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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
¨        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-31721
AXIS CAPITAL HOLDINGS LIMITED
(Exact name of registrant as specified in its charter)
BERMUDA
(State or other jurisdiction of incorporation or organization)
98-0395986
(I.R.S. Employer Identification No.)
92 Pitts Bay Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
(441) 496-2600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x  Accelerated filer  ¨   Non-accelerated filer  ¨  Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  x
As of October 19, 2016, there were 88,445,095 Common Shares, $0.0125 par value per share, of the registrant outstanding.


Table of Contents




AXIS CAPITAL HOLDINGS LIMITED
INDEX TO FORM 10-Q


 
 
 
Page
 
PART I
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
PART II
 
 
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.
 



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PART I
FINANCIAL INFORMATION
This quarterly report contains forward-looking statements within the meaning of the U.S. federal securities laws. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the United States securities laws. In some cases, these statements can be identified by the use of forward-looking words such as “may”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”. Forward-looking statements contained in this report may include information regarding our estimates of losses related to catastrophes and other large losses, measurements of potential losses in the fair value of our investment portfolio and derivative contracts, our expectations regarding pricing and other market conditions, our growth prospects, and valuations of the potential impact of movements in interest rates, equity prices, credit spreads and foreign currency rates. Forward-looking statements only reflect our expectations and are not guarantees of performance.
These statements involve risks, uncertainties and assumptions. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. We believe that these factors include, but are not limited to, the following: 
•
the occurrence and magnitude of natural and man-made disasters,
•
actual claims exceeding our loss reserves,
•
general economic, capital and credit market conditions,
•
the failure of any of the loss limitation methods we employ,
•
the effects of emerging claims, coverage and regulatory issues, including uncertainty related to coverage definitions, limits, terms and conditions,
•
the failure of our cedants to adequately evaluate risks,
•
inability to obtain additional capital on favorable terms, or at all,
•
the loss of one or more key executives,
•
a decline in our ratings with rating agencies,
•
loss of business provided to us by our major brokers,
•
changes in accounting policies or practices,
•
the use of industry catastrophe models and changes to these models,
•
changes in governmental regulations,
•
increased competition,
•
changes in the political environment of certain countries in which we operate or underwrite business including the United Kingdom’s expected withdrawal from the European Union,
•
fluctuations in interest rates, credit spreads, equity prices and/or currency values, and
•
the other matters set forth under Item 1A, ‘Risk Factors’ and Item 7, ‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’ included in our Annual Report on Form 10-K for the year ended December 31, 2015.
We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.



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ITEM 1.     CONSOLIDATED FINANCIAL STATEMENTS
 
 
Page  
 
 
Consolidated Balance Sheets at September 30, 2016 (Unaudited) and December 31, 2015
Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015 (Unaudited)
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015 (Unaudited)
Consolidated Statements of Changes in Shareholders' Equity for the nine months ended September 30, 2016 and 2015 (Unaudited)
Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation and Accounting Policies
Note 2 - Segment Information
Note 3 - Investments
Note 4 - Fair Value Measurements
Note 5 - Derivative Instruments
Note 6 - Reserve for Losses and Loss Expenses
Note 7 - Share-Based Compensation
Note 8 - Earnings Per Common Share
Note 9 - Shareholders' Equity
Note 10 - Commitments and Contingencies
Note 11 - Other Comprehensive Income (Loss)
Note 12 - Subsequent Event






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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2016 (UNAUDITED) AND DECEMBER 31, 2015
 
 
2016
 
2015
 
(in thousands)
Assets
 
 
 
Investments:
 
 
 
Fixed maturities, available for sale, at fair value
(Amortized cost 2016: $11,462,399; 2015: $11,897,639)
$
11,566,860

 
$
11,719,749

Equity securities, available for sale, at fair value
(Cost 2016: $600,604; 2015: $575,776)
644,344

 
597,998

Mortgage loans, held for investment, at amortized cost and fair value
332,753

 
206,277

Other investments, at fair value
847,262

 
816,756

Equity method investments
111,295

 
10,932

Short-term investments, at amortized cost and fair value
39,877

 
34,406

Total investments
13,542,391

 
13,386,118

Cash and cash equivalents
848,200

 
988,133

Restricted cash and cash equivalents
229,063

 
186,618

Accrued interest receivable
71,096

 
73,729

Insurance and reinsurance premium balances receivable
2,694,976

 
1,967,535

Reinsurance recoverable on unpaid and paid losses
2,336,741

 
2,096,104

Deferred acquisition costs
545,618

 
471,782

Prepaid reinsurance premiums
582,551

 
396,201

Receivable for investments sold
2,285

 
26,478

Goodwill and intangible assets
85,501

 
86,858

Other assets
283,969

 
302,335

Total assets
$
21,222,391

 
$
19,981,891

 
 
