Document
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 June 30, 2018
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 website, 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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. |
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Large accelerated filer x | Accelerated filer ¨ |
Non-accelerated filer ¨ (do not check if a smaller reporting company) | Smaller reporting company ¨ |
| Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
At July 30, 2018, there were 83,557,888 Common Shares, $0.0125 par value per share, of the registrant outstanding.
AXIS CAPITAL HOLDINGS LIMITED
INDEX TO FORM 10-Q
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| PART I | |
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Item 1. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| PART II | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 5. | | |
Item 6. | | |
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PART I | FINANCIAL INFORMATION |
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. 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" or similar expressions. Our expectations are not guarantees and are based on currently available competitive, financial and economic data along with our operating plans. Forward-looking statements contained in this report may include, but are not limited to, 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, performance of our business, our financial results, our liquidity and capital resources and the outcome of our strategic initiatives, our expectations regarding estimated synergies and the success of the integration of acquired entities, our expectations regarding the estimated benefits and synergies relating to the Company's transformation program, our expectations regarding pricing and other market conditions, our growth prospects, and valuations of the potential impact of movements in interest rates, equity securities 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:
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• | the cyclical nature of the re(insurance) business leading to periods with excess underwriting capacity and unfavorable premium rates, |
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• | the occurrence and magnitude of natural and man-made disasters, |
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• | losses from war, terrorism and political unrest or other unanticipated losses, |
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• | actual claims exceeding our loss reserves, |
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• | general economic, capital and credit market conditions, |
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• | the failure of any of the loss limitation methods we employ, |
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• | the effects of emerging claims, coverage and regulatory issues, including uncertainty related to coverage definitions, limits, terms and conditions, |
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• | our inability to purchase reinsurance or collect amounts due to us, |
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• | the breach by third parties in our program business of their obligations to us, |
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• | difficulties with technology and/or data security, |
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• | the failure of our policyholders and intermediaries to pay premiums, |
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• | the failure of our cedants to adequately evaluate risks, |
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• | inability to obtain additional capital on favorable terms, or at all, |
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• | the loss of one or more key executives, |
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• | a decline in our ratings with rating agencies, |
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• | loss of business provided to us by our major brokers and credit risk due to our reliance on brokers, |
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• | changes in accounting policies or practices, |
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• | the use of industry catastrophe models and changes to these models, |
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• | changes in governmental regulations and potential government intervention in our industry, |
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• | failure to comply with certain laws and regulations relating to sanctions and foreign corrupt practices, |
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• | 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, |
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• | fluctuations in interest rates, credit spreads, equity securities prices and/or currency values, |
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• | the failure to successfully integrate acquired businesses or realize the expected synergies resulting from such acquisitions, |
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• | the failure to realize the expected benefits or synergies relating to the Company's transformation initiative and the integration of Novae Group plc, |
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• | changes in tax laws, and |
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• | the other factors including but not limited to those 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, 2017 as those factors may be updated from time to time in our periodic and other filings with the SEC, which are accessible on the SEC's website at www.sec.gov. |
We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
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, you may automatically receive e-mail alerts and other information about AXIS when you enroll your e-mail address by visiting the “E-mail Alerts” in the Investor Information section of our website (www.axiscapital.com). The contents of our website and social media channels are not, however, a part of this Quarterly Report on Form 10-Q.
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
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Consolidated Balance Sheets at June 30, 2018 (Unaudited) and December 31, 2017 | |
Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 (Unaudited) | |
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017 (Unaudited) | |
Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2018 and 2017 (Unaudited) | |
Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (Unaudited) | |
Notes to Consolidated Financial Statements (Unaudited) | |
Note 1 - Basis of Presentation and Significant 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 - Earnings Per Common Share | |
Note 8 - Share-Based Compensation | |
Note 9 - Shareholders' Equity | |
Note 10 - Debt and Financing Arrangements | |
Note 11 - Commitments and Contingencies | |
Note 12 - Other Comprehensive Income (Loss) | |
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017
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| | | | | | | |
| 2018 | | 2017 |
| (in thousands) |
Assets | | | |
Investments: | | | |
Fixed maturities, available for sale, at fair value (Amortized cost 2018: $11,911,889; 2017: $12,611,219) | $ | 11,739,305 |
| | $ | 12,622,006 |
|
Equity securities, at fair value (Cost 2018: $366,415; 2017: $552,867) | 417,212 |
| | 635,511 |
|
Mortgage loans, held for investment, at amortized cost and fair value | 344,721 |
| | 325,062 |
|
Other investments, at fair value | 916,191 |
| | 1,009,373 |
|
Equity method investments | 110,488 |
| | 108,597 |
|
Short-term investments, at amortized cost and fair value | 168,944 |
| | 83,661 |
|
Total investments | 13,696,861 |
| | 14,784,210 |
|
Cash and cash equivalents | 1,089,407 |
| | 948,626 |
|
Restricted cash and cash equivalents | 437,286 |
| | 415,160 |
|
Accrued interest receivable | 79,109 |
| | 81,223 |
|
Insurance and reinsurance premium balances receivable | 3,810,316 |
| | 3,012,419 |
|
Reinsurance recoverable on unpaid and paid losses | 3,289,236 |
| | 3,338,840 |
|
Deferred acquisition costs | 708,679 |
| | 474,061 |
|
Prepaid reinsurance premiums | 1,157,228 |
| | 809,274 |
|
Receivable for investments sold | 16,430 |
| | 11,621 |
|
Goodwill | 102,003 |
| | 102,003 |
|
Intangible assets | 250,541 |
| | 257,987 |
|
Value of business acquired | 97,529 |
| | 206,838 |
|
Other assets | 283,861 |
| | 317,915 |
|
Total assets | $ | 25,018,486 |
| | $ | 24,760,177 |
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| | | |
Liabilities | | | |
Reserve for losses and loss expenses | $ | 11,952,734 |
| | $ | 12,997,553 |
|
Unearned premiums | 4,594,150 |
| | 3,641,399 |
|
Insurance and reinsurance balances payable | 1,282,585 |
| | 899,064 |
|
Senior notes and notes payable | 1,377,206 |
| | 1,376,529 |
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Payable for investments purchased | 186,180 |
| | 100,589 |
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Other liabilities | 372,626 |
| | 403,779 |
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Total liabilities | 19,765,481 |
| | 19,418,913 |
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| | | |
Shareholders’ equity | | | |
Preferred shares | 775,000 |
| | 775,000 |
|
Common shares (shares issued 2018: 176,580; 2017: 176,580 shares outstanding 2018: 83,556; 2017: 83,161) | 2,206 |
| | 2,206 |
|
Additional paid-in capital | 2,295,633 |
| | 2,299,166 |
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Accumulated other comprehensive income (loss) | (163,168 | ) | | 92,382 |
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Retained earnings | 6,135,625 |
| | 5,979,666 |
|
Treasury shares, at cost (2018: 93,024; 2017: 93,419 shares) | (3,792,291 | ) | | (3,807,156 | ) |
Total shareholders’ equity | 5,253,005 |
| | 5,341,264 |
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| | | |
Total liabilities and shareholders’ equity | $ | 25,018,486 |
| | $ | 24,760,177 |
|
See accompanying notes to Consolidated Financial Statements.
