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AXIS CAPITAL HOLDINGS LTD - Quarter Report: 2017 September (Form 10-Q)

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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, 2017
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, 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.
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
As of October 31, 2017, there were 83,158,962 Common Shares, $0.0125 par value per share, of the registrant outstanding.


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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 United States 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 cyclical nature of the re(insurance) business leading to periods with excess underwriting capacity and unfavorable premium rates,
the occurrence and magnitude of natural and man-made disasters,
losses from war, terrorism and political unrest or other unanticipated losses,
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,
our inability to purchase reinsurance or collect amounts due to us,
the breach by third parties in our program business of their obligations to us,
difficulties with technology and/or data security,
the failure of our policyholders and intermediaries to pay premiums,
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 and credit risk due to our reliance on brokers,
changes in accounting policies or practices,
the use of industry catastrophe models and changes to these models,
changes in governmental regulations and potential government intervention in our industry,
failure to comply with certain laws and regulations relating to sanctions and foreign corrupt practices,
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,
the failure to successfully integrate acquired businesses or realize the expected synergies resulting from such acquisitions, 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, 2016.



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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, 2017 (Unaudited) and December 31, 2016
Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016 (Unaudited)
Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 (Unaudited)
Consolidated Statements of Changes in Shareholders' Equity for the nine months ended September 30, 2017 and 2016 (Unaudited)
Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation and Accounting Policies
Note 2 - Business Combinations
Note 3 - Segment Information
Note 4 - Investments
Note 5 - Fair Value Measurements
Note 6 - Derivative Instruments
Note 7 - Reserve for Losses and Loss Expenses
Note 8 - Earnings Per Common Share
Note 9 - Share-Based Compensation
Note 10 - Shareholders' Equity
Note 11 - Debt and Financing Arrangements
Note 12 - Commitments and Contingencies
Note 13 - Other Comprehensive Income
Note 14 - Subsequent Events






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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2017 (UNAUDITED) AND DECEMBER 31, 2016
 
 
2017
 
2016
 
(in thousands)
Assets
 
 
 
Investments:
 
 
 
Fixed maturities, available for sale, at fair value
(Amortized cost 2017: $11,043,394; 2016: $11,523,316)
$
11,086,386

 
$
11,397,114

Equity securities, available for sale, at fair value
(Cost 2017: $563,110; 2016: $597,366)
659,751

 
638,744

Mortgage loans, held for investment, at amortized cost and fair value
360,381

 
349,969

Other investments, at fair value
830,253

 
830,219

Equity method investments
108,597

 
116,000

Short-term investments, at amortized cost and fair value
15,282

 
127,461

Total investments
13,060,650

 
13,459,507

Cash and cash equivalents
1,350,613

 
1,039,494

Restricted cash and cash equivalents
280,514

 
202,013

Accrued interest receivable
68,023

 
74,971

Insurance and reinsurance premium balances receivable
2,968,096

 
2,313,512

Reinsurance recoverable on unpaid and paid losses
2,360,821

 
2,334,922

Deferred acquisition costs
562,774

 
438,636

Prepaid reinsurance premiums
734,129

 
556,344

Receivable for investments sold
9,357

 
14,123

Goodwill and intangible assets
87,206

 
85,049

Other assets
335,967

 
295,120

Total assets
$
21,818,150

 
$
20,813,691

 
 
 
 
Liabilities
 
 
 
Reserve for losses and loss expenses
$
10,787,575

 
$
9,697,827

Unearned premiums
3,521,063

 
2,969,498

Insurance and reinsurance balances payable
670,292

 
493,183

Senior notes
993,797

 
992,950

Payable for investments purchased
122,065

 
62,550

Other liabilities
268,659

 
325,313

Total liabilities
16,363,451

 
14,541,321

 
 
 
 
Shareholders’ equity
 
 
 
Preferred shares
775,000

 
1,126,074

Common shares (2017: 176,580; 2016: 176,580 shares issued and
2017: 83,157; 2016: 86,441 shares outstanding)
2,206

 
2,206

Additional paid-in capital
2,291,516

 
2,299,857

Accumulated other comprehensive income (loss)
141,613

 
(121,841
)
Retained earnings
6,051,659

 
6,527,627

Treasury shares, at cost (2017: 93,423; 2016: 90,139 shares)
(3,807,295
)
 
(3,561,553
)
Total shareholders’ equity
5,454,699

 
6,272,370

 
 
 
 