 
 
Liabilities
 
 
 
Reserve for losses and loss expenses
$
9,874,807

 
$
9,646,285

Unearned premiums
3,453,655

 
2,760,889

Insurance and reinsurance balances payable
461,519

 
356,417

Senior notes
992,633

 
991,825

Payable for investments purchased
141,245

 
9,356

Other liabilities
272,874

 
350,237

Total liabilities
15,196,733

 
14,115,009

 
 
 
 
Shareholders’ equity
 
 
 
Preferred shares
625,000

 
627,843

Common shares (2016: 176,575; 2015: 176,240 shares issued and
2016: 88,439; 2015: 96,066 shares outstanding)
2,206

 
2,202

Additional paid-in capital
2,307,866

 
2,241,388

Accumulated other comprehensive income (loss)
98,505

 
(188,465
)
Retained earnings
6,430,573

 
6,194,353

Treasury shares, at cost (2016: 88,136; 2015: 80,174 shares)
(3,438,492
)
 
(3,010,439
)
Total shareholders’ equity
6,025,658

 
5,866,882

 
 
 
 
Total liabilities and shareholders’ equity
$
21,222,391

 
$
19,981,891


See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015


 
Three months ended
 
Nine months ended
 
2016
 
2015
 
2016
 
2015
 
(in thousands, except for per share amounts)
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
934,415

 
$
919,341

 
$
2,783,746

 
$
2,764,605

Net investment income
116,923

 
45,685

 
257,818

 
226,336

Other insurance related income
5,944

 
1,158

 
4,850

 
12,319

Termination fee received
—

 
280,000

 
—

 
280,000

Net realized investment gains (losses):
 
 
 
 
 
 
 
Other-than-temporary impairment ("OTTI") losses
(4,247
)
 
(32,301
)
 
(20,346
)
 
(62,762
)
Other realized investment gains (losses)
9,452

 
(37,656
)
 
(19,949
)
 
(60,856
)
Total net realized investment gains (losses)
5,205

 
(69,957
)
 
(40,295
)
 
(123,618
)
Total revenues
1,062,487

 
1,176,227

 
3,006,119

 
3,159,642

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Net losses and loss expenses
532,328

 
560,387

 
1,663,584

 
1,652,868

Acquisition costs
189,810

 
182,744

 
559,570

 
537,549

General and administrative expenses
142,906

 
144,727

 
439,554

 
456,451

Foreign exchange gains
(13,795
)
 
(28,088
)
 
(69,781
)
 
(69,200
)
Interest expense and financing costs
12,839

 
12,918

 
38,586

 
38,114

Reorganization and related expenses
—

 
45,867

 
—

 
45,867

Total expenses
864,088

 
918,555

 
2,631,513

 
2,661,649

 
 
 
 
 
 
 
 
Income before income taxes and interest in income (loss) of equity method investments
198,399

 
257,672

 
374,606

 
497,993

Income tax expense
9,352

 
30

 
7,712

 
1,155

Interest in loss of equity method investments
(2,434
)
 
—

 
(2,434
)
 
—

Net income
186,613

 
257,642

 
364,460

 
496,838

Preferred share dividends
9,969

 
10,022

 
29,906

 
30,066

Net income available to common shareholders
$
176,644

 
$
247,620

 
$
334,554

 
$
466,772

 
 
 
 
 
 
 
 
Per share data
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
Basic net income
$
1.97

 
$
2.52

 
$
3.64

 
$
4.69

Diluted net income
$
1.96

 
$
2.50

 
$
3.61

 
$
4.65

Weighted average number of common shares outstanding - basic
89,621

 
98,226

 
91,852

 
99,464

Weighted average number of common shares outstanding - diluted
90,351

 
99,124

 
92,579

 
100,468

Cash dividends declared per common share
$
0.35

 
$
0.29

 
$
1.05

 
$
0.87




See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
 
 
Three months ended
 
Nine months ended
 
2016
 
2015
 
2016
 
2015
 
(in thousands)
Net income
$
186,613

 
$
257,642

 
$
364,460

 
$
496,838

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Available for sale investments:
 
