loss Development Method is given progressively more weight as an accident year or underwriting year matures. The main advantage of the BF Method is that it provides a more stable estimate of ultimate losses than the Loss Development Method at earlier stages of development, while remaining more responsive to emerging loss development than the ELR Method. In addition, the BF Method allows for the incorporation of external market information through the use of expected loss ratios, whereas the Loss Development Method does not incorporate such information.
As part of our quarterly loss reserving process, our actuaries employ the estimation method(s) that they believe will produce the most reliable estimate of ultimate losses, at that particular evaluation date, for each reserve class and accident year or underwriting year combination. Often, this is a blend (i.e. weighted average) of the results of two or more appropriate actuarial methods. These ultimate loss estimates are generally utilized to evaluate the adequacy of ultimate loss estimates for previous accident or underwriting years, established in the prior reporting period. For the initial estimate of the current accident or underwriting year, the available claim data is typically insufficient to produce a reliable estimate of ultimate losses. As a result, initial estimates for an accident or underwriting year is generally based on the ELR Method for longer tailed lines and a BF method for shorter tailed lines. The initial ELR for each reserve class is established collaboratively by our actuaries, underwriters and management at the start of the year as part of the planning process, taking into consideration prior accident years’ or underwriting years' experience and industry benchmarks, adjusted after considering factors such as loss and exposure trends, rate differences, changes in contract terms and conditions, business mix changes and other known differences between the current year and prior accident or underwriting years. The initial expected loss ratios for a given accident or underwriting year may be modified over time if the underlying assumptions, such as loss development or premium rate changes, differ from the original assumptions.
Key Actuarial Assumptions
The use of the above actuarial methods requires us to make certain explicit assumptions, the most significant of which are: (1) expected loss ratios and (2) loss development patterns.
In earlier years, we placed significant reliance on industry benchmarks in establishing expected loss ratios and selecting loss development patterns. Over time, we have placed more reliance on our historical loss experience in establishing these ratios and selecting these patterns where we believe the weight of our experience has become sufficiently credible for consideration. The weight given to our experience differs for each of the three claim tail classes (refer to 'Claim Tail Analysis' below for further details). In establishing expected loss ratios for the insurance segment, we give consideration to a number of other factors, including exposure trends, rate adequacy on new and renewal business, ceded reinsurance costs, changes in claims emergence and our underwriters’ view of terms and conditions in the market environment. For the reinsurance segment, expected loss ratios are based on a contract-by-contract review, which considers information provided by clients together with estimates provided by our underwriters and actuaries about the impact of changes in pricing, terms and conditions and coverage. We also have considered the market experience of some classes of business as compiled and analyzed by an independent actuarial firm, as appropriate.
Claim Tail Analysis
Gross loss reserves for each of the reportable segments, segregated between case reserves and IBNR and by reserve class were as shown below. Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for mapping of the Company's lines of business to reserve classes and the expected claim tails.
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| | | | | | | | | | | | | |
| | 2020 | | 2019 | |
| At December 31, | Case reserves | | IBNR | | Total | | Case reserves | | IBNR | | Total | |
| | | | | | | | | | | | | |
| Insurance segment: | | | | | | | | | | | | |
| Property and other | $ | 704,107 | | | $ | 642,413 | | | $ | 1,346,520 | | | $ | 655,262 | | | $ | 327,475 | | | $ | 982,737 | | |
| Marine | 221,243 | | | 317,869 | | | 539,112 | | | 235,549 | | | 281,677 | | | 517,226 | | |
| Aviation | 132,613 | | | 38,018 | | | 170,631 | | | 116,932 | | | 31,445 | | | 148,377 | | |
| Credit and political risk | 8,917 | | | 152,134 | | | 161,051 | | | 5,905 | | | 124,109 | | | 130,014 | | |
| Professional lines | 801,565 | | | 2,279,712 | | | 3,081,277 | | | 806,780 | | | 2,041,317 | | | 2,848,097 | | |
| Liability | 376,486 | | | 1,635,421 | | | 2,011,907 | | | 396,837 | | | 1,473,280 | | | 1,870,117 | | |
| | | | | | | | | | | | | |
| Total Insurance | 2,244,931 | | | 5,065,567 | | | 7,310,498 | | | 2,217,265 | | | 4,279,303 | | | 6,496,568 | | |
| | | | | | | | | | | | | |
| Reinsurance segment: | | | | | | | | | | | | |
| Property and other | 1,086,265 | | | 1,027,316 | | | 2,113,581 | | | 879,301 | | | 1,186,655 | | | 2,065,958 | | |
| Credit and surety | 149,778 | | | 157,196 | | | 306,974 | | | 125,029 | | | 190,368 | | | 315,397 | | |
| Professional lines | 516,011 | | | 673,082 | | | 1,189,093 | | | 429,576 | | | 688,439 | | | 1,118,015 | | |
| Motor | 809,389 | | | 540,623 | | | 1,350,012 | | | 778,534 | | | 516,148 | | | 1,294,681 | | |
| Liability | 525,526 | | | 1,131,082 | | | 1,656,608 | | | 431,211 | | | 1,030,252 | | | 1,461,462 | | |
| | | | | | | | | | | | | |
| Total Reinsurance | 3,086,969 | | | 3,529,299 | | | 6,616,268 | | | 2,643,651 | | | 3,611,862 | | | 6,255,513 | | |
| | | | | | | | | | | | | |
| Total | $ | 5,331,900 | | | $ | 8,594,866 | | | $ | 13,926,766 | | | $ | 4,860,916 | | | $ | 7,891,165 | | | $ | 12,752,081 | | |
| | | | | | | | | | | | | |
In order to capture the key dynamics of loss reserve development and potential volatility, reserve classes should be considered according to their potential expected length of loss emergence and settlement, generally referred to as the "tail". We consider our business to consist of three claim tail classes, short-tail, medium-tail and long-tail. Favorable development on prior accident year reserves indicates that current estimates are lower than previous estimates, while adverse development on prior accident year reserves indicates that current estimates are higher than previous estimates. Below is a discussion of the specifics of our loss reserve process as it applies to each claim tail class, as well as commentary on the factors contributing to our historical loss reserve development for each class.
Short-tail Business
Short-tail business generally includes exposures for which losses are usually known and paid within a relatively short period of time after the underlying loss event has occurred. Our short-tail business primarily relates to property coverages and includes terrorism, accident and health, discontinued lines - Novae, marine, and aviation hull and war business in the insurance segment, together with the catastrophe, property, engineering, agriculture, marine and aviation, accident and health, and discontinued lines - Novae business in the reinsurance segment.
The key actuarial assumptions for short-tail business in early accident years were primarily developed with reference to industry benchmarks for expected loss ratios and loss development patterns. As our historical loss experience amassed, it gained credibility and became relevant for consideration in establishing these key actuarial assumptions. As a result, we gradually increased the weighting assigned to our historical loss experience in selecting the expected loss ratios and loss development patterns utilized to establish estimates of ultimate losses for an accident year. Due to the relatively short reporting and settlement patterns for short-tail business, we generally place more weight on experience-based methods and other qualitative considerations in establishing reserves for recent and more mature accident years (refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for detail on the reserve classes, the expected claim tails, and prior year development).
Although estimates of ultimate losses for short-tail business are inherently more certain than for medium and long-tail business, significant judgment is still required. For example, much of our excess insurance and excess of loss reinsurance business has high attachment points, therefore, it is often difficult to estimate whether claims will exceed those attachment points. In addition, the inherent uncertainties relating to catastrophe events further add to the complexity of estimating potential exposure. Further, we use managing general agents ("MGAs") and other producers for certain business in the insurance segment which can delay the reporting of loss information to us. We expect that the majority of development for an accident year or underwriting year will be recognized in the subsequent one to three years.
Medium-tail Business
Medium-tail business generally has claim reporting and settlement periods that are longer than those of short-tail reserve classes. Our medium-tail business primarily consists of insurance and reinsurance professional lines, reinsurance credit and surety, aviation liability business in the insurance and discontinued lines - Novae in the insurance segment. We also consider insurance credit and political risk business to have a medium tail, due to the complex nature of claims and the potential additional time that may be required to realize subrogation assets.
For our earliest accident and underwriting years, initial key actuarial expected loss ratio and loss development assumptions were established utilizing industry benchmarks. Due to the longer claim tail, the length of time required to develop credible loss history for use in the loss reserving process is greater for medium-tail business than for short-tail business. Our reserving approach for medium-tail business is tailored by line of business, with significant lines of business being specifically addressed below:
•Insurance and Reinsurance Professional Lines
For professional lines business and discontinued lines - Novae, claim payment and reporting patterns are typically medium to long-tail in nature. This business is predominantly written on a claims-made basis.
With respect to key actuarial assumptions, we rely on our loss experience when establishing expected loss ratios and selected loss development patterns. 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 or underwriting year matures. Consequently, initial loss reserves for an accident year or underwriting year are generally based on 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 experience until selections are based almost exclusively on experience-based methods. We evaluate the appropriateness of the transition to experience-based methods at the reserve class level, commencing this transition when we believe that our incurred loss development is sufficient to produce meaningful actuarial indications. The rate at which we transition fully to sole reliance on experience-based methods can vary by reserve class and by year, depending on our assessment of the stability and relevance of such indications. For some professional lines in the insurance segment, we also rely on the evaluation of the open claim inventory in addition to the commonly employed actuarial methods when establishing reserves.
Our transition from the ELR method to experience-based methods began in 2008, when we commenced gradual transition for the 2004 and prior accident years. As our loss history continued to develop, the transition was expanded to include additional accident years (refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for detail on the reserve classes, the expected claim tails, and prior year development).
•Reinsurance Credit and Surety
For reinsurance credit and surety business, initial and most recent underwriting year loss projections are generally based on the ELR method, with consideration given to qualitative factors. Given that there is a quicker and more stable reporting pattern for trade credit and mortgage business, we generally commence the transition to experience-based methods for these lines of business sooner than for surety business.
•Insurance Credit and Political Risk
Refer to 'Reserving for Credit and Political Risk Business' below for a more detailed discussion of specific loss reserve issues related to this business. When considering prior year reserve development for this line of business, it is important to note that the multi-year nature of the credit business distorts loss ratios when a single accident year is considered in isolation. In recent years, the average term of these contracts has been four to five years. Premiums for these contracts generally earn evenly over the contract term, therefore, are reflected in multiple accident years. In contrast, losses incurred on these contracts, which can be characterized as low in frequency and high in severity, are reflected in a single accident year.
The estimation of the value of recoveries on credit and political risk business requires significant management judgment. At December 31, 2020, estimated recoveries on credit and political risk business were $52 million (2019: $35 million).
Long-tail Business
In contrast to short and medium-tail business, the claim tail for long-tail business is expected to be notably longer, as claims are often reported and ultimately paid or settled years, or even decades, after the related loss events occur. Our long-tail business primarily relates to liability business written in the insurance and reinsurance segments, and reinsurance motor business, and discontinued lines - Novae in the insurance and reinsurance segments.
As a general rule, estimates of accident year or underwriting year ultimate losses for long-tail business are notably more uncertain than those for short and medium-tail business. Factors that contribute additional uncertainty to estimates for long-tail business include, but are not limited to:
•more significant weight given to industry benchmarks in forming our key actuarial assumptions;
•potential volatility of actuarial estimates, given the number of years of development it takes to produce a meaningful incurred loss as a percentage of ultimate losses;
•inherent uncertainties about loss trends, claims inflation (e.g. medical, judicial, social) and general economic conditions; and
•the possibility of future litigation, legislative or judicial change that may impact future loss experience relative to the prior industry loss experience relied on in reserve estimation.
To date, key actuarial assumptions for long-tail business have been derived from a combination of industry benchmarks supplemented by our historical loss experience. While we consider industry benchmarks that we believe reflect the nature and coverage of our business, actual loss experience may differ from the benchmarks based on industry averages.
Due to the length of the development tail for this business, reserve estimates for most accident years and underwriting years are predominantly based on the BF or ELR method and the consideration of qualitative factors. As part of our quarterly loss reserving process, we monitor actual paid and incurred loss emergence relative to expected loss emergence based on selected loss development patterns. The drivers of any unfavorable loss emergence are investigated and, as a result, have led to an immediate recognition of adverse development in some instances.
Prior to the fourth quarter of 2012, we did not recognize any favorable loss emergence. As a result, during some periods, we recognized net adverse prior year reserve development for insurance liability business in light of unfavorable loss emergence for certain reserve class and accident year combinations.
Commencing with the fourth quarter 2012 loss reserving process, we began to give weight to actuarial methods that reflect our experience for liability business as we believed that our oldest accident years were at a stage of expected development where such methods would produce meaningful actuarial indications.
In 2020, we continued to give weight to experience-based methods on the earlier years for insurance and reinsurance liability lines of business.
Reserving for Credit and Political Risk Business
Our insurance credit and political risk business provides credit and political risk insurance products for banks, commodity traders, corporations and multilateral and export credit agencies. Cover is provided for a range of risks including sovereign default, credit default, political violence, currency inconvertibility and non-transfer, expropriation, aircraft non-repossession and contract frustration due to political events.
Claims for this business tend to be characterized by their severity risk, as opposed to their frequency risk therefore, claim payment and reporting patterns are anticipated to be volatile. Under the notification provisions of our credit insurance policies, we anticipate being advised of an insured event within a relatively short time period. Consequently, we generally estimate ultimate losses based on a contract-by-contract analysis which considers the contracts’ terms, the facts and circumstances of underlying loss events and qualitative input from claims managers.
An important and distinguishing feature of many of these contracts is the contractual right, subsequent to payment of a claim to an insured, to be subrogated to, or otherwise have an interest in, the insured’s rights of recovery under an insured loan or facility agreement. These estimated recoveries are recorded as an offset to credit and political risk loss reserves. The lag between the date of a claim payment and the ultimate recovery from the corresponding security can result in negative case reserves at a point in time (as was the case at December 31, 2020 and 2019). The nature of the underlying collateral is specific to each transaction therefore we estimate the value of this collateral on a contract-by-contract basis. This valuation process is inherently subjective and involves the application of management’s judgment because active markets for the collateral often do not exist. Estimates of values are based on numerous inputs, including information provided by our insureds, as well as third-party sources including rating agencies, asset valuation specialists and other publicly available information. We also assess any post-event circumstances, including restructurings, liquidations and possession of asset proposals/agreements.
In some instances, on becoming aware of a loss event related to credit and political risk business, we negotiate a final settlement of all of our policy liabilities for a fixed amount. In most circumstances, this occurs when the insured moves to realize the benefit of the collateral that underlies the insured loan or facility and presents us with a net settlement proposal that represents a full and final payment by us under the terms of the policy. In consideration for this payment, we secure a cancellation of the policy, or a release of all claims, and waive our right to pursue a recovery of these settlement payments against the security that may have been available to us under the insured loan or facility agreement. In certain circumstances, cancellation by way of net settlement or full payment can result in an adjustment to the premium associated with the policy.
Reserving for Significant Catastrophic Events
We cannot estimate losses from widespread catastrophic events, such as hurricanes and earthquakes, using the traditional actuarial methods described above. The magnitude and complexity of losses associated with certain of these events inherently increase the level of uncertainty and, therefore, the level of management judgment involved in arriving at loss reserve estimates. As a result, actual losses for these events may ultimately differ materially from current estimates.
Loss reserves related to the COVID-19 pandemic represent our best estimate of losses and loss expenses that have been incurred at the balance sheet date. The determination of loss reserves is based on a ground-up assessment of coverage from individual contracts and treaties across all lines of business, and includes a review of modeling analyses and market information, where appropriate. In addition, we consider information received from clients, brokers and loss adjusters, together with global shelter-in-place orders and the outcomes of recent court judgments, including the UK Supreme Court ruling.
The estimate of loss reserves related to the COVID-19 pandemic is subject to significant uncertainty. This uncertainty is driven by the inherent difficulty in making assumptions around the impact of the COVID-19 pandemic due to the lack of comparable events, the ongoing nature of the event, and its far-reaching impacts on world-wide economies and the health of the population. These assumptions include:
•the nature and the duration of the pandemic;
•the effects on human health, the economy and our customers;
•the response of government bodies including legislative, regulatory or judicial actions and social influences that could alter the interpretation of the our contracts;
•the coverage provided under our contracts;
•the coverage provided by our ceded reinsurance; and
•the evaluation of the loss and impact of loss mitigation actions.