6
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017
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| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in thousands, except for per share amounts) |
Revenues | | | | | | | |
Net premiums earned | $ | 1,185,548 |
| | $ | 981,431 |
| | $ | 2,352,950 |
| | $ | 1,920,133 |
|
Net investment income | 109,960 |
| | 106,063 |
| | 210,961 |
| | 204,728 |
|
Other insurance related income (losses) | 3,730 |
| | 2,560 |
| | 10,335 |
| | (1,222 | ) |
Bargain purchase gain | — |
| | 15,044 |
| | — |
| | 15,044 |
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Net investment losses: | | | | | | | |
Other-than-temporary impairment ("OTTI") losses | (1,674 | ) | | (1,528 | ) | | (2,088 | ) | | (8,082 | ) |
Other realized and unrealized investment losses | (43,419 | ) | | (2,864 | ) | | (57,835 | ) | | (21,361 | ) |
Total net investment losses | (45,093 | ) | | (4,392 | ) | | (59,923 | ) | | (29,443 | ) |
Total revenues | 1,254,145 |
| | 1,100,706 |
| | 2,514,323 |
| | 2,109,240 |
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Expenses | | | | | | | |
Net losses and loss expenses | 706,641 |
| | 605,332 |
| | 1,367,986 |
| | 1,212,273 |
|
Acquisition costs | 231,952 |
| | 204,361 |
| | 461,212 |
| | 394,153 |
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General and administrative expenses | 165,213 |
| | 147,816 |
| | 335,049 |
| | 309,075 |
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Foreign exchange losses (gains) | (44,099 | ) | | 36,118 |
| | (6,239 | ) | | 57,583 |
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Interest expense and financing costs | 17,098 |
| | 12,751 |
| | 33,861 |
| | 25,543 |
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Reorganization expenses | 18,772 |
| | — |
| | 31,825 |
| | — |
|
Amortization of value of business acquired | 53,407 |
| | — |
| | 110,517 |
| | — |
|
Amortization of intangible assets | 4,029 |
| | — |
| | 6,811 |
| | — |
|
Total expenses | 1,153,013 |
| | 1,006,378 |
| | 2,341,022 |
| | 1,998,627 |
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Income before income taxes and interest in income (loss) of equity method investments | 101,132 |
| | 94,328 |
| | 173,301 |
| | 110,613 |
|
Income tax (expense) benefit | (996 | ) | | 3,333 |
| | 40 |
| | 12,670 |
|
Interest in income (loss) of equity method investments | 3,378 |
| | (1,975 | ) | | 3,378 |
| | (7,741 | ) |
Net income | 103,514 |
| | 95,686 |
| | 176,719 |
| | 115,542 |
|
Preferred share dividends | 10,656 |
| | 10,656 |
| | 21,313 |
| | 25,497 |
|
Net income available to common shareholders | $ | 92,858 |
| | $ | 85,030 |
| | $ | 155,406 |
| | $ | 90,045 |
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Per share data | | | | | | | |
Net income per common share: | | | | | | | |
Basic net income | $ | 1.11 |
| | $ | 1.01 |
| | $ | 1.86 |
| | $ | 1.06 |
|
Diluted net income | $ | 1.11 |
| | $ | 1.01 |
| | $ | 1.85 |
| | $ | 1.05 |
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Weighted average number of common shares outstanding - basic | 83,539 |
| | 84,141 |
| | 83,431 |
| | 85,076 |
|
Weighted average number of common shares outstanding - diluted | 83,984 |
| | 84,511 |
| | 83,853 |
| | 85,647 |
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Cash dividends declared per common share | $ | 0.39 |
| | $ | 0.38 |
| | $ | 0.78 |
| | $ | 0.76 |
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See accompanying notes to Consolidated Financial Statements.