 
 
 
 
 
 
Unrealized investment gains (losses) arising during the period
36,336

 
(99,711
)
 
238,656

 
(176,938
)
Adjustment for reclassification of net realized investment gains (losses) and OTTI losses recognized in net income
(2,642
)
 
74,810

 
42,620

 
128,770

Unrealized investment gains (losses) arising during the period, net of reclassification adjustment
33,694

 
(24,901
)
 
281,276

 
(48,168
)
Foreign currency translation adjustment
1,722

 
(14,626
)
 
5,694

 
(23,851
)
Total other comprehensive income (loss), net of tax
35,416

 
(39,527
)
 
286,970

 
(72,019
)
Comprehensive income
$
222,029

 
$
218,115

 
$
651,430

 
$
424,819




See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
 
2016
 
2015
 
(in thousands)
Preferred shares
 
 
 
Balance at beginning of period
$
627,843

 
$
627,843

Shares repurchased
(2,843
)
 
—

Balance at end of period
625,000

 
627,843

 
 
 
 
Common shares (par value)
 
 
 
Balance at beginning of period
2,202

 
2,191

Shares issued
4

 
11

Balance at end of period
2,206

 
2,202

 
 
 
 
Additional paid-in capital
 
 
 
Balance at beginning of period
2,241,388

 
2,285,016

Shares issued - common shares
(4
)
 
2,472

Cost of treasury shares reissued
(19,647
)
 
(17,674
)
Settlement of accelerated share repurchase
60,000

 
(60,000
)
Stock options exercised
—

 
558

Share-based compensation expense
26,129

 
19,906

Balance at end of period
2,307,866

 
2,230,278

 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
Balance at beginning of period
(188,465
)
 
(45,574
)
Unrealized gains (losses) on available for sale investments, net of tax:
 
 
 
Balance at beginning of period
(149,585
)
 
(28,192
)
Unrealized gains (losses) arising during the period, net of reclassification adjustment
281,276

 
(48,168
)
Non-credit portion of OTTI losses
—

 
—

Balance at end of period
131,691

 
(76,360
)
Cumulative foreign currency translation adjustments, net of tax:
 
 
 
Balance at beginning of period
(38,880
)
 
(17,382
)
Foreign currency translation adjustments
5,694

 
(23,851
)
Balance at end of period
(33,186
)
 
(41,233
)
Balance at end of period
98,505

 
(117,593
)
 
 
 
 
Retained earnings
 
 
 
Balance at beginning of period
6,194,353

 
5,715,504

Net income
364,460

 
496,838

Preferred share dividends
(29,906
)
 
(30,066
)
Common share dividends
(98,334
)
 
(88,379
)
Balance at end of period
6,430,573

 
6,093,897

 
 
 
 
Treasury shares, at cost
 
 
 
Balance at beginning of period
(3,010,439
)
 
(2,763,859
)
Shares repurchased for treasury
(449,086
)
 
(264,076
)
Cost of treasury shares reissued
21,033

 
17,674

Balance at end of period
(3,438,492
)
 
(3,010,261
)
 
 
 
 
Total shareholders’ equity
$
6,025,658

 
$
5,826,366

 
 
 
 

See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
 
2016
 
2015
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
364,460

 
$
496,838

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net realized investment losses
40,295

 
123,618

Net realized and unrealized gains on other investments
(23,117
)
 
(17,616
)
Amortization of fixed maturities
51,660

 
75,645

Interest in loss of equity method investments
2,434

 
—

Other amortization and depreciation
17,370

 
26,219

Share-based compensation expense, net of cash payments
28,580

 
25,435

Changes in:
 
 
 
Accrued interest receivable
3,286

 
7,128

Reinsurance recoverable balances
(163,212
)
 
(158,362
)
Deferred acquisition costs
(73,759
)
 
(77,348
)
Prepaid reinsurance premiums
(184,648
)
 
(69,016
)
Reserve for loss and loss expenses
216,828

 
212,066

Unearned premiums
682,686

 
380,610

Insurance and reinsurance balances, net
(623,170
)
 
(330,128
)
Other items
(74,383
)
 
7,841

Net cash provided by operating activities
265,310

 
702,930

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of:
 
 
 
Fixed maturities
(6,624,573
)
 
(8,110,841
)
Equity securities
(295,827
)
 
(240,415
)
Mortgage loans
(131,087
)
 
(129,431
)
Other investments
(177,500
)
 