While we believe our estimate of loss reserves is adequate for losses and loss expenses that have been incurred at the balance sheet date based on current facts and circumstances, we continue to monitor the appropriateness of these assumptions as new information comes to light and adjustments are made to our estimate of ultimate losses related to the COVID-19 pandemic if there are developments that are different from previous expectations. Adjustments are recorded in the period in which they are identified. Actual losses for this event may ultimately differ materially from current estimates.
Loss reserves related to catastrophes other than the COVID-19 pandemic represent our best estimate of losses and loss expenses that have been incurred at the balance sheet date. The determination of these loss reserves is estimated by management after a catastrophe occurs by completing an in-depth analysis of individual contracts which may potentially have been impacted by the catastrophic event. This in-depth analysis may rely on several sources of information including:
•estimates of the size of insured industry losses from the catastrophic event and our corresponding market share;
•a review of our portfolio of contracts to identify those contracts which may be exposed to the catastrophic event;
•a review of modeled loss estimates based on information previously reported by customers and brokers, including exposure data obtained during the underwriting process;
•discussions of the impact of the event with our customers and brokers; and
•catastrophe bulletins published by various independent statistical reporting agencies.
We generally use a blend of these information sources to arrive at aggregate estimates of the ultimate losses arising from the catastrophic event.
There are additional risks that affect our ability to accurately estimate ultimate losses for catastrophic events. For example, the estimates 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 or 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 loss reserves for that reporting period.
While we believe our estimate of loss reserves is adequate for losses and loss expenses that have been incurred at the balance sheet date based on current facts and circumstances, we monitor changes in paid and incurred losses in relation to each significant catastrophe in subsequent reporting periods, and adjustments are made to estimates of ultimate losses for each event if there are developments that are different from previous expectations. Adjustments are recorded in the period in which they are identified. Actual losses for these event may ultimately differ materially from current estimates.
Results of operations for 2020 and 2019 were impacted by natural catastrophe activity (refer to 'Underwriting Results – Insurance segment – Current Accident Year Loss Ratio' and 'Underwriting Results – Reinsurance segment – Current Accident Year Loss Ratio' for further details).
Selection of Reported Reserves – Management’s Best Estimate
Our quarterly loss reserving process involves the collaboration of our underwriting, claims, actuarial, legal, ceded reinsurance and finance departments, includes various segmental committee meetings and culminates with the approval of a single point best estimate by our Group Reserving Committee, which comprises senior management. In selecting this best estimate, management considers actuarial estimates and applies informed judgment regarding qualitative factors that may not be fully captured in these actuarial estimates. Such factors include, but are not limited to, the timing of the emergence of claims, volume and complexity of claims, social and judicial trends, potential severity of individual claims and the extent of our historical loss data versus industry information. While these qualitative factors are considered in arriving at the point estimate, no specific provisions for qualitative factors are established.
With regard to establishing the fair value of reserves for losses and loss expenses for Novae at the acquisition date, weight was given to the observable value of these reserves based on the RITC transaction of the 2015 and prior years of account of Syndicate 2007, which was completed prior to the allocation of purchase price. Management made no change to the initial estimate when establishing its best estimate of reserves for losses and loss expenses at December 31, 2017. This is consistent with our general approach of recognizing all or part of the anticipated cost of third-party liability commutations if the transaction has either completed or is considered sufficiently likely to be completed in the near term.
Beginning in 2013, we significantly enhanced the capabilities and resources dedicated to the actuarial reserving function. Consequently, from the first quarter of 2014, management began to rely on its internal actuarial reserving function for its quarterly loss reserving process rather than utilizing the services of an independent actuarial firm. On an annual basis, we use an independent actuarial firm to provide an actuarial opinion on the reasonableness of loss reserves for each of our operating subsidiaries and statutory reporting entities as these actuarial opinions are required to meet various insurance regulatory requirements. The actuarial firm also discusses its conclusions from the annual review with management and presents its findings to the Audit Committee of the Board of Directors.
Sensitivity Analysis
While we believe that loss reserves at December 31, 2020 are adequate, new information, events or circumstances may result in ultimate losses that are materially greater or less than provided for in our loss reserves. As previously noted, there are many factors that may cause reserves to increase or decrease, particularly those related to catastrophe losses and long-tail lines of business.
Expected loss ratios are a key assumption in estimates of ultimate losses for business at an early stage of development. A higher expected loss ratio results in a higher ultimate loss estimate, and vice versa. Assumed loss development patterns are another significant assumption in estimating loss reserves. Accelerating a loss reporting pattern (i.e. shortening the claim tail) results in lower ultimate losses, as the estimated proportion of losses already incurred would be higher. The uncertainty in the timing of the emergence of claims (i.e. the length of the development pattern) is generally greater for a company with a relatively limited operating history, therefore, we rely on industry benchmarks to a certain extent when establishing loss reserve estimates.
The effect on estimates of gross loss reserves of reasonably likely changes in the two key assumptions used to estimate gross loss reserves at December 31, 2020 was as follows:
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| INSURANCE | |
| Development pattern | Expected loss ratio | |
| Property and other | 5% lower | | Unchanged | | 5% higher | |
| | | | | | | |
| 3 months shorter | $ | (57,199) | | | $ | (50,476) | | | $ | (43,738) | | |
| Unchanged | (9,188) | | | — | | | 9,172 | | |
| 3 months longer | 44,366 | | | 56,197 | | | 68,014 | | |
| | | | | | | |
| Marine | 5% lower | | Unchanged | | 5% higher | |
| | | | | | | |
| 3 months shorter | $ | (47,269) | | | $ | (36,735) | | | $ | (26,215) | | |
| Unchanged | (12,303) | | | — | | | 12,293 | | |
| 3 months longer | 15,612 | | | 29,302 | | | 42,988 | | |
| | | | | | | |
| Aviation | 5% lower | | Unchanged | | 5% higher | |
| | | | | | | |
| 3 months shorter | $ | (11,765) | | | $ | (10,282) | | | $ | (8,799) | | |
| Unchanged | (1,997) | | | — | | | 1,997 | | |
| 3 months longer | 19,663 | | | 22,800 | | | 25,937 | | |
| | | | | | | |
| Credit and political risk | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 3 months shorter | $ | (10,793) | | | $ | (40) | | | $ | 16,612 | | |
| Unchanged | (10,763) | | | — | | | 16,663 | | |
| 3 months longer | (10,714) | | | 59 | | | 16,731 | | |
| | | | | | | |
| Professional lines | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (425,931) | | | $ | (117,973) | | | $ | 191,070 | | |
| Unchanged | (320,129) | | | — | | | 320,504 | | |
| 6 months longer | (174,634) | | | 162,369 | | | 499,595 | | |
| | | | | | | |
| Liability | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (254,234) | | | $ | (47,019) | | | $ | 160,201 | | |
| Unchanged | (211,750) | | | — | | | 211,752 | | |
| 6 months longer | (157,773) | | | 59,784 | | | 277,338 | | |
| | | | | | | |
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| REINSURANCE | |
| Development pattern | Expected loss ratio | |
| Property and other | 5% lower | | Unchanged | | 5% higher | |
| | | | | | | |
| 3 months shorter | $ | (112,472) | | | $ | (53,558) | | | $ | 5,654 | | |
| Unchanged | (64,593) | | | — | | | 55,802 | | |
| 3 months longer | (6,530) | | | 55,296 | | | 117,196 | | |
| | | | | | | |
| Credit and surety | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (33,479) | | | $ | (20,454) | | | $ | (7,198) | | |
| Unchanged | (11,616) | | | — | | | 13,995 | | |
| 6 months longer | 30,774 | | | 43,182 | | | 57,935 | | |
| | | | | | | |
| Professional lines | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (121,004) | | | $ | (51,246) | | | $ | 21,768 | | |
| Unchanged | (65,076) | | | — | | | 70,517 | | |
| 6 months longer | 105 | | | 71,519 | | | 142,065 | | |
| | | | | | | |
| Motor | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (74,686) | | | $ | (31,742) | | | $ | 13,676 | | |
| Unchanged | (44,892) | | | — | | | 46,875 | | |
| 6 months longer | 12,492 | | | 61,015 | | | 110,035 | | |
| | | | | | | |
| Liability | 10% lower | | Unchanged | | 10% higher | |
| | | | | | | |
| 6 months shorter | $ | (201,254) | | | $ | (75,630) | | | $ | 72,860 | | |
| Unchanged | (119,751) | | | — | | | 129,118 | | |
| 6 months longer | (20,305) | | | 107,362 | | | 229,220 | | |
| | | | | | | |
The results show the cumulative increase (decrease) in loss reserves across all accident years. For example, if assumed loss development pattern for insurance property and other business was three months shorter with no accompanying change in ELR assumption, loss reserves may decrease by approximately $50 million. Each of the impacts set forth in the tables is estimated individually, without consideration for any correlation among key assumptions or among reserve classes. Therefore, it would be inappropriate to take each of the amounts and add them together in an attempt to estimate total volatility. While we believe the variations in the expected loss ratios and loss development patterns presented could be reasonably expected, our historical loss data regarding variability is generally limited and actual variations may be greater or less than these amounts. It is also important to note that the variations are not meant to be a "best-case" or "worst-case" series of scenarios and, therefore, it is possible that future variations in loss reserves may be more or less than the amounts presented. While we believe that these are reasonably likely scenarios, we do not believe this sensitivity analysis should be considered an actual reserve range.
Reinsurance Recoverable on Unpaid Losses and Loss Expenses
In the normal course of business, we purchase treaty and facultativereinsurance protection to limit ultimate losses from catastrophic events and to reduce loss aggregation risk. To the extent that reinsurers do not meet their obligations under the reinsurance agreements, we remain liable. Consequently, we are exposed to credit risk associated with reinsurance recoverable balances to the extent that any of our reinsurers are unable or unwilling to pay claims.
Reinsurance recoverable on unpaid losses and loss expenses ("reinsurance recoverable") for each of the reportable segments, segregated between case reserves and IBNR and by reserve class was as shown below. Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for mapping of the Company's lines of business to reserve classes and the expected claim tails.
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| | 2020 | | 2019 | |
| At December 31, | Case
reserves | | IBNR | | Total | | Case
reserves | | IBNR | | Total | |
| | | | | | | | | | | | | |
| Insurance segment: | | | | | | | | | | | | |
| Property and other | $ | 232,796 | | | $ | 275,429 | | | $ | 508,225 | | | $ | 241,029 | | | $ | 117,165 | | | $ | 358,194 | | |
| Marine | 74,065 | | | 88,331 | | | 162,396 | | | 70,927 | | | 93,078 | | | 164,005 | | |
| Aviation | 60,955 | | | 3,297 | | | 64,252 | | | 34,298 | | | 1,796 | | | 36,094 | | |
| Credit and political risk | 7,239 | | | 44,428 | | | 51,667 | | | 9,730 | | | 24,885 | | | 34,615 | | |
| Professional lines | 317,600 | | | 909,583 | | | 1,227,183 | | | 318,850 | | | 786,834 | | | 1,105,684 | | |
| Liability | 185,453 | | | 997,191 | | | 1,182,644 | | | 215,203 | | | 893,178 | | | 1,108,381 | | |
| | | | | | | | | | | | | |
| Total Insurance | 878,108 | | | 2,318,259 | | | 3,196,367 | | | 890,037 | | | 1,916,936 | | | 2,806,973 | | |
| | | | | | | | | | | | | |
| Reinsurance segment: | | | | | | | | | | | | |
| Property and other * | 235,508 | | | 261,703 | | | 497,211 | | | 171,741 | | * | 277,144 | | * | 448,885 | | |
| Credit and surety | 29,138 | | | 41,005 | | | 70,143 | | | 18,490 | | | 45,985 | | | 64,475 | | |
| Professional lines | 58,646 | | | 127,599 | | | 186,245 | | | 23,968 | | | 111,537 | | | 135,505 | | |
| Motor | 105,793 | | | 122,660 | | | 228,453 | | | 99,730 | | | 109,765 | | | 209,495 | | |
| Liability | 76,352 | | | 241,870 | | | 318,222 | | | 39,722 | | | 172,701 | | | 212,423 | | |
| | | | | | | | | | | | | |
| Total Reinsurance | 505,437 | | | 794,837 | | | 1,300,274 | | | 353,651 | | | 717,132 | | | 1,070,783 | | |
| | | | | | | | | | | | | |
| Total | $ | 1,383,545 | | | $ | 3,113,096 | | | $ | 4,496,641 | | | $ | 1,243,688 | | | $ | 2,634,068 | | | $ | 3,877,756 | | |
| | | | | | | | | | | | | |
*To facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform to the current year's presentation. These reclassifications did not impact the results of operations, financial condition or liquidity.
At December 31, 2020, reinsurance recoverables as a percentage of loss reserves was 32% (2019: 30%). At December 31, 2020, reinsurance recoverables (excluding the allowance for expected credit losses) that were collectible from reinsurers rated A- or better by A.M Best were 87.6% (2019: 89.1%). Refer to Item 8, Note 11 to the Consolidated Financial Statements 'Commitments and Contingencies' for an analysis of the credit risk associated with reinsurance recoverable on unpaid and paid losses and loss expenses at December 31, 2020.
The recognition of reinsurance recoverable balances requires two key estimates. The first estimate is the amount of loss reserves to be ceded to our reinsurers. This amount consists of amounts related to case reserves and amounts related to IBNR.
Reinsurance recoverable related to case reserves is estimated on a case-by-case basis by applying the terms of applicable reinsurance cover to individual case reserve estimates. Reinsurance recoverable related to IBNR is generally developed as part of our loss reserving process, therefore, its estimation is subject to similar risks and uncertainties as the estimation of IBNR. Estimates of amounts to be ceded under excess of loss reinsurance contracts also take into account pricing information for those contracts and require greater judgment than estimates for proportional contracts.
The second estimate is the amount of the reinsurance recoverable balance that we believe ultimately will not be collected from reinsurers. We are selective in choosing reinsurers, buying reinsurance principally from reinsurers with a strong financial condition and industry ratings. The amount we ultimately collect may differ from our estimate due to the ability and willingness of reinsurers to pay claims, which may be negatively impacted by factors such as insolvency, contractual disputes over contract language or coverage and/or other reasons. In addition, economic conditions and/or operational performance of a
particular reinsurer may deteriorate, and this could also affect the ability and willingness of a reinsurer to meet their contractual obligations.
Consequently, we review reinsurance recoverable balances at least quarterly to estimate an allowance for expected credit losses.
We estimate a case-specific allowance for expected credit losses against reinsurance recoverable balances that we deem are unlikely to be collected in full. In addition, we estimate an allowance for expected credit losses on the remainder of the reinsurance recoverable balance using a default analysis. The principal components of the default analysis are reinsurance recoverable balances by reinsurer and default factors applied to estimate uncollectible amounts based on reinsurers’ credit ratings and the length of collection periods. The default factors are based on a model developed by a major rating agency. The default analysis considers current and forecasted economic conditions.
The allowance for expected credit losses is recognized in net income (loss). Any adjustment to the allowance for expected credit losses is recognized in the period in which it is determined. Write-offs of reinsurance recoverable balances, together with associated allowances for expected credit losses, are recognized in the period in which balances are deemed uncollectible.
At December 31, 2020 the allowance for expected credit losses was $24 million and at December 31, 2019, the provision for uncollectible amounts was $18 million. We have not written off any significant reinsurance recoverable balances in the last three years.
At December 31, 2020, the use of different assumptions could have a material effect on the allowance for expected credit losses. To the extent the creditworthiness of our reinsurers deteriorates due to an adverse event affecting the reinsurance industry, such as a large number of catastrophes, uncollectible amounts could be significantly greater than the allowance for expected credit losses. Given the various considerations used to estimate the allowance for expected credit losses, we cannot precisely quantify the effect a specific industry event may have on the allowance for expected credit losses.
Gross Premiums Written
Revenues primarily relate to premiums generated by our underwriting operations. The basis for recognizing gross premiums written varies by policy or contract type.
Insurance Segment
Insurance premiums written are recorded in accordance with the terms of the underlying policies.