7
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017
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| | | | | | | | | | | | | | | |
| Three months ended | | Six months ended |
| 2018 | | 2017 | | 2018 | | 2017 |
| (in thousands) |
Net income | $ | 103,514 |
| | $ | 95,686 |
| | $ | 176,719 |
| | $ | 115,542 |
|
Other comprehensive income (loss), net of tax: | | | | | | | |
Available for sale investments: | | | | | | | |
Unrealized investment gains (losses) arising during the period | (105,280 | ) | | 76,243 |
| | (217,434 | ) | | 143,953 |
|
Adjustment for reclassification of net realized investment gains (losses) and OTTI losses recognized in net income | 36,456 |
| | (1,503 | ) | | 37,240 |
| | 23,458 |
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Unrealized investment gains (losses) arising during the period, net of reclassification adjustment | (68,824 | ) | | 74,740 |
| | (180,194 | ) | | 167,411 |
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Foreign currency translation adjustment | (9,129 | ) | | 8,867 |
| | (7,858 | ) | | 38,736 |
|
Total other comprehensive income (loss), net of tax | (77,953 | ) | | 83,607 |
| | (188,052 | ) | | 206,147 |
|
Comprehensive income (loss) | $ | 25,561 |
| | $ | 179,293 |
| | $ | (11,333 | ) | | $ | 321,689 |
|
See accompanying notes to Consolidated Financial Statements.
8
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
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| | | | | | | |
| 2018 | | 2017 |
| (in thousands) |
Preferred shares | | | |
Balance at beginning of period | $ | 775,000 |
| | $ | 1,126,074 |
|
Shares repurchased | — |
| | (351,074 | ) |
Balance at end of period | $ | 775,000 |
| | $ | 775,000 |
|
| | | |
Common shares (par value) | | | |
Balance at beginning and end of period | 2,206 |
| | 2,206 |
|
| | | |
Additional paid-in capital | | | |
Balance at beginning of period | 2,299,166 |
| | 2,299,857 |
|
Treasury shares reissued | (21,879 | ) | | (38,840 | ) |
Share-based compensation expense | 18,346 |
| | 22,506 |
|
Balance at end of period | 2,295,633 |
| | 2,283,523 |
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Accumulated other comprehensive income (loss) | | | |
Balance at beginning of period | 92,382 |
| | (121,841 | ) |
Unrealized gains (losses) on available for sale investments, net of tax: | | | |
Balance at beginning of period | 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 period | (180,194 | ) | | 167,411 |
|
Balance at end of period | (157,730 | ) | | 85,088 |
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Cumulative foreign currency translation adjustments, net of tax: | | | |
Balance at beginning of period | 2,420 |
| | (39,518 | ) |
Foreign currency translation adjustment | (7,858 | ) | | 38,736 |
|
Balance at end of period | (5,438 | ) | | (782 | ) |
Balance at end of period | (163,168 | ) | | 84,306 |
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| | | |
Retained earnings | | | |
Balance at beginning of period | 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 | 176,719 |
| | 115,542 |
|
Preferred share dividends | (21,313 | ) | | (25,497 | ) |
Common share dividends | (66,945 | ) | | (65,871 | ) |
Balance at end of period | 6,135,625 |
| | 6,551,801 |
|
| | | |
Treasury shares, at cost | | | |
Balance at beginning of period | (3,807,156 | ) | | (3,561,553 | ) |
Shares repurchased | (8,676 | ) | | (282,313 | ) |
Shares reissued | 23,541 |
| | 39,725 |
|
Balance at end of period | (3,792,291 | ) | | (3,804,141 | ) |
| | | |
Total shareholders’ equity | $ | 5,253,005 |
| | $ | 5,892,695 |
|
| | | |
See accompanying notes to Consolidated Financial Statements.
9
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
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| | | | | | | |
| 2018 | | 2017 |
| (in thousands) |
Cash flows from operating activities: | | | |
Net income | $ | 176,719 |
| | $ | 115,542 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Net investment losses | 54,002 |
| | 29,443 |
|
Net realized and unrealized gains on other investments | (26,876 | ) | | (40,226 | ) |
Amortization of fixed maturities | 15,642 |
| | 20,740 |
|
Interest in income (loss) of equity method investments | (1,891 | ) | | 7,741 |
|
Amortization of value of business acquired | 110,517 |
| | — |
|
Other amortization and depreciation | 22,680 |
| | 12,638 |
|
Share-based compensation expense, net of cash payments | 11,707 |
| | (10,846 | ) |
Non-cash foreign exchange losses
| — |
| | 24,149 |
|
Bargain purchase gain | — |
| | (15,044 | ) |
Changes in: | | | |
Accrued interest receivable | (1,839 | ) | | 4,208 |
|
Reinsurance recoverable balances | (283,733 | ) | | 242,437 |
|
Deferred acquisition costs | (240,320 | ) | | (151,633 | ) |
Prepaid reinsurance premiums | (361,482 | ) | | (180,107 | ) |
Reserve for loss and loss expenses | 118,803 |
| | 8,015 |
|
Unearned premiums | 991,992 |
| | 724,407 |
|
Insurance and reinsurance balances, net | (654,090 | ) | | (540,557 | ) |
Other items | 25,718 |
| | (102,014 | ) |
Net cash provided by (used in) operating activities | (42,451 | ) | | 148,893 |
|
| | | |
Cash flows from investing activities: | | | |
Purchases of: | | | |
Fixed maturities | (4,910,021 | ) | | (4,766,037 | ) |
Equity securities | (49,498 | ) | | (101,289 | ) |
Mortgage loans | (60,195 | ) | | (10,207 | ) |
Other investments | (57,477 | ) | | (107,020 | ) |
Equity method investments | — |
| | (1,000 | ) |
Short-term investments | (239,313 | ) | | (9,029 | ) |
Proceeds from the sale of: | | | |
Fixed maturities | 4,452,631 |
| | 3,955,065 |
|
Equity securities | 219,916 |
| | 127,182 |
|
Other investments | 91,946 |
| | 177,238 |
|
Short-term investments | 101,510 |
| | 13,539 |
|
Proceeds from redemption of fixed maturities | 706,487 |
| | 1,043,002 |
|
Proceeds from redemption of short-term investments | 30,572 |
| | 116,111 |
|
Proceeds from the repayment of mortgage loans
| 40,741 |
| | 10,467 |
|
Purchase of other assets | (13,043 | ) | | (12,205 | ) |
Purchase of subsidiary, net | — |
| | (78,872 | ) |
Net cash provided by investing activities | 314,256 |
| | 356,945 |
|
| | | |
Cash flows from financing activities: | | | |
Repurchase of common shares - open market | — |
| | (262,592 | ) |
Taxes paid on withholding shares | (8,676 | ) | | (24,370 | ) |