(61,591
)
Equity method investments
(103,548
)
 
—

Short-term investments
(81,479
)
 
(34,147
)
Proceeds from the sale of:
 
 
 
Fixed maturities
6,067,663

 
6,797,585

Equity securities
296,182

 
112,794

Other investments
170,111

 
244,353

Short-term investments
67,408

 
112,694

Proceeds from redemption of fixed maturities
977,852

 
1,107,175

Proceeds from redemption of short-term investments
8,185

 
22,337

Proceeds from the repayment of mortgage loans

4,808

 
—

Purchase of other assets
(19,055
)
 
(18,401
)
Change in restricted cash and cash equivalents
(42,445
)
 
27,996

Net cash provided by (used in) investing activities
116,695

 
(169,892
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Repurchase of common shares
(389,086
)
 
(332,097
)
Dividends paid - common shares
(100,670
)
 
(89,611
)
Dividends paid - preferred shares
(29,940
)
 
(30,066
)
Repurchase of preferred shares
(2,843
)
 
—

Proceeds from issuance of common shares
8

 
3,042

Net cash used in financing activities
(522,531
)
 
(448,732
)
 
 
 
 
Effect of exchange rate changes on foreign currency cash and cash equivalents
593

 
(13,883
)
Increase (decrease) in cash and cash equivalents
(139,933
)
 
70,423

Cash and cash equivalents - beginning of period
988,133

 
921,830

Cash and cash equivalents - end of period
$
848,200

 
$
992,253

 
 
 
 
Supplemental disclosures of cash flow information: Total consideration paid for a quota share and adverse development reinsurance cover was $170 million of which $92 million was settled by transfer of securities and was treated as a non cash activity on the Consolidated Statement of Cash Flows.

See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.
BASIS OF PRESENTATION AND ACCOUNTING POLICIES 

Basis of Presentation

These interim consolidated financial statements include the accounts of AXIS Capital Holdings Limited (“AXIS Capital”) and its subsidiaries (herein referred to as “we,” “us,” “our,” or the “Company”).

The consolidated balance sheet at September 30, 2016 and the consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for the periods ended September 30, 2016 and 2015 have not been audited. The balance sheet at December 31, 2015 is derived from our audited financial statements.

These financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information and with the Securities and Exchange Commission's (“SEC”) instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of our financial position and results of operations for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. All inter-company accounts and transactions have been eliminated.

The following information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2015. Tabular dollar and share amounts are in thousands, except per share amounts. All amounts are reported in U.S. dollars. 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 our results of operations, financial condition or liquidity.

Significant Accounting Policies

There were no notable changes in our significant accounting policies subsequent to our Annual Report on Form 10-K for the year ended December 31, 2015, with the exception of the addition of accounting policies for equity method investments and retroactive accounting noted below.

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 such investments are recorded in net income as interest in income (loss) of equity method investments.

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 earnings in the period of the change so that the deferred gain reflects the balance that would have existed had the revised estimate been available at the inception of the reinsurance transaction.

New Accounting Standards Adopted in 2016

Share-Based Compensation

Effective January 1, 2016, the Company adopted the Accounting Standards Update ("ASU") 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period" issued by the Financial Accounting Standards Board (the "FASB"). This guidance requires that compensation costs be recognized in the period in which it becomes probable that the performance target will be achieved and to represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This guidance was issued to clarify treatment where there was a divergence in accounting practice and its adoption did not impact our results of operations, financial condition or liquidity.

Debt Issuance Costs

Effective January 1, 2016, the Company adopted ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs" issued by the FASB. This guidance requires the debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset. This guidance was issued to simplify the presentation of debt issuance costs and to resolve conflicting guidance. This guidance did not impact our results of operations, financial condition or liquidity.

Investments Measured Using The Net Asset Value Per Share ("NAV") Practical Expedient

Effective January 1, 2016, the Company adopted ASU 2015-07, "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent)" issued by the FASB. This guidance eliminated the requirement to categorize investments measured using the net asset value ("NAV") practical expedient in the fair value hierarchy table. As this new guidance related solely to disclosures, the adoption did not impact our results of operations, financial condition or liquidity. The updated disclosures have been provided in Note 4 'Fair Value Measurements'.

Recently Issued Accounting Standards Not Yet Adopted

Leases

In February 2016, the FASB issued guidance that provides a new comprehensive model for lease accounting. The guidance will require most leases to be recognized on the balance sheet by recording a right-of-use asset and a corresponding lease liability. This guidance is effective for reporting periods beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact of this guidance on our results of operations, financial condition and liquidity.