For the majority of our insurance business, a fixed premium which is identified in the policy is recorded at the inception of the policy. This premium is adjusted if underlying insured values change. We actively monitor underlying insured values and any adjustments to premiums are recognized in the period in which they are determined. Gross premiums written on a fixed premium basis accounted for 86% and 87% of the segment’s gross premiums written for the years ended December 31, 2020 and 2019, respectively. Some of this business is written through MGAs, third parties granted authority to bind risks on our behalf in accordance with our underwriting guidelines. For this business, premiums are recorded based on monthly statements received from MGAs or best estimates based on historical experience.
A limited amount of our insurance business is written on a line slip or proportional basis, where we assume an agreed proportion of the premiums and losses of a particular risk or group of risks along with other unrelated insurers. As premiums for this business are not identified in the policy, premiums are recognized at the inception of the policy based on estimates provided by clients through brokers (refer to 'Reinsurance Segment' below for further details). We review these premium estimates on a quarterly basis and any adjustments to premium estimates are recognized in the period in which they are determined. Gross premiums written on a line slip or proportional basis accounted for 14% and 13% of the segment’s gross premiums written for the years ended December 31, 2020 and 2019, respectively, therefore the impact of these premium estimates on pre-tax net income was immaterial.
For the credit and political risk line of business, we write certain policies on a multi-year basis. Premiums in respect of these policies are recorded at the inception of the policy based on management’s best estimate of premiums to be received, including assumptions relating to prepayments/refinancing. At December 31, 2020, the average duration of unearned premiums for credit and political risk line of business was 5.3 years (2019: 5.9 years).
Reinsurance Segment
Reinsurance premiums are recorded at the inception of the contract based on estimates received from ceding companies.
The reinsurance segment provides cover to cedants (i.e. insurance companies) on an excess of loss and proportional basis. In most cases, cedants seek protection from us for business that they have not yet written at the time they enter into agreements with us, therefore, cedants must estimate their underlying premiums when purchasing reinsurance cover from us.
For multi-year contracts premiums are recorded at the inception of the contract based on management’s best estimate of premiums to be received. Premiums are recognized on an annual basis for multi-year contracts where the cedant has the ability to unilaterally commute or cancel coverage within the term of the contract.
Excess of loss reinsurance contracts with cedants typically include minimum or deposit premium provisions. For excess of loss reinsurance contracts, minimum or deposit premiums are generally considered to be the best estimate of premiums at the inception of the contract. The minimum or deposit premium is normally adjusted at the end of the contract period to reflect changes in the underlying risks in force during the contract period. Any adjustments to minimum or deposit premiums are recognized in the period in which they are determined. Gross premiums written for excess of loss reinsurance contracts accounted for 52% and 48% of the reinsurance segment’s gross premiums written for the years ended December 31, 2020 and 2019, respectively.
Many of our excess of loss reinsurance contracts also include provisions that require an automatic reinstatement of coverage in the event of a loss. In a year of significant loss events, reinstatement premiums will be higher than in a year in which there are no large loss events. Reinstatement premiums are recognized and earned at the time a loss event occurs and losses are recorded. While the reinstatement premium amount is defined by contract terms, recognition of reinstatement premiums is based on estimates of losses and loss expenses, which reflect management’s judgment (refer to 'Critical Accounting Estimates – Reserve for Losses and Loss Expenses' above for further details).
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:
•changes in renewal rates or rates of new business accepted by cedants (changes could result from changes in the relevant insurance market that could affect more than one of our cedants or could be a consequence of changes in the marketing strategy or risk appetite of an individual cedant);
•changes in underlying exposure values; and/or
•changes in rates being charged by cedants.
As a result of this review process, any adjustments to premium estimates are recognized in the period in which they are determined. Changes in premium estimates could be material to gross premiums written in the period. Changes in premium estimates could be also material to net premiums earned in the period in which they are determined as any adjustment may be substantially or fully earned. Gross premiums written for proportional reinsurance contracts, including adjustments to premium estimates established in prior years, accounted for 48% and 52% of the reinsurance segment’s gross premiums written for the years ended December 31, 2020 and 2019, respectively.
Gross premiums written for proportional reinsurance contracts incepting during the year were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Year ended December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Catastrophe | $ | 13,863 | | | $ | 17,149 | | | $ | 12,944 | | |
| Property | 135,312 | | | 184,552 | | | 237,527 | | |
| Credit and surety | 91,940 | | | 162,948 | | | 221,260 | | |
| Professional lines | 156,643 | | | 159,234 | | | 174,126 | | |
| Motor | 228,754 | | | 194,871 | | | 361,471 | | |
| Liability | 265,358 | | | 251,515 | | | 246,554 | | |
| Engineering | 15,472 | | | 51,052 | | | 48,692 | | |
| Agriculture | 52,682 | | | 194,379 | | | 205,116 | | |
| Accident and health | 300,646 | | | 335,538 | | | 284,675 | | |
| Marine and Aviation | 19,065 | | | 22,697 | | | 11,360 | | |
| Total estimated premiums | $ | 1,279,735 | | | $ | 1,573,935 | | | $ | 1,803,725 | | |
| | | | | | | |
| Gross premiums written (reinsurance segment) | $ | 2,808,539 | | | $ | 3,222,927 | | | $ | 3,112,473 | | |
| As a % of total gross premiums written | 46 | % | | 49 | % | | 58 | % | |
| | | | | | | |
Historical experience has shown that cumulative adjustments to initial premium estimates for proportional reinsurance contracts have ranged from 0% to 5% over the last 5 years. Giving more weight to recent years where premium volume was comparable to current levels, we believe that a reasonably likely change to 2020 initial premium estimates for proportional reinsurance contracts would be 3% in either direction. A change in initial premium estimates of this magnitude would result in a change in gross premiums written of approximately $39 million. A change in initial premium estimates of this magnitude would not have a material impact on pre-tax net income, after considering current losses and loss expenses ratios. However, larger variations, positive or negative, are possible.
Net Premiums Earned
Premiums are earned evenly over the period during which we are exposed to the underlying risk. Changes in circumstances subsequent to the inception of contracts can impact the earning periods. For example, when exposure limits for a contract are reached, any associated unearned premiums are fully earned. This can have a significant impact on net premiums earned, particularly for multi-year contracts such as those in the credit and political risk line of business.
Fixed premium insurance policies and excess of loss reinsurance contracts are generally written on a "losses occurring" or "claims made" basis over the term of the contract. Consequently, premiums are earned evenly over the contract term, which is generally 12 months.
Line slip or proportional insurance policies and proportional reinsurance contracts are generally written on a "risks attaching" basis, covering claims that relate to the underlying policies written during the terms of these contracts. As the underlying business incepts throughout the contract term which is typically one year, and the underlying business typically has a one year coverage period, these premiums are generally earned evenly over a 24-month period.
Fair Value Measurements of Financial Assets and Liabilities
Fair value is defined as the price to sell an asset or transfer a liability (i.e. the "exit price") in an orderly transaction between market participants. U.S. GAAP prescribes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement. The hierarchy is broken down into three levels as follows:
•Level 1 – Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments.
•Level 2 – Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
•Level 3 – Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect our judgments about assumptions that market participants might use.
Refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value Measurements' for further information on the valuation techniques including significant inputs and assumptions generally used in estimating the fair values of our financial instruments.
Our estimated fair value of a financial instrument may differ from the amount that could be realized if the financial instrument was sold in an immediate sale, e.g., a forced transaction. In addition, the valuation of financial instruments is more subjective when markets are less liquid due to the lack of available market based inputs, as was the case during the global financial market crisis in late 2008 and early 2009. This may lead us to change the selection of valuation technique (from market to cash flow approach) or may cause us to use multiple valuation techniques to estimate the fair value of a financial instrument. This circumstance may require significant management judgment and could cause a financial instrument to be reclassified between levels of the fair value hierarchy.
Fixed Maturities and Equity Securities
At December 31, 2020, the fair values of 95% (2019: 95%) of total fixed maturities and equity securities were based on prices provided by globally recognized independent pricing services where we have a current and detailed understanding of how their prices were derived. The remaining securities were priced by either non-binding broker quotes or internal valuation models.
Generally, we obtain quotes directly from broker-dealers who are active in the corresponding markets when prices are unavailable from independent pricing services. This may also be the case if the pricing from pricing services is not reflective of current market levels, as detected by our pricing control tolerance procedures. Generally, broker-dealers value securities through their trading desks based on observable market inputs. Their pricing methodologies include mapping securities based on trade data, bids or offers, observed spreads and performance on newly issued securities. They may also establish pricing through observing secondary trading of similar securities.
At December 31, 2020 and 2019, we have not adjusted any pricing provided by independent pricing services (refer to 'Management Pricing Validation' below). In addition, total Level 3 fixed maturities and equity securities amounted to $15 million (2019: $8 million), less than 1% of total fixed maturities and equity securities (refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value Measurements' for further information).
Management Pricing Validation
While we obtain pricing from pricing services and/or broker-dealers, management is ultimately responsible for determining the fair value measurements of all securities. To ensure fair value measurement is applied consistently and in accordance with U.S. GAAP, we annually update our understanding of the pricing methodologies used by the pricing services and broker-dealers.
We also challenge any prices we believe may not be representative of fair value under current market conditions. Our review process includes, but is not limited to: (i) initial and ongoing evaluation of the pricing methodologies and valuation models used by outside parties to calculate fair value; (ii) quantitative analysis; (iii) a review of multiple quotes obtained in the pricing process and the range of resulting fair values for each security, if available, and (iv) randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates provided by the independent pricing sources and broker-dealers.
Other Investments
Hedge Funds, Direct Lending Funds, Private Equity Funds and Real Estate Funds
The fair values of hedge funds, direct lending funds, private equity funds and real estate funds are estimated using net asset values (NAVs) as advised by external fund managers or third-party administrators (refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value Measurements' for further information).
CLO-Equity Securities
At December 31, 2020 and 2019, we had invested indirectly, through a fund structure in CLO-Equities, also known as "cash flow CLOs" in the industry. During 2020, the CLO-Equity market continued to be relatively inactive with only a small number of transactions being observed, particularly related to transactions involving our CLO-Equities. Our indirect investment in CLO-Equities is valued using a discounted cash flow model prepared by an external manager. At December 31, 2020 and 2019, the estimated fair value of our indirect investment in CLO-Equities was $6 million (2019: $14 million).
Significant inputs used in discounted cash flow models were as follows:
| | | | | | | | | | | | | | | | | |
| | | | | |
| At December 31, | 2020 | | 2019 | |
| | | | | |
| Default rates | 4.5% | | 3.5% | |
| Loss severity rate | 50.0% | | 35.0% | |
| Collateral spreads | 3.0% | | 3.0% | |
| Estimated maturity dates | 5 years | | 7 years | |
| | | | | |
The default and loss severity rates are the most judgmental unobservable market inputs to the discounted cash flow model to which the valuation of our indirect investment in CLO-Equities is most sensitive.
As the significant inputs used to price this security are unobservable, the fair value of the indirect investment in CLO-Equities is classified as Level 3.
Other Privately Held Investments
Other privately held investments include convertible preferred shares, common shares, convertible notes and a variable yield security. These investments are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these investments are generally determined using capital statements obtained from each investee. In 2020, the fair value of the variable yield security was determined using an externally developed discounted cash flow model.
Significant inputs used in discounted cash flow models were as follows:
| | | | | | | | | | | | | | | | | |
| | | | | |
| At December 31, | 2020 | | 2019 | |
| | | | | |
| Discount rate | 1.3% | | — | |
| Default rate | 0.5% | | — | |
| Loss absorption yield | 1.0% | | — | |
| Estimated maturity date | 5 years | | — | |
| | | | | |
As the significant inputs used to price these investments are unobservable, the fair values of other privately held investments are classified as Level 3.
Overseas Deposits
Overseas deposits include investments in private funds held by Syndicate 2007 where the underlying investments are primarily U.S. government, non-U.S. government and corporate debt securities. The funds do not trade on an exchange, therefore, are not included in available for sale investments. As the significant inputs used to price the underlying investments are observable market inputs, the fair values of overseas deposits are classified as Level 2.
Impairment Losses and the Allowance for Expected Credit Losses - Fixed Maturities Available for Sale
The following discussion provides details regarding our processes for identification of impairments of fixed maturities, available for sale following the adoption of ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments," and the recognition of the related impairment losses.
During 2020, we recorded an allowance for expected credit losses of $0.3 million and an impairment loss of $1 million (refer to 'Net Investment Income and Net Investment Gains (Losses)' for further details).
Fixed maturities classified as available for sale are reported at fair value at the balance sheet date. Our available for sale ("AFS") investment portfolio is the largest component of consolidated total assets and it is a multiple of shareholders’ equity. As a result, impairment losses could be material to our financial condition and operating results particularly during periods of dislocation in financial markets.
An available for sale fixed maturity is impaired if the fair value of the investment is below amortized cost.
If a fixed maturity is impaired and we intend to sell the security or it is more likely than not that we will be required to sell the security before its anticipated recovery, the full amount of the impairment loss is charged to net income and is included in net investment gains (losses) in the consolidated statements of operations. The new cost basis for the security is the amortized cost basis less the impairment charge recognized in net income. The new cost basis is not adjusted for subsequent increases in fair value.
From time to time, we may sell fixed maturities subsequent to the balance sheet date that we did not intend to sell at the balance sheet date. Conversely, we may not sell fixed maturities that we intended to sell at the balance sheet date. These changes in intent may arise due to events occurring subsequent to the balance sheet date. The types of events that may result in a change in intent include, but are not limited to, significant changes in the economic facts and circumstances related to the specific issuer, changes in liquidity needs, or changes in tax laws or the regulatory environment.
In instances where we intend to hold the impaired fixed maturity, we determine whether the decline in fair value below the amortized cost basis has resulted from a credit loss or other factors. If we do not anticipate to fully recover the amortized cost based on projected cash flows to be collected from the security (i.e. a credit loss exists), an allowance for expected credit losses is established. The allowance for expected credit losses is limited to the difference between a security's amortized cost basis and its fair value. At December 31, 2020, the allowance for expected credit losses was $0.3 million. The allowance for expected credit loss is charged to net income and is included in net investment gains (losses) in the consolidated statements of operations.
On a quarterly basis, we assess whether unrealized losses on fixed maturities represent credit impairments by considering the below factors:
a.the extent to which the fair value is less than amortized cost;
b.adverse conditions related to the security, industry, or geographical area;
c.downgrades in the security's credit rating by a credit rating agency; and
d.failure of the issuer to make scheduled principal or interest payments.
The length of time a security has been in an unrealized loss position no longer impacts the determination of whether a credit loss exists.
If a security is assessed to be credit impaired, it is subject to a discounted cash flow analysis by comparing the present value of expected future cash flows with the amortized cost basis. If the present value of expected cash flows is less than the amortized cost, a credit loss exists and an allowance for expected credit losses is recognized. If the present value of expected future cash flows is equal to or greater than the amortized cost basis, an expected credit loss does not exist.
The non-credit component (e.g. interest rates, market conditions, etc.) of the loss is recognized in other comprehensive income.
Our credit impairment review process excludes fixed maturities guaranteed, either explicitly or implicitly, by the U.S. government and its agencies (U.S. Government, U.S. Agency and U.S. Agency RMBS) because we anticipate these securities will not be settled below amortized cost. These securities are evaluated for intention to sell at a loss.
The allowance for expected credit losses recognized in net income is calculated based on the difference between the amortized cost of the security and the net present value of projected future cash flows expected to be collected from the security. The significant inputs and the methodology used to estimate the allowance for expected credit losses are disclosed in Item 8, Note 5 (f) to the Consolidated Financial Statements 'Investments'.
RECENT ACCOUNTING PRONOUNCEMENTS
At December 31, 2020, there were no recently issued accounting pronouncements that we have not yet adopted that we expect could have a material impact on our results of operations, financial condition or liquidity.
OFF-BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS
At December 31, 2020, we were 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 we believe is material to investors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risk is the risk that our financial instruments may be negatively impacted by movements in financial market prices or rates such as equity prices, interest rates, credit spreads and foreign exchange rates (refer to Item 1 'Risk and Capital Management' for further details).
We own a substantial amount of assets whose fair values are subject to market risks. Our fixed maturities are classified as available for sale, therefore changes in fair values caused by changes in interest rates and foreign currency exchange rates have an immediate impact on other comprehensive income, total shareholders’ equity and book value per common share but may not have an immediate impact on net income. Changes in these market risks impact net income when, and if, securities are sold, or an impairment charge or an allowance for expected credit losses is recorded. Equity securities are reported at fair value, with changes in fair values recognized in net income. At December 31, 2020 and 2019, we also invested in alternative investments including hedge funds, direct lending funds, private equity funds, real estate funds, CLO-Equities, other privately held investments and overseas deposits. These investments are also exposed to market risks, with the changes in fair values immediately reported in net income.