Dividends paid - common shares | (68,172 | ) | | (71,189 | ) |
Repurchase of preferred shares | — |
| | (351,074 | ) |
Dividends paid - preferred shares | (21,313 | ) | | (31,532 | ) |
Net cash used in financing activities | (98,161 | ) | | (740,757 | ) |
| | | |
Effect of exchange rate changes on foreign currency cash, cash equivalents, and restricted cash | (10,737 | ) | | 8,682 |
|
Increase (decrease) in cash, cash equivalents, and restricted cash | 162,907 |
| | (226,237 | ) |
Cash, cash equivalents, and restricted cash - beginning of period | 1,363,786 |
| | 1,241,507 |
|
Cash, cash equivalents, and restricted cash - end of period | $ | 1,526,693 |
| | $ | 1,015,270 |
|
| | | |
| | | |
See accompanying notes to Consolidated Financial Statements.
10
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
|
| | | | | | | |
Supplemental disclosures of cash flow information: | | | |
Income taxes paid | $ | 7,350 |
| | $ | 4,104 |
|
Interest paid | $ | 32,550 |
| | $ | 24,438 |
|
| | | |
Supplemental disclosures of cash flow information: Consideration related to an agreement for the Reinsurance to Close ("RITC") of the 2015 and prior years of account of Syndicate 2007 of $819 million was paid in the period 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. Also refer to Note 6 'Reserve for Losses and Loss Expenses'.
See accompanying notes to Consolidated Financial Statements.
11
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
1. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation
These unaudited Consolidated Financial Statements (the "financial statements") have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the U.S. Securities and Exchange Commission's ("SEC") instructions to Form 10-Q and Article 10 of Regulation S-X and include AXIS Capital Holdings Limited ("AXIS Capital") and its subsidiaries (the "Company"). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. This Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and related notes included in AXIS Capital's Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC.
In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the Company's 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.
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 results of operations, financial condition or liquidity.
Tabular dollar and share amounts are in thousands, except per share amounts. All amounts are reported in U.S. dollars.
Significant Accounting Policies
There was one notable change to the Company's significant accounting policies subsequent to its Annual Report on Form 10-K for the year ended December 31, 2017.
Recognition and Measurement of Financial Assets and Financial Liabilities
Fixed maturities and equity securities are reported at fair value at the balance sheet date (see Note 4 'Fair Value Measurements'). Effective January 1, 2018, the Company adopted ASU 2016-01 "Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities," which requires:
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• | equity investments (except those accounted for under the equity method of accounting, investments that are consolidated or those that meet a practicability exception) to be measured at fair value with changes in fair value recognized in net income, |
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• | simplifies the impairment assessment of equity investments without readily determinable values by requiring a qualitative assessment to identify impairment, eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost, |
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• | requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, |
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• | requires separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the organization has elected to measure the liabilities in accordance with the fair value option, |
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• | requires the separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and |
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• | clarifies that the reporting organization should evaluate the need for a valuation allowance on a deferred tax asset related to available for sale securities in combination with the organization’s other deferred tax assets. |
Upon adoption of this guidance, net unrealized gains on equity securities of $70 million, net of deferred income taxes of $13 million, were reclassified from accumulated other comprehensive income into retained earnings. As prescribed, the prior period has not been restated to conform to the current presentation.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
New Accounting Standards Adopted in 2018
Revenue From Contracts With Customers
Effective January 1, 2018, the Company adopted Accounting Standards Update ("ASU" ) 2014-09 "Revenue from Contracts with Customers (Topic 606)," using the modified retrospective transition approach. This guidance affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards, such as accounting for insurance contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The Company generated fee income of $18 million for the six months ended June 30, 2018 which is within the scope of this ASU. These fees represents service fees and reimbursement of expenses earned by the Company's reinsurance segment related to services provided to its strategic capital partners. These fees are recognized when the related services have been performed and are reported in other insurance related income (losses) in the Consolidated Statements of Operations. Given that the timing and measurement of revenue associated with impacted contracts did not change, the adoption of this guidance did not have a material impact on the Company's results of operations, financial condition and liquidity.
Classification of Certain Cash Receipts and Cash Payments
Effective January 1, 2018, the Company adopted ASU 2016-15, "Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments," which addresses diversity in practice in how eight specific cash receipts and cash payments should be presented and classified on the statement of cash flows. The adoption of this guidance did not impact the Company's results of operations, financial condition and liquidity.