Transition To Equity Method Of Accounting

In March 2016, the FASB issued new guidance eliminating the requirement that an investor retrospectively apply equity method accounting when an existing investment qualifies for equity method accounting. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those fiscal years with early adoption permitted. The guidance will be adopted on a prospective basis. The adoption of this guidance is not expected to materially impact our results of operations, financial condition or liquidity.

Share-Based Compensation Accounting

In March 2016, the FASB issued new guidance that will change the accounting for certain aspects of share-based compensation payments to employees. The guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. The guidance will also allow employers to increase the amounts withheld to cover income taxes on



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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.
BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)

share-based compensation awards without requiring liability classification. Additionally, companies will be required to elect whether they will account for award forfeitures by recognizing forfeitures only as they occur or by estimating the number of awards expected to be forfeited. This guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact of this guidance on our results of operations, financial condition and liquidity.

Credit Losses

In June 2016, the FASB issued a new credit loss standard that changes the impairment model for most financial assets and certain other instruments. The guidance will replace the current "incurred loss" approach with a more forward looking "expected loss" model for instruments measured at amortized cost and will require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount. This guidance is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the impact of this guidance on our results of operations, financial condition and liquidity.

Cash Flows

In August 2016, the FASB issued new guidance to clarify how certain cash receipts and cash payments should be classified on the statement of cash flows. This guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those fiscal years with early adoption permitted. The adoption of this guidance is not expected to impact our results of operations, financial condition or liquidity.





11
Table of Contents

AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2.
SEGMENT INFORMATION


Our underwriting operations are organized around our global underwriting platforms, AXIS Insurance and AXIS Re. Therefore we have determined that we have two reportable segments, insurance and reinsurance. We do not allocate our assets by segment, with the exception of goodwill and intangible assets, as we evaluate the underwriting results of each segment separately from the results of our investment portfolio.

The following tables summarize the underwriting results of our reportable segments, as well as the carrying values of allocated goodwill and intangible assets:
 
  
2016
 
2015
 
 
Three months ended and at September 30,
Insurance
 
Reinsurance
 
Total
 
Insurance
 
Reinsurance
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
675,430

 
$
284,532

 
$
959,962

 
$
606,704

 
$
329,879

 
$
936,583

 
 
Net premiums written
433,131

 
162,300

 
595,431

 
381,118

 
296,099

 
677,217

 
 
Net premiums earned
444,691

 
489,724

 
934,415

 
444,550

 
474,791

 
919,341

 
 
Other insurance related income
39

 
5,905

 
5,944

 
542

 
616

 
1,158

 
 
Net losses and loss expenses
(273,226
)
 
(259,102
)
 
(532,328
)
 
(283,272
)
 
(277,115
)
 
(560,387
)
 
 
Acquisition costs
(61,755
)
 
(128,055
)
 
(189,810
)
 
(69,118
)
 
(113,626
)
 
(182,744
)
 
 
General and administrative expenses
(84,588
)
 
(29,635
)
 
(114,223
)
 
(85,814
)
 
(35,309
)
 
(121,123
)
 
 
Underwriting income
$
25,161

 
$
78,837

 
103,998

 
$
6,888

 
$
49,357

 
56,245

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate expenses
 
 
 
 
(28,683
)
 
 
 
 
 
(23,604
)
 
 
Net investment income
 
 
 
 
116,923

 
 
 
 
 
45,685

 
 
Net realized investment gains (losses)
 
 
 
 
5,205

 
 
 
 
 
(69,957
)
 
 
Foreign exchange gains
 
 
 
 
13,795

 
 
 
 
 
28,088

 
 
Interest expense and financing costs
 
 
 
 
(12,839
)
 
 
 
 
 
(12,918
)
 
 
Termination fee received
 
 
 
 
—

 
 
 
 
 
280,000

 
 
Reorganization and related expenses
 
 
 
 
—

 
 
 
 
 
(45,867
)
 
 
Income before income taxes and interest in income (loss) of equity method investments
 
 
 
 
$
198,399

 
 
 
 
 
$
257,672

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss and loss expense ratio
61.4
%
 