Sensitivity Analysis
The following is a sensitivity analysis of our primary market risk exposures at December 31, 2020 and 2019.
Our policies to address these risks in 2020 were not materially different from 2019. We do not currently anticipate significant changes in our primary market risk exposures or in how those exposures are managed in future reporting periods based on what is known or expected to be in effect in future reporting periods.
Interest Rate and Credit Spread Risk
Interest rate risk includes fluctuations in interest rates and credit spreads that have a direct impact on the fair values of fixed maturities. As interest rates rise and credit spreads widen, the fair value of fixed maturities falls, and the converse is also true.
We monitor sensitivity to interest rate and credit spread changes by revaluing fixed maturities using a variety of different interest rates (inclusive of credit spreads). We use duration and convexity at the security level to estimate the change in fair value that would result from a change in each security’s yield. Duration measures the price sensitivity of an asset to changes in yield rates. Convexity measures how the duration of the security changes with interest rates. The duration and convexity analysis take into account changes in prepayment expectations for MBS and ABS. The analysis is performed at the security level and aggregated to the asset category levels.
The following table presents the estimated pre-tax impact on the fair value of fixed maturities due to an instantaneous increase in the U.S. yield curve of 100 basis points and an additional 100 basis point credit spread widening for corporate debt, non-agency residential and commercial MBS, ABS and municipal bond securities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | Fair value | | Potential adverse change in fair value | |
Increase in
interest rate
by 100
basis points | | Widening of
credit spreads
by 100
basis points | | Total | |
| | | | | | | | | |
| At December 31, 2020 | | | | | | | | |
| U.S. government and agency | $ | 1,918,699 | | | $ | (67,495) | | | $ | — | | | $ | (67,495) | | |
| Non-U.S. government | 671,273 | | | (23,491) | | | — | | | (23,491) | | |
| Agency RMBS | 1,286,209 | | | (41,345) | | | — | | | (41,345) | | |
| | | | | | | | | |
| Securities exposed to credit spreads: | | | | | | | | |
| Corporate debt | 4,655,951 | | | (169,961) | | | (174,114) | | | (344,075) | | |
| CMBS | 1,353,587 | | | (64,430) | | | (68,978) | | | (133,408) | | |
| Non-agency RMBS | 140,104 | | | (2,137) | | | (4,022) | | | (6,159) | | |
| ABS | 1,720,078 | | | (15,460) | | | (53,007) | | | (68,467) | | |
| Municipals | 295,898 | | | (15,314) | | | (15,375) | | | (30,689) | | |
| | $ | 12,041,799 | | | $ | (399,633) | | | $ | (315,496) | | | $ | (715,129) | | |
| | | | | | | | | |
| At December 31, 2019 | | | | | | | | |
| U.S. government and agency | $ | 2,112,881 | | | $ | (78,364) | | | $ | — | | | $ | (78,364) | | |
| Non-U.S. government | 576,592 | | | (20,430) | | | — | | | (20,430) | | |
| Agency RMBS | 1,592,584 | | | (54,850) | | | — | | | (54,850) | | |
| | | | | | | | | |
| Securities exposed to credit spreads: | | | | | | | | |
| Corporate debt | 4,930,254 | | | (154,282) | | | (162,741) | | | (317,023) | | |
| CMBS | 1,365,052 | | | (69,922) | | | (74,549) | | | (144,471) | | |
| Non-agency RMBS | 84,922 | | | (1,766) | | | (3,205) | | | (4,971) | | |
| ABS | 1,598,693 | | | (10,951) | | | (47,745) | | | (58,696) | | |
| Municipals | 207,227 | | | (9,045) | | | (9,399) | | | (18,444) | | |
| | $ | 12,468,205 | | | $ | (399,610) | | | $ | (297,639) | | | $ | (697,249) | | |
| | | | | | | | | |
U.S. government agencies have a limited range of spread widening, therefore, 100 basis points of spread widening for these securities is highly improbable in normal market conditions. Our non-U.S. government debt obligations are highly-rated and we believe the potential for future widening of credit spreads would also be limited for these securities. Certain of our holdings in non-agency RMBS and ABS have floating interest rates, which mitigate interest rate risk exposure.
The above sensitivity analysis reflects our view of changes that are reasonably possible over a one-year period. Note this should not be construed as our prediction of future market events, but rather an illustration of the impact of such events.
Our investment in CLO-Equities is also exposed to interest rate risk, but an increase in the risk free yield curve of 100 basis points would have an insignificant impact on its fair value.
In addition, our investment in bond mutual funds is exposed to interest rate risk, however, this exposure is largely mitigated by the short duration of the underlying securities.
Equity Price Risk
Our portfolio of equity securities, excluding the bond mutual funds, has exposure to equity price risk. This risk is defined as the potential loss in fair value resulting from adverse changes in stock prices. The global equity portfolio is managed to a benchmark composite index, which consists of a blend of the S&P 500 and MSCI World indices. Changes in the underlying indices have a corresponding impact on the overall portfolio. At December 31, 2020, the fair value of equity securities was $241 million (2019: $298 million). At December 31, 2020, the impact of a 20% decline in the overall market prices of our equity exposures would be $48 million (2019: $60 million), on a pre-tax basis.
Our investment in hedge funds has significant exposure to equity strategies with net long positions. At December 31, 2020, the impact of an instantaneous 15% decline in the fair value of our investment in hedge funds would be $22 million (2019: $25 million), on a pre-tax basis.
Foreign Currency Risk
The following table presents a sensitivity analysis of total net foreign currency exposures.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | AUD | | NZD | | CAD | | EUR | | GBP | | JPY | | Other | | Total | |
| | | | | | | | | | | | | | | | | |
| At December 31, 2020 | | | | | | | | | | | | | | | | |
| Net managed assets (liabilities), excluding derivatives | $ | 7,100 | | | $ | 2,067 | | | $ | 231,382 | | | $ | (527,046) | | | $ | (412,049) | | | $ | (125,523) | | | $ | 70,496 | | | $ | (753,573) | | |
| Foreign currency derivatives, net | (769) | | | 5,752 | | | (205,005) | | | 466,006 | | | 329,055 | | | 122,459 | | | 9,097 | | | 726,595 | | |
| Net managed foreign currency exposure | 6,331 | | | 7,819 | | | 26,377 | | | (61,040) | | | (82,994) | | | (3,064) | | | 79,593 | | | (26,978) | | |
| Other net foreign currency exposure | 1 | | | — | | | 118 | | | (2,369) | | | (1,245) | | | — | | | 38,631 | | | 35,136 | | |
| Total net foreign currency exposure | $ | 6,332 | | | $ | 7,819 | | | $ | 26,495 | | | $ | (63,409) | | | $ | (84,239) | | | $ | (3,064) | | | $ | 118,224 | | | $ | 8,158 | | |
| Net foreign currency exposure as a percentage of total shareholders’ equity | 0.1 | % | | 0.1 | % | | 0.5 | % | | (1.2 | %) | | (1.6 | %) | | (0.1 | %) | | 2.2 | % | | 0.2 | % | |
| Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement(1) | $ | 633 | | | $ | 782 | | | $ | 2,650 | | | $ | (6,341) | | | $ | (8,424) | | | $ | (306) | | | $ | 11,822 | | | $ | 816 | | |
| | | | | | | | | | | | | | | | | |
| At December 31, 2019 | | | | | | | | | | | | | | | | |
| Net managed assets (liabilities), excluding derivatives | $ | 42,435 | | | $ | (2,247) | | | $ | 157,512 | | | $ | (442,481) | | | $ | (198,535) | | | $ | (160,737) | | | $ | 114,073 | | | $ | (489,980) | | |
| Foreign currency derivatives, net | (23,881) | | | 6,407 | | | (125,019) | | | 356,501 | | | 144,866 | | | 204,918 | | | 4,366 | | | 568,158 | | |
| Net managed foreign currency exposure | 18,554 | | | 4,160 | | | 32,493 | | | (85,980) | | | (53,669) | | | 44,181 | | | 118,439 | | | 78,178 | | |
| Other net foreign currency exposure | 1 | | | — | | | 116 | | | (319) | | | (316) | | | — | | | 51,323 | | | 50,805 | | |
| Total net foreign currency exposure | $ | 18,555 | | | $ | 4,160 | | | $ | 32,609 | | | $ | (86,299) | | | $ | (53,985) | | | $ | 44,181 | | | $ | 169,762 | | | $ | 128,983 | | |
| Net foreign currency exposure as a percentage of total shareholders’ equity | 0.3 | % | | 0.1 | % | | 0.6 | % | | (1.6 | %) | | (1.0 | %) | | 0.8 | % | | 3.1 | % | | 2.3 | % | |
| Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement(1) | $ | 1,856 | | | $ | 416 | | | $ | 3,261 | | | $ | (8,630) | | | $ | (5,399) | | | $ | 4,418 | | | $ | 16,976 | | | $ | 12,898 | | |
| | | | | | | | | | | | | | | | | |
(1)Assumes 10% change in underlying currencies relative to the U.S. dollar.
Net Managed Foreign Currency Exposure
Our net managed foreign currency exposure is subject to internal risk tolerance standards. For significant foreign currency exposures, defined as those where net asset/liability position exceeds the greater of 1% of total shareholders' equity or $53 million the value of assets denominated in those currencies should fall within a range of 90 - 110% of liabilities denominated in the same currency. In addition, aggregate foreign currency exposure is subject to the same tolerance range. We may use derivative instruments to maintain net managed foreign currency exposures within our risk tolerance levels.
Other Net Foreign Currency Exposure
Other net foreign currency exposure includes those assets managed by specific investment managers who have the discretion to hold foreign currency exposures as part of their total return strategy. At December 31, 2020, other net foreign currency exposure primarily consisted of our emerging market debt securities portfolio.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
| | | | | |
| Index to Consolidated Financial Statements and Accompanying Notes | Page |
| |
| Report of Independent Registered Public Accounting Firm | |
| |
| Consolidated Balance Sheets at December 31, 2020 and 2019 | |
| |
| Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018 | |
| |
| Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2020, 2019 and 2018 | |
| |
| Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2020, 2019 and 2018 | |
| |
| Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 | |
| |
| Notes to Consolidated Financial Statements | |
| |
| Note 1 – Organization | |
| |
| Note 2 – Basis of Presentation and Significant Accounting Policies | |
| |
| Note 3 – Segment Information | |
| |
| Note 4 – Goodwill and Intangible Assets | |
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| Note 5 – Investments | |
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| Note 6 – Fair Value Measurements | |
| |
| Note 7 – Derivative Instruments | |
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| Note 8 – Reserve for Losses and Loss Expenses | |
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| Note 9 – Reinsurance | |
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| Note 10 – Debt and Financing Arrangements | |
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| Note 11 – Commitments and Contingencies | |
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| Note 12 – Leases | |
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| Note 13 – Earnings Per Common Share | |
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| Note 14 – Shareholders’ Equity | |
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| Note 15 – Retirement Plans | |
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| Note 16 – Share-Based Compensation | |
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| Note 17 – Related Party Transactions | |
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| Note 18 – Reorganization Expenses | |
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| Note 19 – Income Taxes | |
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| Note 20 – Other Comprehensive Income (Loss) | |
| |
| Note 21 – Statutory Financial Information | |
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| Note 22 – Unaudited Condensed Quarterly Financial Data | |
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| Note 23 – Subsequent Events | |
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| |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of AXIS Capital Holdings Limited
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of AXIS Capital Holdings Limited and subsidiaries (the "Company") as of December 31, 2020 and 2019, 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, 2020, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2021 expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Reserve for losses and loss expenses - Refer to Notes 2 and 8 to the consolidated financial statements
Critical Audit Matter Description
The Company’s estimate of loss and loss expense reserves is derived using expected trends in claim severity and frequency and other factors that may vary significantly as claims are settled. The estimate is sensitive to significant assumptions, including the initial expected loss ratio and loss development factors. The estimate is also sensitive to the selection of actuarial methods and weighting of these methods applied to project the ultimate losses, the estimation of ultimate reserves associated with catastrophic events, and other factors. Further, not all catastrophic events can be modeled using traditional actuarial methodologies, which increases the degree of judgment needed in estimating loss reserves for such events.
Auditing the Company’s methods, assumptions and best estimate of the cost of the ultimate settlement and administration of claims represented by the incurred but not reported ("IBNR") claims included in recorded loss and loss adjustment reserves involved especially subjective auditor judgment and an increased extent of effort, including the involvement of our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to reserves for losses and loss expenses included the following, among others:
•We tested the effectiveness of controls over the valuation of the recorded loss and loss expense reserves, including the review and approval process that management has in place for significant actuarial methods and assumptions used and the approval of management’s best estimate of loss and loss expense reserves.
•We tested the completeness and accuracy of the underlying data that served as the basis for the Company’s actuarial analysis, including historical claims data, to test the reasonableness of key inputs to the actuarial estimate.
•With the assistance of our actuarial specialists:
–We independently developed an estimate of the reserves for selected classes of business, compared our estimates to those booked by the Company, and evaluated the differences.
–We evaluated the Company’s methodologies against recognized actuarial practices for the remaining classes. We also evaluated the assumptions used by the Company using our industry knowledge and experience and other analytical procedures.
–We compared the results of the reserve study prepared by third party actuaries to management’s best estimate and evaluated the differences.
| | |
|
| /s/ Deloitte Ltd. |
| Hamilton, Bermuda |
| February 26, 2021 |
We have served as the Company's auditor since 2001.
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2020 AND 2019
| | | | | | | | | | | |
| 2020 | | 2019 |
| | (in thousands) |
| Assets | | | |
| Investments: | | | |
Fixed maturities, available for sale, at fair value (Amortized cost 2020: $11,566,930; 2019: $12,263,240 Allowance for expected credit losses 2020: $323) | $ | 12,041,799 | | | $ | 12,468,205 | |
Equity securities, at fair value (Cost 2020: $421,744; 2019: $398,956) | 518,445 | | | 474,207 | |
Mortgage loans, held for investment, at fair value (Allowance for expected credit losses 2020: $NaN) | 593,290 | | | 432,748 | |
| Other investments, at fair value | 829,156 | | | 770,923 | |
| Equity method investments | 114,209 | | | 117,821 | |
| Short-term investments, at fair value | 161,897 | | | 38,471 | |
| Total investments | 14,258,796 | | | 14,302,375 | |
| Cash and cash equivalents | 902,831 | | | 1,241,109 | |
| Restricted cash and cash equivalents | 600,401 | | | 335,348 | |
| Accrued interest receivable | 65,020 | | | 78,085 | |
Insurance and reinsurance premium balances receivable (Allowance for expected credit losses 2020: $8,836) | 2,738,342 | | | 3,071,390 | |
Reinsurance recoverable on unpaid losses and loss expenses (Allowance for expected credit losses 2020: $23,711) | 4,496,641 | | | 3,877,756 | |
| Reinsurance recoverable on paid losses and loss expenses | 434,201 | | | 327,795 | |
| Deferred acquisition costs | 431,439 | | | 492,119 | |
| Prepaid reinsurance premiums | 1,194,455 | | | 1,101,889 | |
| Receivable for investments sold | 2,150 | | | 35,659 | |
| Goodwill | 100,801 | | | 102,003 | |
| Intangible assets | 219,633 | | | 230,550 | |
| Value of business acquired | 3,854 | | | 8,992 | |
| Operating lease right-of-use assets | 123,579 | | | 111,092 | |
| Other assets | 305,544 | | | 287,892 | |
| Total assets | $ | 25,877,687 | | | $ | 25,604,054 | |
| Liabilities | | | |
| Reserve for losses and loss expenses | $ | 13,926,766 | | | $ | 12,752,081 | |
| Unearned premiums | 3,685,886 | | | 3,626,246 | |
| Insurance and reinsurance balances payable | 1,092,042 | | | 1,349,082 | |
| Debt | 1,309,695 | | | 1,808,157 | |
| Payable for investments purchased | 104,777 | | | 32,985 | |
| Operating lease liabilities | 140,263 | | | 115,584 | |
| Other liabilities | 322,564 | | | 375,911 | |
| Total liabilities | 20,581,993 | | | 20,060,046 | |
| | | |
| | | |
| | | |
| Commitments and Contingencies | 0 | | 0 |
| Shareholders' equity | | | |
| Preferred shares | 550,000 | | | 775,000 | |
Common shares (shares issued 2020: 176,580; 2019: 176,580 shares outstanding 2020: 84,353; 2019: 83,959) | 2,206 | | | 2,206 | |
| Additional paid-in capital | 2,330,054 | | | 2,317,212 | |
| Accumulated other comprehensive income | 414,395 | | | 171,710 | |
| Retained earnings | 5,763,607 | | | 6,056,686 | |
Treasury shares, at cost (2020: 92,227; 2019: 92,621) | (3,764,568) | | | (3,778,806) | |
| | | |
| | | |
| Total shareholders’ equity | 5,295,694 | | | 5,544,008 | |
| Total liabilities and shareholders’ equity | $ | 25,877,687 | | | $ | 25,604,054 | |
See accompanying notes to Consolidated Financial Statements.