Total liabilities and shareholders’ equity
$
21,818,150

 
$
20,813,691


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, 2017 AND 2016


 
Three months ended
 
Nine months ended
 
2017
 
2016
 
2017
 
2016
 
(in thousands, except for per share amounts)
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
1,017,131

 
$
934,415

 
$
2,937,265

 
$
2,783,746

Net investment income
95,169

 
116,923

 
299,899

 
257,818

Other insurance related income (losses)
(3,197
)
 
5,944

 
(4,420
)
 
4,850

Bargain purchase gain

 

 
15,044

 

Net realized investment gains (losses):
 
 
 
 
 
 
 
Other-than-temporary impairment ("OTTI") losses
(5,412
)
 
(4,247
)
 
(13,493
)
 
(20,346
)
Other realized investment gains (losses)
20,044

 
9,452

 
(1,318
)
 
(19,949
)
Total net realized investment gains (losses)
14,632

 
5,205

 
(14,811
)
 
(40,295
)
Total revenues
1,123,735

 
1,062,487

 
3,232,977

 
3,006,119

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Net losses and loss expenses
1,235,367

 
532,328

 
2,447,640

 
1,663,584

Acquisition costs
194,724

 
189,810

 
588,879

 
559,570

General and administrative expenses
124,629

 
142,906

 
433,704

 
439,554

Foreign exchange losses (gains)
32,510

 
(13,795
)
 
90,093

 
(69,781
)
Interest expense and financing costs
12,835

 
12,839

 
38,377

 
38,586

Transaction related expenses
5,970

 

 
5,970

 

Total expenses
1,606,035

 
864,088

 
3,604,663

 
2,631,513

 
 
 
 
 
 
 
 
Income (loss) before income taxes and interest in income (loss) of equity method investments
(482,300
)
 
198,399

 
(371,686
)
 
374,606

Income tax (expense) benefit
25,877

 
(9,352
)
 
38,547

 
(7,712
)
Interest in loss of equity method investments
(661
)
 
(2,434
)
 
(8,402
)
 
(2,434
)
Net income (loss)
(457,084
)
 
186,613

 
(341,541
)
 
364,460

Preferred share dividends
10,656

 
9,969

 
36,154

 
29,906

Net income (loss) available to common shareholders
$
(467,740
)
 
$
176,644

 
$
(377,695
)
 
$
334,554

 
 
 
 
 
 
 
 
Per share data
 
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
 
 
Basic net income (loss)
$
(5.61
)
 
$
1.97

 
$
(4.47
)
 
$
3.64

Diluted net income (loss)
$
(5.61
)
 
$
1.96

 
$
(4.47
)
 
$
3.61

Weighted average number of common shares outstanding - basic
83,305

 
89,621

 
84,479

 
91,852

Weighted average number of common shares outstanding - diluted
83,305

 
90,351

 
84,479

 
92,579

Cash dividends declared per common share
$
0.38

 
$
0.35

 
$
1.14

 
$
1.05




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, 2017 AND 2016
 
 
Three months ended
 
Nine months ended
 
2017
 
2016
 
2017
 
2016
 
(in thousands)
Net income (loss)
$
(457,084
)
 
$
186,613

 
$
(341,541
)
 
$
364,460

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Available for sale investments:
 
 
 
 
 
 
 
Unrealized investment gains arising during the period
62,505

 
36,336

 
206,461

 
238,656

Adjustment for reclassification of net realized investment (gains) losses and OTTI losses recognized in net income
(13,286
)
 
(2,642
)
 
10,169

 
42,620

Unrealized investment gains arising during the period, net of reclassification adjustment
49,219

 
33,694

 
216,630

 
281,276

Foreign currency translation adjustment
8,088

 
1,722

 
46,824

 
5,694

Total other comprehensive income, net of tax
57,307

 
35,416

 
263,454

 
286,970

Comprehensive income (loss)
$
(399,777
)
 
$
222,029

 
$
(78,087
)
 
$
651,430




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, 2017 AND 2016
 
2017
 
2016
 
(in thousands)
Preferred shares
 
 
 
Balance at beginning of period
$
1,126,074

 
$
627,843

Shares repurchased
(351,074
)
 
(2,843
)
Balance at end of period
775,000

 
625,000

 
 
 
 
Common shares (par value)
 
 
 
Balance at beginning of period
2,206

 
2,202

Shares issued

 
4

Balance at end of period
2,206

 
2,206

 
 
 
 
Additional paid-in capital
 
 
 
Balance at beginning of period
2,299,857

 
2,241,388

Shares issued - common shares

 
(4
)
Cost of treasury shares reissued
(39,033
)
 