52.9
%
 
57.0
%
 
63.7
%
 
58.4
%
 
61.0
%
 
 
Acquisition cost ratio
13.9
%
 
26.1
%
 
20.3
%
 
15.5
%
 
23.9
%
 
19.9
%
 
 
General and administrative expense ratio
19.1
%
 
6.1
%
 
15.3
%
 
19.4
%
 
7.4
%
 
15.7
%
 
 
Combined ratio
94.4
%
 
85.1
%
 
92.6
%
 
98.6
%
 
89.7
%
 
96.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill and intangible assets
$
85,501

 
$
—

 
$
85,501

 
$
87,329

 
$
—

 
$
87,329

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  



12
Table of Contents

AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2.
SEGMENT INFORMATION (CONTINUED)

 
  
2016
 
2015
 
 
Nine months ended and at September 30,
Insurance
 
Reinsurance
 
Total
 
Insurance
 
Reinsurance
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
2,112,796

 
$
2,126,762

 
$
4,239,558

 
$
1,970,554

 
$
1,833,374

 
$
3,803,928

 
 
Net premiums written
1,433,058

 
1,855,529

 
3,288,587

 
1,352,122

 
1,727,185

 
3,079,307

 
 
Net premiums earned
1,322,649

 
1,461,097

 
2,783,746

 
1,344,339

 
1,420,266

 
2,764,605

 
 
Other insurance related income (loss)
(57
)
 
4,907

 
4,850

 
811

 
11,508

 
12,319

 
 
Net losses and loss expenses
(853,771
)
 
(809,813
)
 
(1,663,584
)
 
(866,580
)
 
(786,288
)
 
(1,652,868
)
 
 
Acquisition costs
(184,982
)
 
(374,588
)
 
(559,570
)
 
(200,493
)
 
(337,056
)
 
(537,549
)
 
 
General and administrative expenses
(252,652
)
 
(99,980
)
 
(352,632
)
 
(261,924
)
 
(110,701
)
 
(372,625
)
 
 
Underwriting income
$
31,187

 
$
181,623

 
212,810

 
$
16,153

 
$
197,729

 
213,882

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate expenses
 
 
 
 
(86,922
)
 
 
 
 
 
(83,826
)
 
 
Net investment income
 
 
 
 
257,818

 
 
 
 
 
226,336

 
 
Net realized investment losses
 
 
 
 
(40,295
)
 
 
 
 
 
(123,618
)
 
 
Foreign exchange gains
 
 
 
 
69,781

 
 
 
 
 
69,200

 
 
Interest expense and financing costs
 
 
 
 
(38,586
)
 
 
 
 
 
(38,114
)
 
 
Termination fee received
 
 
 
 
—

 
 
 
 
 
280,000

 
 
Reorganization and related expenses
 
 
 
 
—

 
 
 
 
 
(45,867
)
 
 
Income before income taxes and interest in income (loss) of equity method investments
 
 
 
 
$
374,606

 
 
 
 
 
$
497,993

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss and loss expense ratio
64.6
%
 
55.4
%
 
59.8
%
 
64.5
%
 
55.4
%
 
59.8
%
 
 
Acquisition cost ratio
14.0
%
 
25.6
%
 
20.1
%
 
14.9
%
 
23.7
%
 
19.4
%
 
 
General and administrative expense ratio
19.0
%
 
6.9
%
 
15.8
%
 
19.5
%
 
7.8
%
 
16.5
%
 
 
Combined ratio
97.6
%
 
87.9
%
 
95.7
%
 
98.9
%
 
86.9
%
 
95.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill and intangible assets
$
85,501

 
$
—

 
$
85,501

 
$
87,329

 
$
—

 
$
87,329

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




13
Table of Contents

AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.
INVESTMENTS

a)     Fixed Maturities and Equities

The amortized cost or cost and fair values of our fixed maturities and equities were as follows:
 
 
Amortized
Cost or
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Non-credit
OTTI
in AOCI(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
1,542,943

 
$
22,349

 
$
(2,415
)
 
$
1,562,877

 
$
—

 
 
Non-U.S. government
620,601

 
4,799

 
(43,344
)
 
582,056

 
—

 
 
Corporate debt
4,516,290

 
87,184

 
(34,974
)
 
4,568,500

 
—

 
 
Agency RMBS(1)
2,473,832

 
49,661

 
(762
)
 
2,522,731

 
—

 
 
CMBS(2)
877,732

 
18,546

 
(2,003
)
 
894,275

 
—

 
 
Non-Agency RMBS
71,842

 
1,636

 
(1,648
)
 
71,830

 
(870
)
 