Restricted Cash
Effective January 1, 2018, the Company adopted ASU 2016-18, "Statement of Cash Flows (Topic 230) - Restricted Cash," which addresses diversity in practice in the classification and presentation of changes in restricted cash on the statement of cash flows. This guidance requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, restricted cash and restricted cash equivalents. Transfers between cash and cash equivalents and restricted cash and restricted cash equivalents will no longer be presented on the statement of cash flows. To facilitate comparison of the Company's Consolidated Statements of Cash Flows, the Company adopted this guidance utilizing the full retrospective approach for all periods presented in the Company's Consolidated Financial Statements. As a result, the Company's Consolidated Statements of Cash Flows now explains the change during the period in the total of cash, cash equivalents, and restricted cash. Therefore, restricted cash is now included with cash and cash equivalents in the reconciliation of the beginning of period and end of period total amounts shown on the statement of cash flows. The adoption of this guidance did not impact the Company's results of operations, financial condition and liquidity.
Stock Compensation - Scope of Modification Accounting
Effective January 1, 2018, the Company adopted ASU 2017-09 "Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting," which provides clarity and reduces diversity in practice of applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The guidance states that an entity should account for the effects of a modification unless all the following are met:
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1. | the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; |
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2. | the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
The current disclosure requirements in Topic 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this Update. The adoption of this guidance did not impact the Company's results of operations, financial condition and liquidity.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
Effective January 1, 2018, the Company adopted ASU 2018-02 "Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" which was a response to a financial reporting issue that arose as a consequence of the U.S. federal government tax bill, H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018 ("U.S. Tax Reform"), which was enacted on December 22, 2017.
U.S. GAAP currently requires deferred tax liabilities and assets to be adjusted for the effect of a change in tax laws or rates with the effect included in income from continuing operations in the reporting period that includes the enactment date. This guidance is applicable even in situations in which the related income tax effects of items in accumulated other comprehensive income were originally recognized in other comprehensive income rather than in income from continuing operations. As the adjustment of deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate is required to be included in income from continuing operations, the tax effects of items within accumulated other comprehensive income (referred to as stranded tax effects for purposes of this Update) do not reflect the appropriate tax rate.
The amendments in this Update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from U.S. Tax Reform. Consequently, the amendments eliminate the stranded tax effects resulting from U.S. Tax Reform and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of U.S. Tax Reform, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected.
As a consequence of U.S. Tax Reform, the Company recognized a tax benefit of $2 million related to the revaluation of net deferred tax liabilities associated with the reduction in the U.S. corporate income tax rate from 35% to 21%, attributable to net unrealized investment gains associated with investments held by the Company's U.S. domiciled entities. Upon adoption of this guidance, the tax benefit of $2 million was reclassified from accumulated other comprehensive income into retained earnings.
Recently Issued Accounting Standards Not Yet Adopted
Leases
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)" which provides a new comprehensive model for lease accounting. The guidance will require a lessee to recognize 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. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of this guidance on the Company's results of operations, financial condition and liquidity.
Measurement of Credit Losses on Financial Instrument
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments" which replaces 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 guidance requires financial assets measured at amortized cost 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 amortized cost of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses. The guidance also provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. This guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for interim and
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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1. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) |
annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of this guidance on its results of operations, financial condition and liquidity.
Simplifying the Test for Goodwill Impairment
In January 2017, the FASB issued ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment" that eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, an impairment charge will be based on the excess of a reporting unit's carrying amount over its fair value (i.e., measure the charge based on Step 1 of the current goodwill impairment test). This guidance is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019, with early adoption permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The guidance will be adopted on a prospective basis.
Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued 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. This guidance is effective for interim and annual reporting periods, beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of this guidance on its results of operations, financial condition and liquidity.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AXIS Capital's underwriting operations are organized around its global underwriting platforms, AXIS Insurance and AXIS Re. The Company has determined that it has two 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.
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. Financial results relating to the Company's accident and health line of business were previously included in the Company's insurance segment. As a result of the realignment, accident and health results are included in the results of both the insurance and reinsurance segments of the Company with effect from January 1, 2018.
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, together with discontinued lines, which represents lines of business that Novae Group plc ("Novae") exited or placed into run-off in the three month periods ended December 31, 2016 and March 31, 2017.