114
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| | (in thousands, except for per share data) |
| Revenues | | | | | |
| Net premiums earned | $ | 4,371,309 | | | $ | 4,587,178 | | | $ | 4,791,495 | |
| Net investment income | 349,601 | | | 478,572 | | | 438,507 | |
| Other insurance related income (loss) | (8,089) | | | 16,444 | | | 10,622 | |
| Net investment gains (losses): | | | | | |
| Allowance for expected credit losses | (323) | | | 0 | | | 0 | |
| Impairment losses | (1,486) | | | 0 | | | 0 | |
| Other-than-temporary impairment ("OTTI") losses | 0 | | | (6,984) | | | (9,733) | |
| | | | | |
| Other realized and unrealized investment gains (losses) | 130,942 | | | 98,217 | | | (140,485) | |
| Total net investment gains (losses) | 129,133 | | | 91,233 | | | (150,218) | |
| Total revenues | 4,841,954 | | | 5,173,427 | | | 5,090,406 | |
| | | | | |
| Expenses | | | | | |
| Net losses and loss expenses | 3,281,252 | | | 3,044,798 | | | 3,190,287 | |
| Acquisition costs | 929,517 | | | 1,024,582 | | | 968,835 | |
| General and administrative expenses | 579,790 | | | 634,831 | | | 627,389 | |
| Foreign exchange losses (gains) | 81,069 | | | (12,041) | | | (29,165) | |
| Interest expense and financing costs | 75,049 | | | 68,107 | | | 67,432 | |
| Reorganization expenses | 7,881 | | | 37,384 | | | 66,940 | |
| Amortization of value of business acquired | 5,139 | | | 26,722 | | | 172,332 | |
| Amortization of intangible assets | 11,390 | | | 11,597 | | | 13,814 | |
| Total expenses | 4,971,087 | | | 4,835,980 | | | 5,077,864 | |
| | | | | |
| Income (loss) before income taxes and interest in income (loss) of equity method investments | (129,133) | | | 337,447 | | | 12,542 | |
| Income tax (expense) benefit | 12,321 | | | (23,692) | | | 29,486 | |
| Interest in income (loss) of equity method investments | (3,612) | | | 9,718 | | | 993 | |
| | | | | |
| Net income (loss) | (120,424) | | | 323,473 | | | 43,021 | |
| Preferred share dividends | 30,250 | | | 41,112 | | | 42,625 | |
| | | | | |
| Net income (loss) available (attributable) to common shareholders | $ | (150,674) | | | $ | 282,361 | | | $ | 396 | |
| | | | | |
| Per share data | | | | | |
| Earnings (loss) per common share: | | | | | |
Earnings (loss) per common share
| $ | (1.79) | | | $ | 3.37 | | | $ | 0 | |
| Earnings (loss) per diluted common share | $ | (1.79) | | | $ | 3.34 | | | $ | 0 | |
| Weighted average common shares outstanding | 84,262 | | | 83,894 | | | 83,501 | |
| Weighted average diluted common shares outstanding | 84,262 | | | 84,473 | | | 84,007 | |
See accompanying notes to Consolidated Financial Statements.
115
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Net income (loss) | $ | (120,424) | | | $ | 323,473 | | | $ | 43,021 | |
| | | | | |
| Other comprehensive income (loss), net of tax: | | | | | |
| Available for sale investments: | | | | | |
| Unrealized gains (losses) arising during the year for which an allowance for expected credit losses has not been recognized | 317,166 | | | 374,615 | | | (291,731) | |
| Unrealized gains (losses) arising during the year for which an allowance for expected credit losses has been recognized | (40) | | | 0 | | | 0 | |
| Adjustment for reclassification of net realized (gains) losses, impairment losses and OTTI losses recognized in net income (loss) | (78,012) | | | (24,729) | | | 100,902 | |
| Unrealized gains (losses) arising during the year, net of reclassification adjustment | 239,114 | | | 349,886 | | | (190,829) | |
| | | | | |
| Foreign currency translation adjustment | 3,571 | | | (1,066) | | | (11,165) | |
| | | | | |
| Total other comprehensive income (loss), net of tax | 242,685 | | | 348,820 | | | (201,994) | |
| Comprehensive income (loss) | $ | 122,261 | | | $ | 672,293 | | | $ | (158,973) | |
See accompanying notes to Consolidated Financial Statements.
116
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Preferred shares | | | | | |
| Balance at beginning of year | $ | 775,000 | | | $ | 775,000 | | | $ | 775,000 | |
| | | | | |
| Shares repurchased | (225,000) | | | 0 | | | 0 | |
| Balance at end of year | 550,000 | | | 775,000 | | | 775,000 | |
| | | | | |
| Common shares (par value) | | | | | |
| | | | | |
| | | | | |
| Balance at beginning and end of year | 2,206 | | | 2,206 | | | 2,206 | |
| | | | | |
| Additional paid-in capital | | | | | |
| Balance at beginning of year | 2,317,212 | | | 2,308,583 | | | 2,299,166 | |
| | | | | |
| Treasury shares reissued | (22,732) | | | (21,046) | | | (24,088) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Share-based compensation expense | 35,574 | | | 29,675 | | | 33,505 | |
| Balance at end of year | 2,330,054 | | | 2,317,212 | | | 2,308,583 | |
| | | | | |
| Accumulated other comprehensive income (loss) | | | | | |
| Balance at beginning of year | 171,710 | | | (177,110) | | | 92,382 | |
| Unrealized gains (losses) on available-for-sale investments, net of tax: | | | | | |
| Balance at beginning of year | 181,521 | | | (168,365) | | | 89,962 | |
| Cumulative effect of adoption of ASU No. 2018-02 | — | | | — | | | 2,106 | |
| Cumulative effect of adoption of ASU No. 2016-01, net of taxes | — | | | — | | | (69,604) | |
| Unrealized gains (losses) arising during the year, net of reclassification adjustment | 239,114 | | | 349,886 | | | (190,829) | |
| | | | | |
| Balance at end of year | 420,635 | | | 181,521 | | | (168,365) | |
| Cumulative foreign currency translation adjustments, net of tax: | | | | | |
| Balance at beginning of year | (9,811) | | | (8,745) | | | 2,420 | |
| Foreign currency translation adjustment | 3,571 | | | (1,066) | | | (11,165) | |
| Balance at end of year | (6,240) | | | (9,811) | | | (8,745) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Balance at end of year | 414,395 | | | 171,710 | | | (177,110) | |
| | | | | |
| Retained earnings | | | | | |
| Balance at beginning of year | 6,056,686 | | | 5,912,812 | | | 5,979,666 | |
| Cumulative effect of adoption of ASU No. 2018-02 | — | | | — | | | (2,106) | |
| Cumulative effect of adoption of ASU No. 2016-01, net of taxes | — | | | — | | | 69,604 | |
| Net income (loss) | (120,424) | | | 323,473 | | | 43,021 | |
| | | | | |
Preferred share dividends (1) | (30,250) | | | (41,112) | | | (42,625) | |
| | | | | |
Common share dividends (1) | (142,405) | | | (138,487) | | | (134,748) | |
| Balance at end of year | 5,763,607 | | | 6,056,686 | | | 5,912,812 | |
| | | | | |
| Treasury shares, at cost | | | | | |
| Balance at beginning of year | (3,778,806) | | | (3,791,420) | | | (3,807,156) | |
| Shares repurchased | (10,382) | | | (10,165) | | | (10,080) | |
| Shares reissued | 24,620 | | | 22,779 | | | 25,816 | |
| Balance at end of year | (3,764,568) | | | (3,778,806) | | | (3,791,420) | |
| | | | | |
| | | | | |
| Total shareholders' equity | $ | 5,295,694 | | | $ | 5,544,008 | | | $ | 5,030,071 | |
| | | | | |
(1) Refer to Note 14 'Shareholder's Equity' for details on dividends declared and paid related to the Company's common and preferred shares.
See accompanying notes to Consolidated Financial Statements.
117
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
| | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 |
| | (in thousands) |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | (120,424) | | | $ | 323,473 | | | $ | 43,021 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
| Net investment (gains) losses | (129,133) | | | (91,233) | | | 144,297 | |
| Net realized and unrealized gains on other investments | (16,059) | | | (60,038) | | | (45,153) | |
| Amortization of fixed maturities | 32,893 | | | 18,499 | | | 24,663 | |
| Interest in (income) loss of equity method investments | 3,612 | | | (9,718) | | | 495 | |
| Amortization of value of business acquired | 5,139 | | | 26,722 | | | 172,332 | |
| Other amortization and depreciation | 65,797 | | | 75,229 | | | 9,795 | |
| Share-based compensation expense, net of cash payments | 29,005 | | | 32,491 | | | 34,346 | |
| Non-cash foreign exchange gains | 0 | | | (6,043) | | | 0 | |
| | | | | |
| Changes in: | | | | | |
| Accrued interest receivable | 13,097 | | | 2,140 | | | (3,184) | |
| Reinsurance recoverable on unpaid and paid losses and loss expenses | (723,860) | | | (412,076) | | | (766,690) | |
| Deferred acquisition costs | 60,828 | | | 74,331 | | | (98,329) | |
| Prepaid reinsurance premiums | (94,122) | | | (88,789) | | | (212,654) | |
| Reserve for losses and loss expenses | 1,178,292 | | | 467,428 | | | 442,839 | |
| Unearned premiums | 62,999 | | | (7,958) | | | 29,760 | |
| Insurance and reinsurance balances, net | 72,503 | | | (51,075) | | | 208,783 | |
| Other items | (97,064) | | | (94,379) | | | 26,452 | |
| Net cash provided by operating activities | 343,503 | | | 199,004 | | | 10,773 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Purchases of: | | | | | |
| Fixed maturities | (10,494,198) | | | (9,994,025) | | | (8,464,140) | |
| Equity securities | (117,883) | | | (58,022) | | | (73,107) | |
| Mortgage loans | (199,259) | | | (194,020) | | | (106,171) | |
| Other investments | (166,602) | | | (218,178) | | | (180,126) | |
| | | | | |
| Short-term investments | (365,170) | | | (179,230) | | | (305,670) | |
| Proceeds from the sale of: | | | | | |
| Fixed maturities | 9,784,137 | | | 8,018,658 | | | 7,586,536 | |
| Equity securities | 119,381 | | | 36,016 | | | 246,196 | |
| Other investments | 166,976 | | | 249,129 | | | 361,030 | |
| Short-term investments | 171,976 | | | 266,057 | | | 178,983 | |
| Proceeds from redemption of fixed maturities | 1,526,396 | | | 1,282,796 | | | 1,241,214 | |
| Proceeds from redemption of short-term investments | 69,707 | | | 19,366 | | | 45,831 | |
| Proceeds from the repayment of mortgage loans | 39,121 | | | 60,244 | | | 133,081 | |
| Purchase of other assets | (44,661) | | | (63,106) | | | (25,103) | |
| | | | | |
| | | | | |
| | | | | |
| Net cash provided by (used in) investing activities | 489,921 | | | (774,315) | | | 638,554 | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Net proceeds from issuance of senior notes | 0 | | | 717,509 | | | 0 | |
| Redemption of senior notes | (500,000) | | | (250,000) | | | 0 | |
| Repurchase of preferred shares | (225,000) | | | 0 | | | 0 | |
| | | | | |
| | | | | |
| Taxes paid on withholding shares | (10,382) | | | (10,165) | | | (10,080) | |
| Dividends paid - common shares | (141,590) | | | (137,209) | | | (133,502) | |
| | | | | |
| Dividends paid - preferred shares | (31,831) | | | (42,625) | | | (42,625) | |
| | | | | |
| | | | | |
| | | | | |
| Net cash provided by (used in) financing activities | (908,803) | | | 277,510 | | | (186,207) | |
| | | | | |
| Effect of exchange rate changes on foreign currency cash, cash equivalents and restricted cash | 2,154 | | | 44,238 | | | 3,114 | |
| Increase (decrease) in cash, cash equivalents and restricted cash | (73,225) | | | (253,563) | | | 466,234 | |
| Cash, cash equivalents and restricted cash - beginning of year | 1,576,457 | | | 1,830,020 | | | 1,363,786 | |
| Cash, cash equivalents and restricted cash - end of year | $ | 1,503,232 | | | $ | 1,576,457 | | | $ | 1,830,020 | |
| | | | | |
See accompanying notes to Consolidated Financial Statements.
118
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
| | | | | | | | | | | | | | | | | |
| | | | | |
| Supplemental disclosures of cash flow information: | | | | | |
| Income taxes paid | $ | 4,414 | | | $ | 39,949 | | | $ | 15,698 | |
| Interest paid | $ | 54,108 | | | $ | 59,563 | | | $ | 64,822 | |
Supplemental disclosures of cash flow information:
In 2019, non-cash foreign exchange gains were attributable to the reclassification of the cumulative translation adjustment balance related to Aviabel Re S.A. from accumulated other comprehensive income in the consolidated balance sheet to foreign exchange losses (gains) in the consolidated statement of operations due to the liquidation of that entity (refer to Note 8 'Reserve for Losses and Loss Expenses' and Note 20 'Other Comprehensive Income (Loss)').
In 2018, total consideration paid for an agreement for the Reinsurance to Close ("RITC") of the 2015 and prior years of account of Syndicate 2007 was $819 million of which $600 million was settled by way of a transfer of securities and was treated as a non-cash activity in the consolidated statement of cash flows (refer to Note 8 'Reserve for Losses and LossExpenses').
See accompanying notes to Consolidated Financial Statements.
119
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 AND 2018
1. ORGANIZATION
AXIS Capital Holdings Limited ("AXIS Capital" and together with its wholly owned subsidiaries the "Company"), was incorporated on December 9, 2002, under the laws of Bermuda. The Company provides a broad range of insurance and reinsurance products on a worldwide basis. The Company's principal operating subsidiaries, located in Bermuda, the United States ("U.S."), Europe, Singapore and Canada are described below:
•AXIS Specialty Limited ("AXIS Specialty Bermuda"), a Bermuda domiciled company is licensed to provide specialty insurance and treaty reinsurance products on a worldwide basis. In addition, AXIS Specialty Bermuda conducts insurance and reinsurance business through its branch in Singapore, AXIS Specialty Limited (Singapore Branch).
•AXIS Insurance Company, domiciled in Illinois and AXIS Reinsurance Company, domiciled in New York, together with AXIS Reinsurance Company (Canadian Branch) are licensed to offer a range of specialty insurance and treaty reinsurance products to a variety of niche markets on a worldwide basis. AXIS Surplus Insurance Company, domiciled in the state of Illinois, is eligible to write insurance on a surplus lines basis.