 
ABS(3)
1,234,292

 
4,028

 
(2,724
)
 
1,235,596

 
—

 
 
Municipals(4)
124,867

 
4,215

 
(87
)
 
128,995

 
—

 
 
Total fixed maturities
$
11,462,399

 
$
192,418

 
$
(87,957
)
 
$
11,566,860

 
$
(870
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
Common stocks
$
379

 
$
38

 
$
(348
)
 
$
69

 
 
 
 
Exchange-traded funds
463,655

 
41,611

 
(1,060
)
 
504,206

 
 
 
 
Bond mutual funds
136,570

 
3,499

 
—

 
140,069

 
 
 
 
Total equity securities
$
600,604

 
$
45,148

 
$
(1,408
)
 
$
644,344

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
1,673,617

 
$
1,545

 
$
(23,213
)
 
$
1,651,949

 
$
—

 
 
Non-U.S. government
809,025

 
2,312

 
(72,332
)
 
739,005

 
—

 
 
Corporate debt
4,442,315

 
16,740

 
(96,286
)
 
4,362,769

 
—

 
 
Agency RMBS(1)
2,236,138

 
22,773

 
(9,675
)
 
2,249,236

 
—

 
 
CMBS(2)
1,088,595

 
3,885

 
(9,182
)
 
1,083,298

 
—

 
 
Non-Agency RMBS
99,989

 
1,992

 
(973
)
 
101,008

 
(875
)
 
 
ABS(3)
1,387,919

 
952

 
(17,601
)
 
1,371,270

 
—

 
 
Municipals(4)
160,041

 
2,319

 
(1,146
)
 
161,214

 
—

 
 
Total fixed maturities
$
11,897,639

 
$
52,518

 
$
(230,408
)
 
$
11,719,749

 
$
(875
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
Common stocks
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
Exchange-traded funds
447,524

 
31,211

 
(4,762
)
 
473,973

 
 
 
 
Bond mutual funds
128,252

 
—

 
(4,227
)
 
124,025

 
 
 
 
Total equity securities
$
575,776

 
$
31,211

 
$
(8,989
)
 
$
597,998

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Residential mortgage-backed securities (RMBS) originated by U.S. agencies.
(2)
Commercial mortgage-backed securities (CMBS).
(3)
Asset-backed securities (ABS) include debt tranched securities collateralized primarily by auto loans, student loans, credit cards, and other asset types. This asset class also includes collateralized loan obligations (CLOs) and collateralized debt obligations (CDOs).
(4)
Municipals include bonds issued by states, municipalities and political subdivisions.
(5)
Represents the non-credit component of the other-than-temporary impairment (OTTI) losses, adjusted for subsequent sales, maturities and redemptions. It does not include the change in fair value subsequent to the impairment measurement date.




14
Table of Contents

AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.
INVESTMENTS (CONTINUED)

In the normal course of investing activities, we actively manage allocations to non-controlling tranches of structured securities (variable interests) issued by VIEs. These structured securities include RMBS, CMBS and ABS and are included in the above table. Additionally, within our other investments portfolio, we also invest in limited partnerships (hedge funds, direct lending funds, real estate funds and private equity funds) and CLO equity tranched securities, which are all variable interests issued by VIEs (see Note 3(c)). For these variable interests, we do not have the power to direct the activities that are most significant to the economic performance of the VIEs therefore we are not the primary beneficiary of any of these VIEs. Our maximum exposure to loss on these interests is limited to the amount of our investment. We have not provided financial or other support with respect to these structured securities other than our original investment.

Contractual Maturities

The contractual maturities of fixed maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
Amortized
Cost
 
Fair
Value
 
% of Total
Fair Value
 
 
 
 
 
 
 
 
 
 
At September 30, 2016
 
 
 
 
 
 
 
Maturity
 
 
 
 
 
 
 
Due in one year or less
$
363,821

 
$
356,706

 
3.0
%
 
 
Due after one year through five years
3,809,515

 
3,801,104

 
32.9
%
 
 
Due after five years through ten years
2,286,970

 
2,330,895

 
20.2
%
 
 
Due after ten years
344,395

 
353,723

 
3.1
%
 
 
 
6,804,701

 
6,842,428

 
59.2
%
 
 
Agency RMBS
2,473,832

 
2,522,731

 
21.8
%
 
 
CMBS
877,732

 
894,275

 
7.7
%
 
 
Non-Agency RMBS
71,842

 
71,830

 
0.6
%
 
 
ABS
1,234,292

 
1,235,596

 
10.7
%
 
 
Total
$
11,462,399

 
$
11,566,860

 
100.0
%
 
 
 