Reinsurance
The Company's reinsurance segment provides non-life treaty reinsurance to insurance companies on a worldwide basis. The product lines in this segment are catastrophe, property, professional lines, credit and surety, motor, liability, agriculture, engineering, marine and other, accident and health, together with discontinued lines, which represents lines of business that Novae exited or placed into run-off in the three month periods ended December 31, 2016 and March 31, 2017. The reinsurance segment also wrote derivative based risk management products designed to address weather and commodity price risks until July 1, 2017.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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2. | SEGMENT INFORMATION (CONTINUED) |
The following tables present the underwriting results of the Company's reportable segments, as well as the carrying values of allocated goodwill and intangible assets:
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| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | |
| Three months ended and at June 30, | Insurance | | Reinsurance | | Total | | Insurance | | Reinsurance | | Total | |
| | | | | | | | | | | | | |
| Gross premiums written | $ | 1,026,644 |
| | $ | 624,181 |
| | $ | 1,650,825 |
| | $ | 764,202 |
| | $ | 598,125 |
| | $ | 1,362,327 |
| |
| Net premiums written | 598,179 |
| | 402,276 |
| | 1,000,455 |
| | 496,109 |
| | 459,908 |
| | 956,017 |
| |
| Net premiums earned | 577,271 |
| | 608,277 |
| | 1,185,548 |
| | 417,541 |
| | 563,890 |
| | 981,431 |
| |
| Other insurance related income (losses) | 1,214 |
| | 2,516 |
| | 3,730 |
| | 508 |
| | 2,052 |
| | 2,560 |
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| Net losses and loss expenses | (328,773 | ) | | (377,868 | ) | | (706,641 | ) | | (275,465 | ) | | (329,867 | ) | | (605,332 | ) | |
| Acquisition costs | (90,864 | ) | | (141,088 | ) | | (231,952 | ) | | (62,390 | ) | | (141,971 | ) | | (204,361 | ) | |
| General and administrative expenses | (102,369 | ) | | (32,590 | ) | | (134,959 | ) | | (83,126 | ) | | (34,160 | ) | | (117,286 | ) | |
| Underwriting income (loss) | $ | 56,479 |
| | $ | 59,247 |
| | 115,726 |
| | $ | (2,932 | ) | | $ | 59,944 |
| | 57,012 |
| |
| | | | | | | | | | | | | |
| Corporate expenses | | | | | (30,254 | ) | | | | | | (30,530 | ) | |
| Net investment income | | | | | 109,960 |
| | | | | | 106,063 |
| |
| Net investment losses | | | | | (45,093 | ) | | | | | | (4,392 | ) | |
| Foreign exchange (losses) gains | | | | | 44,099 |
| | | | | | (36,118 | ) | |
| Interest expense and financing costs | | | | | (17,098 | ) | | | | | | (12,751 | ) | |
| Bargain purchase gain | | | | | — |
| | | | | | 15,044 |
| |
| Reorganization expenses | | | | | (18,772 | ) | | | | | | — |
| |
| Amortization of value of business acquired | | | | | (53,407 | ) | | | | | | — |
| |
| Amortization of intangible assets | | | | | (4,029 | ) | | | | | | — |
| |
| Income before income taxes and interest in income (loss) of equity method investments | | | | | $ | 101,132 |
| | | | | | $ | 94,328 |
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| | | | | | | | | | | | | |
| Net loss and loss expense ratio | 57.0 | % | | 62.1 | % | | 59.6 | % | | 66.0 | % | | 58.5 | % | | 61.7 | % | |
| Acquisition cost ratio | 15.7 | % | | 23.2 | % | | 19.6 | % | | 14.9 | % | | 25.2 | % | | 20.8 | % | |
| General and administrative expense ratio | 17.7 | % | | 5.4 | % | | 13.9 | % | | 19.9 | % | | 6.1 | % | | 15.1 | % | |
| Combined ratio | 90.4 | % | | 90.7 | % | | 93.1 | % | | 100.8 | % | | 89.7 | % | | 97.6 | % | |
| | | | | | | | | | | | | |
| Goodwill and intangible assets | $ | 450,073 |
| | $ | — |
| | $ | 450,073 |
| | $ | 86,220 |
| | $ | — |
| | $ | 86,220 |
| |
| | | | | | | | | | | | | |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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2. | SEGMENT INFORMATION (CONTINUED) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | |
| Six months ended and at June 30, | Insurance | | Reinsurance | | Total | | Insurance | | Reinsurance | | Total | |
| | | | | | | | | | | | | |
| Gross premiums written | $ | 1,907,492 |
| | $ | 2,406,128 |
| | $ | 4,313,620 |
| | $ | 1,309,464 |
| | $ | 1,964,735 |
| | $ | 3,274,199 |
| |
| Net premiums written | 1,146,071 |
| | 1,840,255 |
| | 2,986,326 |
| | 852,945 |
| | 1,612,031 |
| | 2,464,976 |
| |
| Net premiums earned | 1,157,330 |
| | 1,195,620 |
| | 2,352,950 |
| | 809,504 |
| | 1,110,629 |
| | 1,920,133 |
| |
| Other insurance related income (losses) | 1,833 |
| | 8,502 |
| | 10,335 |
| | 551 |
| | (1,773 | ) | | (1,222 | ) | |
| Net losses and loss expenses | (650,312 | ) | | (717,674 | ) | | (1,367,986 | ) | | (516,549 | ) | | (695,724 | ) | | (1,212,273 | ) | |
| Acquisition costs | (178,193 | ) | | (283,019 | ) | | (461,212 | ) | | (116,394 | ) | | (277,759 | ) | | (394,153 | ) | |
| General and administrative expenses | (204,738 | ) | | (69,886 | ) | | (274,624 | ) | | (168,381 | ) | | (70,705 | ) | | (239,086 | ) | |
| Underwriting income | $ | 125,920 |
| | $ | 133,543 |
| | 259,463 |
| | $ | 8,731 |
| | $ | 64,668 |
| | 73,399 |
| |
| | | | | | | | | | | | | |
| Corporate expenses | | | | | (60,425 | ) | | | | | | (69,989 | ) | |
| Net investment income | | | | | 210,961 |
| | | | | | 204,728 |
| |
| Net realized investment losses | | | | | (59,923 | ) | | | | | | (29,443 | ) | |
| Foreign exchange (losses) gains | | | | | 6,239 |
| | | | | | (57,583 | ) | |
| Interest expense and financing costs | | | | | (33,861 | ) | | | | | | (25,543 | ) | |
| Bargain purchase gain | | | | | — |
| | | | | | 15,044 |
| |
| Reorganization expenses | | | | | (31,825 | ) | | | | | | — |
| |