•AXIS Specialty Europe SE ("AXIS Specialty Europe") is a European public limited liability company, incorporated as a non-life insurer under the laws of Ireland. It is a Societas Europaea (SE), or European society company registered in accordance with company law of the E.U. AXIS Specialty Europe also conducts insurance business through its branch in the United Kingdom ("U.K."), AXIS Specialty Europe SE ("UK Branch"). Pursuant to the U.K.'s withdrawal from the European Union on January 31, 2020, AXIS Specialty Europe expects to be fully regulated by the Prudential Regulation Authority ("PRA") as a third-country branch in the U.K. once the transitional arrangements have expired on December 31, 2021. Until AXIS Specialty Europe's application to the PRA for authorization of a third-country branch in the U.K. is approved, AXIS Specialty Europe will continue to trade in the U.K. under the PRA and the U.K. Financial Conduct Authority ("FCA") Temporary Permissions Regime. Effective January 1, 2019, Compagnie Belge d’Assurances Aviation NV/SA ("Aviabel") was merged into AXIS Specialty Europe by way of merger by absorption and dissolved without going into liquidation (the "Aviabel Merger"). In connection with the Aviabel Merger, AXIS Specialty Europe established new branches in Belgium and the Netherlands, AXIS Specialty Europe SE (Belgium Branch) and AXIS Specialty Europe SE (Netherlands Branch), respectively. Effective January 1, 2019, AXIS Specialty Europe conducts insurance business through its new branches in Belgium and the Netherlands.
•AXIS Re SE is a European public limited liability company, incorporated as a reinsurer under the laws of Ireland. AXIS Re SE is also a Societas Europaea (SE). AXIS Re SE also conducts reinsurance business through its branch in Switzerland, AXIS Re SE, Dublin (Zurich Branch).
•The Company operates in the Lloyd's of London ("Lloyd's") market through its corporate members AXIS Corporate Capital UK Limited and AXIS Corporate Capital UK II Limited, which provide 70% and 30%, respectively of AXIS Syndicate 1686's ("Syndicate 1686") capital support. AXIS Syndicate 1686 is managed by AXIS Managing Agency Ltd. ("AXIS Managing Agency").
•On October 2, 2017, AXIS Specialty UK Holdings Limited, a wholly owned subsidiary of the Company, acquired a 100% ownership interest in Novae Group plc ("Novae"). AXIS Corporate Capital UK II Limited is the sole corporate member of Novae Syndicate 2007 ("Syndicate 2007"). Effective January 1, 2018, AXIS Managing Agency commenced management and oversight of Syndicate 2007. Effective January 1, 2019, Syndicate 2007 ceased accepting new business and was placed into run-off.
•AXIS Ventures Limited ("AXIS Ventures") and AXIS Reinsurance Managers Limited ("AXIS Reinsurance Managers"), regulated by the BMA as insurance managers, generate fee income from services provided to strategic capital partners. Effective September 23, 2020, AXIS Ventures deregistered as an insurance manager with the BMA.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 AND 2018
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") and include AXIS Capital Holdings Limited and its wholly-owned subsidiaries.
All inter-company accounts and transactions have been eliminated.0
Tabular dollar and share amounts are in thousands, with the exception of per share amounts. All amounts are reported in U.S. dollars.
Use of Estimates
The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. While management believes that the amounts included in the consolidated financial statements reflect its best estimates and assumptions, actual results could differ from those estimates. The Company’s principal estimates include:
•reserve for losses and loss expenses;
•reinsurance recoverable on unpaid losses and loss expenses, including the provision for expected credit losses;
•gross premiums written and net premiums earned;
•fair value measurements of financial assets and liabilities; and
•the allowance for credit losses associated with available for sale securities.
The Company's significant accounting policies are as follows:
a) Investments
Fixed Maturities, Available for sale, at Fair Value
Fixed maturities classified as available for sale are reported at fair value (refer to Note 6 'Fair Value Measurements'). The change in fair values of fixed maturities, net of tax is recognized in accumulated other comprehensive income (loss) ("AOCI") in the consolidated statement of changes in shareholders’ equity.
Net investment income includes interest 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 fixed maturities are recorded on a trade-date basis and realized gains (losses) on sales of fixed maturities are determined based on the specific identification method. Realized gains (losses) on fixed maturities are included in net investment gains (losses) in the consolidated statements of operations.
The Company recognizes investment income from fixed maturities based on the constant effective yield method, which includes an adjustment for estimated principal repayments, if applicable. The effective yield used to determine the amortization of fixed maturities subject to prepayment risk (e.g. asset-backed, mortgage-backed and other structured securities) is recalculated and adjusted periodically based on historical and/or projected future cash flows. Adjustments to the yield for highly rated prepayable fixed maturities are accounted for using the retrospective method. Adjustments to the yield for other prepayable fixed maturities are accounted for using the prospective method.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 AND 2018
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Following the adoption of Accounting Standard Update ("ASU") 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments," (refer to 'New Accounting Standards Adopted in 2020' below):
An available for sale fixed maturity is impaired if the fair value of the investment is below amortized cost.
If a fixed maturity is impaired and the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before its anticipated recovery, the full amount of the impairment loss is charged to net income and is included in net investment gains (losses).
In instances where the Company intends to hold the impaired fixed maturity, the Company determines whether the decline in fair value below the amortized cost basis has resulted from a credit loss or other factors. If the Company does not anticipate to fully recover the amortized cost, an allowance for expected credit losses is established. The allowance for expected credit losses is limited to the difference between a security's amortized cost basis and its fair value.The allowance for expected credit losses is charged to net income and is included in net investment gains (losses).
On a quarterly basis, the Company assesses whether unrealized losses on fixed maturities represent credit impairments by considering the following factors:
a.the extent to which the fair value is less than amortized cost;
b.adverse conditions related to the security, industry, or geographical area;
c.downgrades in the security's credit rating by a credit rating agency; and
d.failure of the issuer to make scheduled principal or interest payments.
The length of time a security has been in an unrealized loss position no longer impacts the determination of whether a credit loss exists. If a security is assessed to be credit impaired, it is subject to a discounted cash flow analysis by comparing the present value of expected future cash flows with the amortized cost basis. If the present value of expected cash flows is less than the amortized cost, a credit loss exists and an allowance for expected credit losses is recognized. If the present value of expected future cash flows is equal to or greater than the amortized cost basis, an expected credit loss does not exist.
The non-credit impairment amount of the loss is recognized in other comprehensive income.
The Company reports accrued interest receivable related to available for sale debt securities separately and has elected not to measure an allowance for expected credit losses for accrued interest receivable. Write-offs of accrued interest receivable balances are recognized in net investment gains (losses) in the period in which they are deemed uncollectible.
Prior to the adoption of ASU 2016-13
An available for sale fixed maturity is impaired if the fair value of the investment is below amortized cost.
On a quarterly basis, the Company assesses whether unrealized losses on fixed maturities represent impairments that are other-than-temporary. The Company's impairment review process begins with a quantitative analysis to identify securities to be evaluated for potential OTTI. For identified securities, fundamental analysis is performed that considers the following quantitative and qualitative factors:
a.the duration and the extent of the decline;
b.the financial condition, near-term and long-term prospects of the issuer of the security;
c.the reason for the decline (e.g. credit spread widening, credit event, foreign exchange rate movements);
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 AND 2018
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
d.the historical and implied future volatility of the fair value; and
e.the collateral structure and credit support of the security, if applicable.
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.
In instances where the Company intends to hold the impaired fixed maturity, the Company estimates the anticipated credit loss on the security and this component of the impairment is charged to net income and is included in net investment gains (losses) in the consolidated statements of operations. On recognition of an OTTI charge, the new cost basis for the security is the amortized cost basis less the OTTI charge recognized in net income. The new cost basis is not adjusted for subsequent increases in fair value. The difference between the new cost basis and the cash flows expected to be collected is accreted or amortized on a quarterly basis to net investment income over the remaining life of the fixed maturity.
The Company recognizes the non-credit component of the impairment (i.e. related to interest rates, market conditions, etc.) in other comprehensive income.
Equity Securities, at Fair Value
Equity securities are reported at fair value. The change in the fair values of equity securities, net of tax is recognized in net investment gains (losses) in the consolidated statements of operations.
Net investment income includes dividend income and is presented net of investment expenses. Investment income is recognized when earned. Purchases and sales of equity securities are recorded on a trade-date basis and realized gains (losses) on sales of equity securities are determined based on the specific identification method. Realized gains (losses) on equity securities are included in net investment gains (losses) in the consolidated statements of operations.
Mortgage Loans, Held for investment, at Fair Value
Following the adoption of Accounting Standard Update ("ASU") 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments," (refer to 'New Accounting Standards Adopted in 2020' below):
Mortgage loans, held for investment are reported at amortized cost which is calculated as the unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, and is net of valuation allowances.
Mortgage loans, held for investment are presented net of an allowance for expected credit losses. The allowance for expected credit losses is estimated based on the Company’s analysis of projected lifetime losses. These projections take into account the Company’s experience with credit quality indicators,loan losses, defaults, loss severity, and loss expectations for loans with similar risk characteristics. These evaluations are revised as conditions change and new information becomes available. The allowance for expected credit losses is recognized in net investment gains (losses). Any adjustment to the allowance for expected credit losses is recognized in the period in which it is determined.
Interest income and prepayment fees are recognized when earned. Interest income is recognized based on an effective yield method which gives effect to the amortization of premiums and accretion of discounts.
Prior to the adoption of ASU 2016-13
Mortgage loans, held for investment are reported at amortized cost which is calculated as the unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, and is net of valuation allowances.
Interest income and prepayment fees are recognized when earned. Interest income is recognized based on an effective yield method which gives effect to the amortization of premiums and accretion of discounts.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 AND 2018
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Other Investments
Other investments are recorded at fair value (refer to Note 6 'Fair Value Measurements'). Changes in fair value and realized gains (losses) are reported in net investment income in the consolidated statements of operations.
Equity Method Investments
Investments in which the Company has significant influence over the operating and financial policies of the investee are classified as equity method investments and are accounted for using the equity method of accounting. In applying the equity method of accounting, investments are initially recorded at cost and are subsequently adjusted based on the Company’s proportionate share of net income or loss of the investee. Adjustments are based on the most recently available financial information from the investee. Changes in the carrying value of these investments are recorded in net income as interest in income (loss) of equity method investments.
Short-term Investments
Short-term investments primarily comprise highly liquid debt securities with maturities greater than three months but less than one year from the date of purchase. These investments are carried at amortized cost, which approximates fair value.
b) Cash and Cash Equivalents
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
| |
2. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| |
b) | Cash and Cash Equivalents |
Cash equivalents include money-market funds, fixed interest deposits and reverse repurchase agreements with a maturity of under 90 days when purchased. Cash and cash equivalents are recorded at amortized cost, which approximates fair value due to the short-term, liquid nature of these securities. Restricted cash primarily relates to funds held in trust to support of obligations in regulatory jurisdictions where the Company operates as a non-admitted carrier and to support the underwriting activities of Syndicate 1686 and Syndicate 2007 at Lloyd's.
| |
c) | Premiums and Acquisition Costs |
c) Premiums and Acquisition Costs
Premiums
Insurance premiums written are recorded in accordance with the terms of the underlying policies.
Reinsurance premiums are recorded at the inception of the contract and are estimated based on informationestimates received from ceding companies. For multi-year contracts insurance and reinsurance premiums are recorded at the inception of the contract based on management’s best estimate of total premiums to be received. Premiums are recognized on an annual basis for multi-year contracts where the cedant has the ability to unilaterally commute or cancel coverage within the term of the contract.
Any adjustments to insurance and reinsurance premium estimates are recognized in the period in which they are determined.
Insurance and reinsurance premiums are earned evenly over the period during which the Company is exposed to the underlying risk, which is generally one to two years with the exception of multi-year contracts. Unearned premiums represent the portion of premiums which relate to the unexpired risks under contracts in force.
Reinstatement premiums are recognized and earned at the time a loss event occurs and losses are recorded, where the coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms. The recognition of reinstatement premiums is based on estimates of losses and loss expenses, which reflects management’s judgment, as described in Note 2(d) 'Losses and Loss Expenses' below.
Following the adoption of Accounting Standard Update ("ASU") 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments," (refer to 'New Accounting Standards Adopted in 2020' below):
Insurance and reinsurance premiumspremium balances receivable are reviewed for impairment at least quarterly and are presented net of an allowance for expected credit losses.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 AND 2018
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The allowance for expected credit losses is estimated based on the Company's analysis of amounts due, historical delinquencies and write-offs, and current economic conditions, together with reasonable and supportable forecasts of short-term economic conditions. The allowance for expected credit losses is recognized in net income (loss). Any adjustment to the allowance for expected credit losses is recognized in the period in which it is determined. Write-offs of premium balances receivable, together with associated allowances for expected credit losses, are recognized in the period in which balances are deemed uncollectible. The Company does not have a history of significant write-offs.
Prior to the adoption of ASU 2016-13
Insurance and reinsurance premium balances receivable are reviewed for impairment at least quarterly and an allowance is established for amounts considered uncollectible.
Acquisition Costs
Acquisition costs vary with and are directly related to the successful acquisition efforts of acquiring new or renewing existing insurance and reinsurance contracts and consist primarily of fees and commissions paid to brokers and premium taxes. Acquisition costs are shown net of commissions on reinsurance purchased. Net acquisition costs are deferred and charged to net income as the related premium is earned. Insurance and reinsurance premiums balancepremium balances receivable is presented net of acquisition costs when contract terms provide for the right of offset.
Anticipated losses and loss expenses, other costs and investment income related to these premiums are considered in assessing the recoverability of deferred acquisition costs. If deferred amounts are estimated to be unrecoverable, they are expensed. Compensation expenses for personnel involved in contract acquisition, as well as advertising costs, are expensed as incurred.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
| |
2. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| |
d) | Losses and Loss Expenses |
Reserve for losses and loss expenses represents an estimate of the unpaid portion of the ultimate liability for losses and loss expenses for insured and reinsured events that have occurred at or before the balance sheet date. These amounts reflect claims that have been reported ("case reserves") and claims that have been incurred but have not yet been reported ("IBNR") and are reduced for estimated amounts of salvage and subrogation recoveries.
The Company reviews its reserve for losses and loss expenses on a quarterly basis. Case reserves are primarily established based on amounts reported by insuredsclients 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, Chain Ladder and Bornhuetter Ferguson methods. The estimate is highly dependent on management’s judgment as to which method(s) are most appropriate for a particular accident/underwriting year and line of business. Historical claims data is often supplemented with industry benchmarks when applying these methodologies.
Any adjustments to estimates of reserve for losses and loss expenses estimates are recognized in the period in which they are determined. While the Company believes that its reserves for losses and loss expenses are adequate, this estimate requires significant judgment and new information, events or circumstances may result in ultimate losses that are materially greater or less than provided for in the consolidated balance sheets.
e) Reinsurance
In the normal course of business, the Company purchases treaty and facultative reinsurance protection to limit its ultimate losses from catastrophic events and to reduce its loss aggregation risk. The premiums paid to reinsurers (i.e. ceded premiums written) are recognized over the coverage period. Prepaid reinsurance premiums represent the portion of premiums ceded which relate to the unexpired term of the contracts in force. Reinstatement premiums are recognized and earned at the time a loss event occurs and losses are recorded, where the coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 AND 2018
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reinsurance recoverable on unpaid and paid losses and loss expenses ("reinsurance recoverable") related to case reserves is estimated on a case-by-case basis by applying the terms of applicable reinsurance cover to individual case reserve estimates. Reinsurance recoverable related to IBNR is generally developed as part of the Company's loss reserving process, therefore, its estimation is subject to similar risks and uncertainties as the estimation of IBNR.
Following the adoption of Accounting Standard Update ("ASU") 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments," (refer to 'New Accounting Standards Adopted in 2020' below):
Reinsurance recoverable balances are reviewed for impairment at least quarterly and are presented net of an allowance for expected credit losses.
A case-specific allowance for expected credit losses is estimated based on the Company's analysis of amounts due, historical delinquencies and write-offs. In addition, the Company uses a default analysis which is based on the reinsurers' credit rating and the length of collection periods to estimate allowances for expected credit losses on the remainder of the reinsurance recoverable balance. Thedefault analysis considers current and forecasted economic conditions.
The allowance for expected credit losses is recognized in net income (loss). Any adjustment to the allowance for expected credit losses is recognized in the period in which it is determined. Write-offs of reinsurance recoverable balances, together with associated allowances for expected credit losses, are recognized in the period in which balances are deemed uncollectible. The Company does not have a history of significant write-offs.
Prior to the adoption of ASU 2016-13
Reinsurance recoverable is presented net of a provision for uncollectible amounts, reflecting the amount the Company believes ultimately will not be recovered from reinsurers due to insolvency, contractual disputes over contract language or coverage and/or some other reason. The Company applies case specific provisions against reinsurance recoverable balances that it deems unlikely to be collected in full. In addition, the Company uses a default analysis to estimate the provision for uncollectible amounts on the remainder of the reinsurance recoverable balance.