 
 
 
 
 
 
 
At December 31, 2015
 
 
 
 
 
 
 
Maturity
 
 
 
 
 
 
 
Due in one year or less
$
291,368

 
$
289,571

 
2.5
%
 
 
Due after one year through five years
4,217,515

 
4,142,802

 
35.3
%
 
 
Due after five years through ten years
2,263,684

 
2,181,525

 
18.6
%
 
 
Due after ten years
312,431

 
301,039

 
2.6
%
 
 
 
7,084,998

 
6,914,937

 
59.0
%
 
 
Agency RMBS
2,236,138

 
2,249,236

 
19.2
%
 
 
CMBS
1,088,595

 
1,083,298

 
9.2
%
 
 
Non-Agency RMBS
99,989

 
101,008

 
0.9
%
 
 
ABS
1,387,919

 
1,371,270

 
11.7
%
 
 
Total
$
11,897,639

 
$
11,719,749

 
100.0
%
 
 
 
 
 
 
 
 
 




15
Table of Contents

AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.
INVESTMENTS (CONTINUED)

 Gross Unrealized Losses

The following table summarizes fixed maturities and equities in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
 
  
12 months or greater
 
Less than 12 months
 
Total
 
 
  
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
55,000

 
$
(1,635
)
 
$
422,681

 
$
(780
)
 
$
477,681

 
$
(2,415
)
 
 
Non-U.S. government
104,441

 
(24,061
)
 
254,694

 
(19,283
)
 
359,135

 
(43,344
)
 
 
Corporate debt
285,848

 
(26,202
)
 
639,722

 
(8,772
)
 
925,570

 
(34,974
)
 
 
Agency RMBS
80,375

 
(556
)
 
121,203

 
(206
)
 
201,578

 
(762
)
 
 
CMBS
99,004

 
(1,260
)
 
173,795

 
(743
)
 
272,799

 
(2,003
)
 
 
Non-Agency RMBS
10,184

 
(1,306
)
 
5,187

 
(342
)
 
15,371

 
(1,648
)
 
 
ABS
518,647

 
(2,253
)
 
50,402

 
(471
)
 
569,049

 
(2,724
)
 
 
Municipals
2,384

 
(18
)
 
15,567

 
(69
)
 
17,951

 
(87
)
 
 
Total fixed maturities
$
1,155,883

 
$
(57,291
)
 
$
1,683,251

 
$
(30,666
)
 
$
2,839,134

 
$
(87,957
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
$
—

 
$
—

 
$
31

 
$
(348
)
 
$
31

 
$
(348
)
 
 
Exchange-traded funds
6,153

 
(425
)
 
39,097

 
(635
)
 
45,250

 
(1,060
)
 
 
Bond mutual funds
—

 
—

 
—

 
—

 
—

 
—

 
 
Total equity securities
$
6,153

 
$
(425
)
 
$
39,128

 
$
(983
)
 
$
45,281

 
$
(1,408
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
84,179

 
$
(7,622
)
 
$
1,474,202

 
$
(15,591
)
 
$
1,558,381

 
$
(23,213
)
 
 
Non-U.S. government
170,269

 
(50,841
)
 
317,693

 
(21,491
)
 
487,962

 
(72,332
)
 
 
Corporate debt
340,831

 
(33,441
)
 
2,845,375

 
(62,845
)
 
3,186,206

 
(96,286
)
 
 
Agency RMBS
64,792

 
(1,609
)
 
1,073,566

 
(8,066
)
 
1,138,358

 
(9,675
)
 
 
CMBS
75,627

 
(1,579
)
 
659,480

 
(7,603
)
 
735,107

 
(9,182
)
 
 
Non-Agency RMBS
5,283

 
(210
)
 
43,199

 
(763
)
 
48,482

 
(973
)
 
 
ABS
562,599

 
(11,158
)
 
667,448

 
(6,443
)
 
1,230,047

 
(17,601
)
 
 
Municipals
14,214

 
(310
)
 
64,104

 
(836
)
 
78,318

 
(1,146
)
 
 
Total fixed maturities
$
1,317,794

 
$
(106,770
)
 
$
7,145,067

 
$
(123,638
)
 
$
8,462,861

 
$
(230,408
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
$
—

 
$
—

 
$
—

 
$
—

 
$