| Amortization of value of business acquired | | | | | (110,517 | ) | | | | | | — |
| |
| Amortization of intangible assets | | | | | (6,811 | ) | | | | | | — |
| |
| Income before income taxes and interest in income (loss) of equity method investments | | | | | $ | 173,301 |
| | | | | | $ | 110,613 |
| |
| | | | | | | | | | | | | |
| Net loss and loss expense ratio | 56.2 | % | | 60.0 | % | | 58.1 | % | | 63.8 | % | | 62.6 | % | | 63.1 | % | |
| Acquisition cost ratio | 15.4 | % | | 23.7 | % | | 19.6 | % | | 14.4 | % | | 25.0 | % | | 20.5 | % | |
| General and administrative expense ratio | 17.7 | % | | 5.8 | % | | 14.3 | % | | 20.8 | % | | 6.4 | % | | 16.2 | % | |
| Combined ratio | 89.3 | % | | 89.5 | % | | 92.0 | % | | 99.0 | % | | 94.0 | % | | 99.8 | % | |
| | | | | | | | | | | | | |
| Goodwill and intangible assets | $ | 450,073 |
| | $ | — |
| | $ | 450,073 |
| | $ | 86,220 |
| | $ | — |
| | $ | 86,220 |
| |
| | | | | | | | | | | | | |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
a) Fixed Maturities and Equity securities
Fixed maturities
The amortized cost and fair values of the Company's fixed maturities classified as available for sale were as follows:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | | Non-credit OTTI in AOCI(5) | |
| | | | | | | | | | | |
| At June 30, 2018 | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | |
| U.S. government and agency | $ | 1,692,025 |
| | $ | 556 |
| | $ | (23,160 | ) | | $ | 1,669,421 |
| | $ | — |
| |
| Non-U.S. government | 596,802 |
| | 4,475 |
| | (16,114 | ) | | 585,163 |
| | — |
| |
| Corporate debt | 4,945,251 |
| | 18,686 |
| | (92,965 | ) | | 4,870,972 |
| | — |
| |
| Agency RMBS(1) | 1,738,740 |
| | 3,903 |
| | (42,915 | ) | | 1,699,728 |
| | — |
| |
| CMBS(2) | 1,142,204 |
| | 1,086 |
| | (21,323 | ) | | 1,121,967 |
| | — |
| |
| Non-Agency RMBS | 38,572 |
| | 1,574 |
| | (842 | ) | | 39,304 |
| | (884 | ) | |
| ABS(3) | 1,617,950 |
| | 2,509 |
| | (6,425 | ) | | 1,614,034 |
| | — |
| |
| Municipals(4) | 140,345 |
| | 706 |
| | (2,335 | ) | | 138,716 |
| | — |
| |
| Total fixed maturities | $ | 11,911,889 |
| | $ | 33,495 |
| | $ | (206,079 | ) | | $ | 11,739,305 |
| | $ | (884 | ) | |
| | | | | | | | | | | |
| At December 31, 2017 | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | |
| U.S. government and agency | $ | 1,727,643 |
| | $ | 1,735 |
| | $ | (16,909 | ) | | $ | 1,712,469 |
| | $ | — |
| |
| Non-U.S. government | 798,582 |
| | 17,240 |
| | (9,523 | ) | | 806,299 |
| | — |
| |
| Corporate debt | 5,265,795 |
| | 61,922 |
| | (29,851 | ) | | 5,297,866 |
| | — |
| |
| Agency RMBS(1) | 2,414,720 |
| | 8,132 |
| | (27,700 | ) | | 2,395,152 |
| | — |
| |
| CMBS(2) | 776,715 |
| | 4,138 |
| | (3,125 | ) | | 777,728 |
| | — |
| |
| Non-Agency RMBS | 45,713 |
| | 1,917 |
| | (799 | ) | | 46,831 |
| | (853 | ) | |
| ABS(3) | 1,432,884 |
| | 5,391 |
| | (1,994 | ) | | 1,436,281 |
| | — |
| |
| Municipals(4) | 149,167 |
| | 1,185 |
| | (972 | ) | | 149,380 |
| | — |
| |
| Total fixed maturities | $ | 12,611,219 |
| | $ | 101,660 |
| | $ | (90,873 | ) | | $ | 12,622,006 |
| | $ | (853 | ) | |
| | | | | | | | | | | |
| |
(1) | Residential mortgage-backed securities ("RMBS") originated by U.S. government-sponsored agencies. |
| |
(2) | Commercial mortgage-backed securities ("CMBS"). |
| |
(3) | Asset-backed securities (ABS) include debt tranched securities collateralized primarily by auto loans, student loans, credit card receivables, collateralized debt obligations ("CDOs") and collateralized loan obligations ("CLOs"). |
| |
(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. |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
3. | INVESTMENTS (CONTINUED) |
Equity Securities
The cost and fair values of the Company's equity securities were as follows:
|
| | | | | | | | | | | | | | | | | |
| | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
| At June 30, 2018 | | | | | | | | |
| Equity securities | | | | | | | | |
| Common stocks | $ | 13,302 |
| | $ | 1,239 |
| | $ | (1,114 | ) | | $ | 13,427 |
| |
| Exchange-traded funds | 211,940 |
| | 53,318 |
| | (1,413 | ) | | 263,845 |
| |
| Bond mutual funds | 141,173 |
| | 3 |
| | (1,236 | ) | | 139,940 |
| |
| Total equity securities | $ | 366,415 |
| | $ | 54,560 |
| | $ | (3,763 | ) | | $ | 417,212 |
| |
| | | | | | | | | |
| At December 31, 2017 | | | | | | | | |
| Equity securities | | | | | | | | |
| Common stocks | $ | 22,836 |
| | $ | 3,412 |
| | $ | (590 | ) | | $ | 25,658 |
| |
| Exchange-traded funds | 356,252 |
| | 71,675 |
| | (294 | ) | | 427,633 |
| |
| Bond mutual funds | 173,779 |
| | 9,440 |
| | (999 | ) | | 182,220 |
| |
| Total equity securities | $ | 552,867 |
| | $ | 84,527 |
| | $ | (1,883 | ) | | $ | 635,511 |
| |
| | | | | | | | | |
In the normal course of investing activities, the Company actively manages allocations to non-controlling tranches of structured securities (variable interests) issued by Variable Interest Entities ("VIEs"). These structured securities include RMBS, CMBS and ABS. The Company also invests in limited partnerships (hedge funds, direct lending funds, private equity funds and real estate funds) and CLO equity tranched securities, which are all variable interests issued by VIEs (see Note 3(c) 'Other Investments'). The Company does not have the power to direct the activities that are most significant to the economic performance of the VIEs therefore the Company is not the primary beneficiary of any of these VIEs. The maximum exposure to loss on these interests is limited to the amount of investment made by the Company. The Company has not provided financial or other support with respect to these structured securities other than the original investment.