The estimates of reinsurance recoverable balances and the provision for uncollectible amounts require management’s judgment and are reviewed in detail on a quarterly basis. Any adjustments to the provision for uncollectible amounts are recognized in the period in which they are determined.
Retroactive Reinsurance
Retroactive reinsurance reimburses a ceding company for liabilities incurred as a result of past insurable events covered under contracts subject to the reinsurance. In certain instances, reinsurance contracts cover losses both on a prospective basis and on a retroactive basis and where practical the Company bifurcates the prospective and retrospective elements of these reinsurance contracts and accounts for each element separately. Initial gains in connection with retroactive reinsurance contracts are deferred and amortized into income over the settlement period while losses are recognized immediately. When changes in the estimated amount recoverable from the reinsurer or in the timing of receipts related to that amount occur, a cumulative amortization adjustment is recognized in net income in the period in which the change is determined so that the
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
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2. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
deferred gain reflects the balance that would have existed had the revised estimate been available at the inception of the reinsurance transaction.
f) Foreign Exchange
The functional currency of the Company and the majority of its subsidiaries is the U.S. dollar. All foreign currency transactions are initially measured and recorded in functional currency using the rates of exchange prevailing at the transaction date.
Monetary assets and liabilities denominated in foreign currency are remeasured to functional currency at the rates of exchange in effect at the balance sheet date with the resulting foreign exchange losses (gains) generally being recognized in
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 AND 2018
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the consolidated statements of operations. Foreign exchange losses (gains) related to available for sale investments denominated in foreign currency represent an unrealized appreciation (depreciation) in the market value of the securities and are included in AOCI. Non-monetary assets and liabilities denominated in foreign currency are not subsequently remeasured.
The Company’s reporting currency is the U.S. dollar. Assets and liabilities of the Company's subsidiaries and branches where the functional currency is not the U.S. dollar, are translated into U.S. dollars using the rates of exchange in effect at the balance sheet date, and revenue and expenses are translated using the weighted average foreign exchange rates for the period. The effect of translation adjustments is reported as a separate component of AOCI in the consolidated statements of change shareholders’ equity.
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g) | Share-based Compensation |
g) Share-based Compensation
The Company is authorized to issue restricted shares, restricted stock units, performance units, stock options, stock appreciation rights and other equity-based awards to its employees and directors. The Company's plan includes share-settled and cash-settled service and performance awards.
The fair value of 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.
The fair value of the cash-settled service and performance awards is recognized as a liability in the consolidated balance sheets and is remeasured at the end of each reporting period.
The Company recognizes forfeitures when they occur.
h) Derivative Instruments
The Company may enter into derivative instruments such as futures, options, interest rate swaps and foreign currency forward contracts as part of its overall foreign currency risk management strategy, to obtain exposure to a particular financial market or for yield enhancement.
During 2013, the Company began to write derivative based risk management products designed to address weather and commodity price risks, with the objective of generating profits on a portfolio basis. Effective July 1, 2017, the Company ceased writing derivative-based risk management products which address weather risks.
From time to time the Company may also enter into insurance and reinsurance contracts that meet the Financial Accounting Standards Board's ("FASB") definition of a derivative contract.
The Company measures all derivative instruments at fair value (refer to Note 6 'Fair Value Measurements') and recognizes these instruments as either assets or liabilities in the consolidated balance sheets. Subsequent changes in fair value and any realized gains or losses are recognized in the consolidated statements of operations.
i) Goodwill and Intangible Assets
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
| |
2. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
| |
i) | Goodwill and Intangible Assets |
The Company recognizes goodwill and other intangible assets in connection with certain acquisitions. Goodwill represents the excess of the purchase price paid over the fair value of the net assets acquired in these acquisitions and is not amortized. Other intangible assets with a finite life are amortized over the estimated useful live of the intangible asset. Other intangible assets with an indefinite life are not amortized.
The Company tests goodwill and indefinite intangible assets for potential impairment during the fourth quarter each year and between annual tests if an event occurs or changes in circumstances indicate that the asset is impaired. Such events or circumstances may include an economic downturn in a geographic market or a change in the assessment of future operations.
For the purpose of evaluating goodwill for impairment, the Company may first perform a qualitative assessment to determine whether it is necessary to perform a quantitative goodwill impairment test. If determined to be necessary, the quantitative test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of the reporting
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 AND 2018
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
unit exceeds the fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
For the purpose of evaluating indefinite lived intangibles for impairment, the Company may first perform a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test. If the Company elects to perform a qualitative assessment, it first assesses qualitative factors to determine whether it is more likely than not that an indefinite lived intangible asset is impaired. If the Company determines that it is not more likely than not that the indefinite lived intangible asset is impaired, the Company performs the quantitative impairment test.
For the purposes of evaluating goodwill and indefinite lived intangible assets for impairment, the Company has an unconditional option to bypass the qualitative assessment in any period and proceed directly to performing the quantitative impairment test. The Company may resume performing the qualitative assessment in any subsequent period.
For other definite lived intangible assetassets the Company tests for recoverability whenever events or changes in circumstances indicate its carrying amount may not be recoverable. The Company recognizes an impairment loss if the carrying amount of the asset is not recoverable and exceeds its fair value. The carrying amount of a definite lived intangible asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.
If goodwill or an intangible asset is impaired, the carrying value of the asset is reduced to fair value and a corresponding expense is recorded in the consolidated statements of operations.
j) Income Taxes
Certain subsidiaries and branches of the Company operate in jurisdictions where they are subject to taxation. Current and deferred income taxes are charged or credited to net income, or in certain cases to AOCI, based on enacted tax laws and rates applicable in the relevant jurisdiction in the period in which the tax becomes accruable or realizable. Deferred income taxes are provided for all temporary differences between the bases of assets and liabilities used in the consolidated balance sheets and those used in the various jurisdictional tax returns. When the assessment indicates that it is more likely than not that a portion of a deferred tax asset will not be realized in the foreseeable future, a valuation allowance against deferred tax assets is recorded. The Company recognizes the tax benefits of uncertain tax positions only when the position is more-likely-than-not to be sustained on audit by the relevant taxing authorities.
k) Treasury Shares
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019, 2018 AND 2017
| |
2. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
Common shares repurchased by the Company and not subsequently canceled are classified as treasury shares and are recorded at cost. This results in a reduction of shareholders’ equity in the consolidated balance sheets. The Company uses the average cost method to determine the cost of shares reissued from treasury.
| |
l) | New Accounting Standards Adopted in 2019 |
l) Leases
Effective January 1, 2019, theThe Company adopted ASU 2016-02, "Leases (Topic 842)," which provides a new comprehensive model for lease accounting. Topic 842 requires a lessee to recognizerecognizes a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The adoption of this standard resulted in the recognition of lease liabilities and right-of-use assets of $150 million in the Company's consolidated balance sheet at January 1, 2019, which areterm related to office property and equipment leases.
In addition, the Company adopted ASU 2018-11, "Leases (Topic 842) - Targeted Improvements," which provides an additional (and optional) transition method to adopt the new lease guidance. Under the alternative transition method, the Company's reporting for the comparative periods presented in its financial statements will be in accordance with the pre-effective date lease accounting requirements (Topic 840).
The Company also elected the package of practical expedients permitted under the transition guidance of Topic 842, which were elected as a package and applied consistently to all leases. At the adoption date, the package of practical expedients permitted the Company to not reassess the following:
| |
1. | whether any expired or existing contracts are or contain leases; |
| |
2. | the lease classification for any expired or existing leases; and |
| |
3. | initial direct costs for any existing leases. |
In addition to electing the package of practical expedients, the Company made an accounting policy election to accountaccounts for non-lease components separately from lease components. As a result, the non-lease components associated with the Company's leases are not included in the lease liabilities and right-of-use assets in the Company's consolidated balance sheet at December 31, 2019.sheets.
Further, theThe Company made an accounting policy election todoes not record office property and equipment leases with an initial term of 12 months or less (short-term) in the Company's consolidated balance sheets. For the year ended December 31, 2019, the Company recognized expenses for short-term leases of $1.1 million in the Company's consolidated statements of operations. The adoption of this guidance did not impact the Company's retained earnings or liquidity and it did not have a material impact on the Company's results of operations.
Premium Amortization on Purchased Callable Debt Securities
Effective January 1, 2019, the Company adopted ASU 2017-08, "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities," which shortens the amortization period for certain purchased callable debt securities held at a premium. The adoption of this guidance did not impact the Company's results of operations, financial condition or liquidity.
Changes to Disclosures on Fair Value Measurement
Effective January 1, 2019, the Company adopted ASU 2018-13, "Fair Value Measurement (Topic 820) - Disclosure Framework -
Changes to the Disclosure Requirements for Fair Value Measurement," which aims to improve the effectiveness of fair value measurement disclosures. The adoption of this guidance did not impact the Company's results of operations, financial condition, or liquidity.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 2018 AND 20172018
| |
2. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
| |
m) | Recently Issued Accounting Standards Not Yet Adopted |
Measurement of Credit Losses on Financial InstrumentInstruments
In June 2016,
Effective January 1, 2020, the FASB issuedCompany adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments," which replacesusing the modified retrospective approach for insurance and reinsurance premium balances receivable, reinsurance recoverable on unpaid losses and loss expenses and mortgage loans, held for investment. The Company assessed that the impact of adoption of ASU 2016-13 was $NaN. This guidance replaced the "incurred loss" impairment methodology with an approach based on "expected losses" to estimate credit losses on certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company's mortgage loans, held for investment, insurance and reinsurance premium balances receivable and its reinsurance recoverables on unpaid and paid losses and loss expenses are its more significant financial assets within the scope of ASU 2016-13. The guidance requires financial assets to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the cost of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. This guidance is effective
Insurance and reinsurance premium balances receivable of $2,738 million at December 31, 2020 was presented net of an allowance for interimexpected credit losses. The allowance for expected credit losses was estimated based on the Company's analysis of amounts due, historical delinquencies and annualwrite-offs, and current economic conditions, together with reasonable and supportable forecasts of short-term economic conditions, giving consideration to the potential impact from the COVID-19 pandemic. At December 31, 2020, the allowance for credit losses expected to be recognized over the life of premium balances receivable was $9 million.
Reinsurance recoverable on unpaid losses and loss expenses of $4,497 million at December 31, 2020 was presented net of an allowance for expected credit losses. A case-specific allowance for expected credit losses was estimated based on the Company's analysis of amounts due, historical delinquencies and write-offs. In addition, the Company used a default analysis based on the reinsurers' credit rating and the length of collection periods beginning afterto estimate allowances for expected credit losses on the remainder of the reinsurance recoverable balance. The default analysis considered current and forecasted economic conditions including the potential impact from the COVID-19 pandemic. At December 15, 2019.31, 2020, the allowance for credit losses expected to be recognized over the life of the reinsurance recoverable balances was $24 million.
Mortgage loans, held for investment of $593 million at December 31, 2020 was presented net of an allowance for expected credit losses. The Company does not anticipate thatallowance for expected credit losses was estimated based on the adoptionCompany’s analysis of this guidance will have a material impact on its resultsprojected lifetime losses. These projections take into account the Company’s experience with credit quality indicators, loan losses, defaults, loss severity, and loss expectations for loans with similar risk characteristics. These projections are revised as conditions change and new information becomes available. At December 31, 2020, the allowance for credit losses expected to be recognized over the life of operations, financial condition or liquidity.our mortgage loans was $NaN.
The
Effective January 1, 2020, the Company will also be impacted byadopted the targeted changes to the impairment model for available for sale securities introduced in ASU 2016-13. Credit2016-13 using the prospective transition approach. The updated guidance amends the previous other-than-temporary impairment model by requiring the recognition of impairments related to credit losses relating to available for sale debt securities will be recorded through an allowance account and limits the amount of credit loss to the difference between a security's amortized cost basis and its fair value. In addition, the length of time a security has been in an unrealized loss position no longer impacts the determination of whether a credit loss exists.
In instances where the Company intends to hold the impaired fixed maturity, and it does not anticipate to fully recover the amortized cost, an allowance for expected credit losses. This guidancelosses is effectiveestablished. At December 31, 2020, the allowance for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the impact of this guidance on its results of operations, financial condition and liquidity.
expected credit losses was $(0.3) million.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 2018 AND 20172018
3. SEGMENT INFORMATION
AXIS Capital's underwriting operations are organized around its global underwriting platforms, AXIS Insurance and AXIS Re. The Company has determined that it has 2 reportable segments, insurance and reinsurance. The Company does not allocate its assets by segment, with the exception of goodwill and intangible assets, as it evaluates the underwriting results of each segment separately from the results of its investment portfolio.assets.
Insurance
The Company's insurance segment offers specialty insurance products to a variety of niche markets on a worldwide basis. The product lines in this segment are property, marine, terrorism, aviation, credit and political risk, professional lines, liability, accident and health, and discontinued lines - Novae.
Reinsurance
The Company's reinsurance segment provides treaty reinsurance to insurance companies on a worldwide basis. The product lines in this segment are catastrophe, property, professional lines, credit and surety, professional lines, motor, liability, engineering, agriculture, engineering, marine and other,aviation, accident and health, and discontinued lines - Novae. The reinsurance segment also wrote derivative based risk management products designed to address weather and commodity price risks until July 1, 2017.