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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3. | INVESTMENTS (CONTINUED) |
Contractual Maturities
Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The contractual maturities of fixed maturities are shown below:
|
| | | | | | | | | | | | |
| | Amortized Cost | | Fair Value | | % of Total Fair Value | |
| | | | | | | |
| At June 30, 2018 | | | | | | |
| Maturity | | | | | | |
| Due in one year or less | $ | 470,471 |
| | $ | 463,126 |
| | 4.0 | % | |
| Due after one year through five years | 4,881,214 |
| | 4,828,882 |
| | 41.1 | % | |
| Due after five years through ten years | 1,818,888 |
| | 1,769,098 |
| | 15.1 | % | |
| Due after ten years | 203,850 |
| | 203,166 |
| | 1.7 | % | |
| | 7,374,423 |
| | 7,264,272 |
| | 61.9 | % | |
| Agency RMBS | 1,738,740 |
| | 1,699,728 |
| | 14.5 | % | |
| CMBS | 1,142,204 |
| | 1,121,967 |
| | 9.6 | % | |
| Non-Agency RMBS | 38,572 |
| | 39,304 |
| | 0.3 | % | |
| ABS | 1,617,950 |
| | 1,614,034 |
| | 13.7 | % | |
| Total | $ | 11,911,889 |
| | $ | 11,739,305 |
| | 100.0 | % | |
| | | | | | | |
| At December 31, 2017 | | | | | | |
| Maturity | | | | | | |
| Due in one year or less | $ | 486,659 |
| | $ | 484,663 |
| | 3.8 | % | |
| Due after one year through five years | 4,906,207 |
| | 4,912,189 |
| | 38.9 | % | |
| Due after five years through ten years | 2,338,964 |
| | 2,350,433 |
| | 18.6 | % | |
| Due after ten years | 209,357 |
| | 218,729 |
| | 1.7 | % | |
| | 7,941,187 |
| | 7,966,014 |
| | 63.0 | % | |
| Agency RMBS | 2,414,720 |
| | 2,395,152 |
| | 19.0 | % | |
| CMBS | 776,715 |
| | 777,728 |
| | 6.2 | % | |
| Non-Agency RMBS | 45,713 |
| | 46,831 |
| | 0.4 | % | |
| ABS | 1,432,884 |
| | 1,436,281 |
| | 11.4 | % | |
| Total | $ | 12,611,219 |
| | $ | 12,622,006 |
| | 100.0 | % | |
| | | | | | | |
AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
3. | INVESTMENTS (CONTINUED) |
Gross Unrealized Losses
The following table summarizes fixed maturities and equity securities 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 June 30, 2018(1) | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | |
| U.S. government and agency | $ | 125,039 |
| | $ | (6,565 | ) | | $ | 1,378,293 |
| | $ | (16,595 | ) | | $ | 1,503,332 |
| | $ | (23,160 | ) | |
| Non-U.S. government | 63,216 |
| | (7,352 | ) | | 326,670 |
| | (8,762 | ) | | 389,886 |
| | (16,114 | ) | |
| Corporate debt | 325,074 |
| | (17,362 | ) | | 3,513,735 |
| | (75,603 | ) | | 3,838,809 |
| | (92,965 | ) | |
| Agency RMBS | 527,560 |
| | (23,601 | ) | | 836,763 |
| | (19,314 | ) | | 1,364,323 |
| | (42,915 | ) | |
| CMBS | 29,405 |
| | (1,556 | ) | | 925,264 |
| | (19,767 | ) | | 954,669 |
| | (21,323 | ) | |
| Non-Agency RMBS | 7,455 |
| | (763 | ) | | 4,320 |
| | (79 | ) | | 11,775 |
| | (842 | ) | |
| ABS | 27,316 |
| | (413 | ) | | 853,002 |
| | (6,012 | ) | | 880,318 |
| | (6,425 | ) | |
| Municipals | 11,037 |
| | (414 | ) | | 97,649 |
| | (1,921 | ) | | 108,686 |
| | (2,335 | ) | |
| Total fixed maturities | $ | 1,116,102 |
| | $ | (58,026 | ) | | $ | 7,935,696 |
| | $ | (148,053 | ) | | $ | 9,051,798 |
| | $ | (206,079 | ) | |
| | | | | | | | | | | | | |
| At December 31, 2017 | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | |
| U.S. government and agency | $ | 194,916 |
| | $ | (5,963 | ) | | $ | 1,389,792 |
| | $ | (10,946 | ) | | $ | 1,584,708 |
| | $ | (16,909 | ) | |
| Non-U.S. government | 62,878 |
| | (6,806 | ) | | 204,110 |
| | (2,717 | ) | | 266,988 |
| | (9,523 | ) | |
| Corporate debt | 407,300 |
| | (11,800 | ) | |