The following tables present the underwriting results of the Company's reportable segments, as well as the carrying amounts of allocated goodwill and intangible assets: |
| | | | | | | | | | | | | |
| | | | | | | | |
| | At and year ended December 31, 2019 | Insurance | | Reinsurance | | Total | |
| | | | | | | | |
| | Gross premiums written | $ | 3,675,931 |
| | $ | 3,222,927 |
| | $ | 6,898,858 |
| |
| | Net premiums written | 2,209,155 |
| | 2,280,460 |
| | 4,489,615 |
| |
| | Net premiums earned | 2,190,084 |
| | 2,397,094 |
| | 4,587,178 |
| |
| | Other insurance related income | 2,858 |
| | 13,586 |
| | 16,444 |
| |
| | Net losses and loss expenses | (1,278,679 | ) | | (1,766,119 | ) | | (3,044,798 | ) | |
| | Acquisition costs | (468,281 | ) | | (556,301 | ) | | (1,024,582 | ) | |
| | General and administrative expenses | (401,963 | ) | | (103,772 | ) | | (505,735 | ) | |
| | Underwriting income (loss) | $ | 44,019 |
| | $ | (15,512 | ) | | $ | 28,507 |
| |
| | | | | | | | |
| | Net investment income | | | | | 478,572 |
| |
| | Net investment gains | | | | | 91,233 |
| |
| | Corporate expenses | | | | | (129,096 | ) | |
| | Foreign exchange gains | | | | | 12,041 |
| |
| | Interest expense and financing costs | | | | | (68,107 | ) | |
| | Reorganization expenses | | | | | (37,384 | ) | |
| | Amortization of value of business acquired | | | | | (26,722 | ) | |
| | Amortization of intangible assets | | | | | (11,597 | ) | |
| | Income before income taxes and interest in income (loss) of equity method investments | | | | | $ | 337,447 |
| |
| | | | | | | | |
| | Net losses and loss expenses ratio | 58.4 | % | | 73.7 | % | | 66.4 | % | |
| | Acquisition cost ratio | 21.4 | % | | 23.2 | % | | 22.3 | % | |
| | General and administrative expense ratio | 18.3 | % | | 4.3 | % | | 13.9 | % | |
| | Combined ratio | 98.1 | % | | 101.2 | % | | 102.6 | % | |
| | | | | | | | |
| | Goodwill and intangible assets | $ | 332,553 |
| | $ | — |
| | $ | 332,553 |
| |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| At and year ended December 31, 2020 | Insurance | | Reinsurance | | Total | |
| | | | | | | |
| Gross premiums written | $ | 4,018,399 | | | $ | 2,808,539 | | | $ | 6,826,938 | | |
| Net premiums written | 2,357,501 | | | 1,978,908 | | | 4,336,409 | | |
| Net premiums earned | 2,299,038 | | | 2,072,271 | | | 4,371,309 | | |
| Other insurance related income (loss) | 2,647 | | | (10,736) | | | (8,089) | | |
| Net losses and loss expenses | (1,697,014) | | | (1,584,238) | | | (3,281,252) | | |
| Acquisition costs | (461,533) | | | (467,984) | | | (929,517) | | |
| Underwriting-related general and administrative expenses | (378,839) | | | (99,129) | | | (477,968) | | |
| Underwriting income (loss) | $ | (235,701) | | | $ | (89,816) | | | $ | (325,517) | | |
| | | | | | | |
| Net investment income | | | | | 349,601 | | |
| Net investment gains | | | | | 129,133 | | |
| Corporate expenses | | | | | (101,822) | | |
| Foreign exchange losses | | | | | (81,069) | | |
| Interest expense and financing costs | | | | | (75,049) | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Reorganization expenses | | | | | (7,881) | | |
| Amortization of value of business acquired | | | | | (5,139) | | |
| Amortization of intangible assets | | | | | (11,390) | | |
| Income (loss) before income taxes and interest in income (loss) of equity method investments | | | | | $ | (129,133) | | |
| | | | | | | |
| Net losses and loss expenses ratio | 73.8 | % | | 76.4 | % | | 75.1 | % | |
| Acquisition cost ratio | 20.1 | % | | 22.6 | % | | 21.3 | % | |
| General and administrative expense ratio | 16.5 | % | | 4.8 | % | | 13.2 | % | |
| Combined ratio | 110.4 | % | | 103.8 | % | | 109.6 | % | |
| | | | | | | |
| Goodwill and intangible assets | $ | 320,434 | | | $ | 0 | | | $ | 320,434 | | |
| | | | | | | |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 2018 AND 20172018
| |
3. | SEGMENT INFORMATION (CONTINUED) |
3. SEGMENT INFORMATION (CONTINUED)
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| At and year ended December 31, 2019 | Insurance | | Reinsurance | | Total | |
| | | | | | | |
| Gross premiums written | $ | 3,675,931 | | | $ | 3,222,927 | | | $ | 6,898,858 | | |
| Net premiums written | 2,209,155 | | | 2,280,460 | | | 4,489,615 | | |
| Net premiums earned | 2,190,084 | | | 2,397,094 | | | 4,587,178 | | |
| Other insurance related income | 2,858 | | | 13,586 | | | 16,444 | | |
| Net losses and loss expenses | (1,278,679) | | | (1,766,119) | | | (3,044,798) | | |
| Acquisition costs | (468,281) | | | (556,301) | | | (1,024,582) | | |
| Underwriting-related general and administrative expenses | (401,963) | | | (103,772) | | | (505,735) | | |
| Underwriting income (loss) | $ | 44,019 | | | $ | (15,512) | | | $ | 28,507 | | |
| | | | | | | |
| Net investment income | | | | | 478,572 | | |
| Net investment gains | | | | | 91,233 | | |
| Corporate expenses | | | | | (129,096) | | |
| Foreign exchange gains | | | | | 12,041 | | |
| Interest expense and financing costs | | | | | (68,107) | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Reorganization expenses | | | | | (37,384) | | |
| Amortization of value of business acquired | | | | | (26,722) | | |
| Amortization of intangible assets | | | | | (11,597) | | |
| Income (loss) before income taxes and interest in income (loss) of equity method investments | | | | | $ | 337,447 | | |
| | | | | | | |
| Net losses and loss expenses ratio | 58.4 | % | | 73.7 | % | | 66.4 | % | |
| Acquisition cost ratio | 21.4 | % | | 23.2 | % | | 22.3 | % | |
| General and administrative expense ratio | 18.3 | % | | 4.3 | % | | 13.9 | % | |
| Combined ratio | 98.1 | % | | 101.2 | % | | 102.6 | % | |
| | | | | | | |
| Goodwill and intangible assets | $ | 332,553 | | | $ | 0 | | | $ | 332,553 | | |
| | | | | | | |
|
| | | | | | | | | | | | | |
| | | | | | | | |
| | At and year ended December 31, 2018 | Insurance | | Reinsurance | | Total | |
| | | | | | | | |
| | Gross premiums written | $ | 3,797,592 |
| | $ | 3,112,473 |
| | $ | 6,910,065 |
| |
| | Net premiums written | 2,324,747 |
| | 2,334,215 |
| | 4,658,962 |
| |
| | Net premiums earned | 2,362,606 |
| | 2,428,889 |
| | 4,791,495 |
| |
| | Other insurance related income | 3,460 |
| | 7,162 |
| | 10,622 |
| |
| | Net losses and loss expenses | (1,494,323 | ) | | (1,695,964 | ) | | (3,190,287 | ) | |
| | Acquisition costs | (399,193 | ) | | (569,642 | ) | | (968,835 | ) | |
| | General and administrative expenses | (395,252 | ) | | (123,916 | ) | | (519,168 | ) | |
| | Underwriting income | $ | 77,298 |
| | $ | 46,529 |
| | $ | 123,827 |
| |
| | | | | | | | |
| | Net investment income | | | | | 438,507 |
| |
| | Net investment losses | | | | | (150,218 | ) | |
| | Corporate expenses | | | | | (108,221 | ) | |
| | Foreign exchange gains | | | | | 29,165 |
| |
| | Interest expense and financing costs | | | | | (67,432 | ) | |
| | Reorganization expenses | | | | | (66,940 | ) | |
| | Amortization of value of business acquired | | | | | (172,332 | ) | |
| | Amortization of intangible assets | | | | | (13,814 | ) | |
| | Income before income taxes and interest in income (loss) of equity method investments | | | | | $ | 12,542 |
| |
| | | | | | | | |
| | Net losses and loss expenses ratio | 63.2 | % | | 69.8 | % | | 66.6 | % | |
| | Acquisition cost ratio | 16.9 | % | | 23.5 | % | | 20.2 | % | |
| | General and administrative expense ratio | 16.8 | % | | 5.1 | % | | 13.1 | % | |
| | Combined ratio | 96.9 | % | | 98.4 | % | | 99.9 | % | |
| | | | | | | | |
| | Goodwill and intangible assets | $ | 343,571 |
| | $ | — |
| | $ | 343,571 |
| |
| | | | | | | | |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 2018 AND 20172018
| |
3. | SEGMENT INFORMATION (CONTINUED) |
|
| | | | | | | | | | | | | |
| | | | | | | | |
| | At and year ended December 31, 2017 | Insurance | | Reinsurance | | Total | |
| | | | | | | | |
| | Gross premiums written | $ | 2,814,918 |
| | $ | 2,741,355 |
| | $ | 5,556,273 |
| |
| | Net premiums written | 1,775,825 |
| | 2,251,318 |
| | 4,027,143 |
| |
| | Net premiums earned | 1,816,438 |
| | 2,332,322 |
| | 4,148,760 |
| |
| | Other insurance related income (losses) | 2,944 |
| | (4,184 | ) | | (1,240 | ) | |
| | Net losses and loss expenses | (1,465,427 | ) | | (1,822,345 | ) | | (3,287,772 | ) | |
| | Acquisition costs | (270,229 | ) | | (553,362 | ) | | (823,591 | ) | |
| | General and administrative expenses | (325,368 | ) | | (124,115 | ) | | (449,483 | ) | |
| | Underwriting loss | $ | (241,642 | ) | | $ | (171,684 | ) | | $ | (413,326 | ) | |
| | | | | | | | |
| | Net investment income | | | | | 400,805 |
| |
| | Net investment gains | | | | | 28,226 |
| |
| | Corporate expenses | | | | | (129,945 | ) | |
| | Foreign exchange losses | | | | | (134,737 | ) | |
| | Interest expense and financing costs | | | | | (54,811 | ) | |
| | Bargain purchase gain | | | | | 15,044 |
| |
| | Transaction and reorganization expenses | | | | | (26,718 | ) | |
| | Amortization of value of business acquired | | | | | (50,104 | ) | |
| | Amortization of intangible assets | | | | | (2,543 | ) | |
| | Loss before income taxes and interest in income (loss) of equity method investments | | | | | $ | (368,109 | ) | |
| | | | | | | | |
| | Net losses and loss expenses ratio | 80.7 | % | | 78.1 | % | | 79.2 | % | |
| | Acquisition cost ratio | 14.9 | % | | 23.7 | % | | 19.9 | % | |
| | General and administrative expense ratio | 17.9 | % | | 5.3 | % | | 14.0 | % | |
| | Combined ratio | 113.5 | % | | 107.1 | % | | 113.1 | % | |
| | | | | | | | |
| | Goodwill and intangible assets | $ | 359,990 |
| | $ | — |
| | $ | 359,990 |
| |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| At and year ended December 31, 2018 | Insurance | | Reinsurance | | Total | |
| | | | | | | |
| Gross premiums written | $ | 3,797,592 | | | $ | 3,112,473 | | | $ | 6,910,065 | | |
| Net premiums written | 2,324,747 | | | 2,334,215 | | | 4,658,962 | | |
| Net premiums earned | 2,362,606 | | | 2,428,889 | | | 4,791,495 | | |
| Other insurance related income | 3,460 | | | 7,162 | | | 10,622 | | |
| Net losses and loss expenses | (1,494,323) | | | (1,695,964) | | | (3,190,287) | | |
| Acquisition costs | (399,193) | | | (569,642) | | | (968,835) | | |
| Underwriting-related general and administrative expenses | (395,252) | | | (123,916) | | | (519,168) | | |
| Underwriting income | $ | 77,298 | | | $ | 46,529 | | | $ | 123,827 | | |
| | | | | | | |
| Net investment income | | | | | 438,507 | | |
| Net investment losses | | | | | (150,218) | | |
| Corporate expenses | | | | | (108,221) | | |
| Foreign exchange gains | | | | | 29,165 | | |
| Interest expense and financing costs | | | | | (67,432) | | |
| Reorganization expenses | | | | | (66,940) | | |
| Amortization of value of business acquired | | | | | (172,332) | | |
| Amortization of intangible assets | | | | | (13,814) | | |
| Income (loss) before income taxes and interest in income (loss) of equity method investments | | | | | $ | 12,542 | | |
| | | | | | | |
| Net losses and loss expenses ratio | 63.2 | % | | 69.8 | % | | 66.6 | % | |
| Acquisition cost ratio | 16.9 | % | | 23.5 | % | | 20.2 | % | |
| General and administrative expense ratio | 16.8 | % | | 5.1 | % | | 13.1 | % | |
| Combined ratio | 96.9 | % | | 98.4 | % | | 99.9 | % | |
| | | | | | | |
| Goodwill and intangible assets | $ | 343,571 | | | $ | 0 | | | $ | 343,571 | | |
| | | | | | | |
The following table presents gross premiums written by the geographical location of the Company's subsidiaries:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Years ended December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Bermuda | $ | 602,432 | | | $ | 738,258 | | | $ | 606,452 | | |
| Ireland | 1,516,596 | | | 1,679,646 | | | 1,805,882 | | |
| U.S. | 3,398,108 | | | 3,090,547 | | | 2,811,537 | | |
| Lloyd's of London | 1,309,802 | | | 1,390,407 | | | 1,686,194 | | |
| Gross premiums written | $ | 6,826,938 | | | $ | 6,898,858 | | | $ | 6,910,065 | | |
| | | | | | | |
|
| | | | | | | | | | | | | |
| | | | | | | | |
| | Years ended December 31, | 2019 | | 2018 | | 2017 | |
| | | | | | | | |
| | Bermuda | $ | 738,258 |
| | $ | 606,452 |
| | $ | 529,425 |
| |
| | Ireland | 1,679,646 |
| | 1,805,882 |
| | 1,569,956 |
| |
| | U.S. | 3,090,547 |
| | 2,811,537 |
| | 2,814,933 |
| |
| | Lloyd's of London | 1,390,407 |
| | 1,686,194 |
| | 641,959 |
| |
| | Gross premiums written | $ | 6,898,858 |
| | $ | 6,910,065 |
| | $ | 5,556,273 |
| |
| | | | | | | | |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 2018 AND 20172018
| |
3. | SEGMENT INFORMATION (CONTINUED) |
The following table presents net premiums earned by segment and line of business:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Years ended December 31, | 2020 | | 2019 | | 2018 | |
| | | | | | | |
| Insurance | | | | | | |
| Property | $ | 605,650 | | | $ | 633,550 | | | $ | 796,945 | | |
| Marine | 293,746 | | | 281,764 | | | 300,944 | | |
| Terrorism | 47,378 | | | 47,345 | | | 49,150 | | |
| Aviation | 70,910 | | | 55,028 | | | 74,203 | | |
| Credit and political risk | 105,869 | | | 91,698 | | | 102,825 | | |
| Professional lines | 715,276 | | | 661,250 | | | 570,241 | | |
| Liability | 313,291 | | | 264,667 | | | 229,373 | | |
| Accident and health | 143,723 | | | 144,499 | | | 207,777 | | |
| Discontinued lines - Novae | 3,195 | | | 10,283 | | | 31,148 | | |
| Total Insurance | 2,299,038 | | | 2,190,084 | | | 2,362,606 | | |
| | | | | | | |
| Reinsurance | | | | | | |
| Catastrophe | 244,934 | | | 267,591 | | | 250,016 | | |
| Property | 256,244 | | | 311,625 | | | 317,038 | | |
| Credit and surety | 187,721 | | | 208,717 | | | 250,276 | | |
| Professional lines | 207,605 | | | 206,328 | | | 220,687 | | |
| Motor | 255,916 | | | 398,565 | | | 438,693 | | |
| Liability | 396,906 | | | 373,664 | | | 363,292 | | |
| Engineering | 60,521 | | | 63,899 | | | 67,932 | | |
| Agriculture | 73,696 | | | 188,925 | | | 176,435 | | |
| Marine and aviation | 53,516 | | | 59,209 | | | 35,570 | | |
| Accident and health | 333,996 | | | 319,619 | | | 299,813 | | |
| Discontinued lines - Novae | 1,216 | | | (1,048) | | | 9,137 | | |
| Total Reinsurance | 2,072,271 | | | 2,397,094 | | | 2,428,889 | | |
| | | | | | | |
| Total | $ | 4,371,309 | | | $ | 4,587,178 | | | $ | 4,791,495 | | |
| | | | | | | |
|
| | | | | | | | | | | | | |
| | | | | | | | |
| | Years ended December 31, | 2019 | | 2018 | | 2017 | |
| | | | | | | | |
| | Insurance | | | | | | |
| | Property | $ | 633,550 |
| | $ | 796,945 |
| | $ | 543,342 |
| |
| | Marine | 281,764 |
| | 300,944 |
| | 181,533 |
| |
| | Terrorism | 47,345 |
| | 49,150 |
| | 36,084 |
| |
| | Aviation | 55,028 |
| | 74,203 |
| | 75,107 |
| |
| | Credit and political risk | 91,698 |
| | 102,825 |
| | 56,432 |
| |
| | Professional lines | 661,250 |
| | 570,241 |
| | 519,759 |
| |
| | Liability | 264,667 |
| | 229,373 |
| | 188,770 |
| |
| | Accident and health | 144,499 |
| | 207,777 |
| | 199,121 |
| |
| | Discontinued lines - Novae | 10,283 |
| | 31,148 |
| | 16,290 |
| |
| | Total Insurance | 2,190,084 |
| | 2,362,606 |
| | 1,816,438 |
| |
| | | | | | | | |
| | Reinsurance | | | | | | |
| | Catastrophe | 267,591 |
| | 250,016 |
| | 209,470 |
| |
| | Property | 311,625 |
| | 317,038 |
| | 304,376 |
| |
| | Professional lines | 206,328 |
| | 220,687 |
| | 226,622 |
| |
| | Credit and surety | 208,717 |
| | 250,276 |
| | 244,186 |
| |
| | Motor | 398,565 |
| | 438,693 |
| | 371,501 |
| |
| | Liability | 373,664 |
| | 363,292 |
| | 351,940 |
| |
| | Agriculture | 188,925 |
| | 176,435 |
| | 195,391 |
| |
| | Engineering | 63,899 |
| | 67,932 |
| | 66,291 |
| |
| | Marine and other | 59,209 |
| | 35,570 |
| | 64,449 |
| |
| | Accident and health | 319,619 |
| | 299,813 |
| | 289,925 |
| |
| | Discontinued lines - Novae | (1,048 | ) | | 9,137 |
| | 8,171 |
| |
| | Total Reinsurance | 2,397,094 |
| | 2,428,889 |
| | 2,332,322 |
| |
| | | | | | | | |
| | Total | $ | 4,587,178 |
| | $ | 4,791,495 |
| | $ | 4,148,760 |
| |
| | | | | | | | |