(19,647
)
Settlement of accelerated share repurchase

 
60,000

Share-based compensation expense
30,692

 
26,129

Balance at end of period
2,291,516

 
2,307,866

 
 
 
 
Accumulated other comprehensive income
 
 
 
Balance at beginning of period
(121,841
)
 
(188,465
)
Unrealized gains (losses) on available for sale investments, net of tax:
 
 
 
Balance at beginning of period
(82,323
)
 
(149,585
)
Unrealized gains arising during the period, net of reclassification adjustment
216,630

 
281,276

Balance at end of period
134,307

 
131,691

Cumulative foreign currency translation adjustments, net of tax:
 
 
 
Balance at beginning of period
(39,518
)
 
(38,880
)
Foreign currency translation adjustment
46,824

 
5,694

Balance at end of period
7,306

 
(33,186
)
Balance at end of period
141,613

 
98,505

 
 
 
 
Retained earnings
 
 
 
Balance at beginning of period
6,527,627

 
6,194,353

Net income (loss)
(341,541
)
 
364,460

Preferred share dividends
(36,154
)
 
(29,906
)
Common share dividends
(98,273
)
 
(98,334
)
Balance at end of period
6,051,659

 
6,430,573

 
 
 
 
Treasury shares, at cost
 
 
 
Balance at beginning of period
(3,561,553
)
 
(3,010,439
)
Shares repurchased for treasury
(285,659
)
 
(449,086
)
Cost of treasury shares reissued
39,917

 
21,033

Balance at end of period
(3,807,295
)
 
(3,438,492
)
 
 
 
 
Total shareholders’ equity
$
5,454,699

 
$
6,025,658

 
 
 
 

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, 2017 AND 2016
 
2017
 
2016
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(341,541
)
 
$
364,460

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Net realized investment losses
14,811

 
40,295

Net realized and unrealized gains on other investments
(56,759
)
 
(23,117
)
Amortization of fixed maturities
32,528

 
51,660

Interest in loss of equity method investments
8,402

 
2,434

Other amortization and depreciation
19,279

 
17,370

Share-based compensation expense, net of cash payments
1,516

 
28,580

Non-cash foreign exchange losses

24,149

 

Bargain purchase gain
(15,044
)
 

Changes in:
 
 
 
Accrued interest receivable
8,730

 
3,286

Reinsurance recoverable balances
60,522

 
(163,212
)
Deferred acquisition costs
(123,961
)
 
(73,759
)
Prepaid reinsurance premiums
(178,464
)
 
(184,648
)
Reserve for loss and loss expenses
918,511

 
216,828

Unearned premiums
540,108

 
682,686

Insurance and reinsurance balances, net
(465,436
)
 
(623,170
)
Other items
(135,266
)
 
(74,383
)
Net cash provided by operating activities
312,085

 
265,310

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of:
 
 
 
Fixed maturities
(6,250,608
)
 
(6,624,573
)
Equity securities
(108,804
)
 
(295,827
)
Mortgage loans
(20,812
)
 
(131,087
)
Other investments
(135,526
)
 
(177,500
)
Equity method investments
(1,000
)
 
(103,548
)
Short-term investments
(20,792
)
 
(81,479
)
Proceeds from the sale of:
 
 
 
Fixed maturities
5,354,398

 
6,067,663

Equity securities
232,755

 
296,182

Other investments
203,896

 
170,111

Short-term investments
19,284

 
67,408

Proceeds from redemption of fixed maturities
1,546,998

 
977,852

Proceeds from redemption of short-term investments
116,261

 
8,185

Proceeds from the repayment of mortgage loans

10,702

 
4,808

Purchase of other assets
(25,842
)
 
(19,055
)
Change in restricted cash and cash equivalents
(78,501
)
 
(42,445
)
Purchase of subsidiary, net
(73,067
)
 

Net cash provided by investing activities
769,342

 
116,695

 
 
 
 
Cash flows from financing activities:
 
 
 
Repurchase of common shares
(290,496
)
 
(389,086
)
Dividends paid - common shares
(102,868
)
 
(100,670
)
Repurchase of preferred shares
(351,074
)
 
(2,843
)
Dividends paid - preferred shares
(42,188
)
 
(29,940
)
Proceeds from issuance of common shares

 
8

Net cash used in financing activities
(786,626
)
 
(522,531
)
 
 
 
 
Effect of exchange rate changes on foreign currency cash and cash equivalents
16,318

 
593

Increase (decrease) in cash and cash equivalents
311,119

 
(139,933
)
Cash and cash equivalents - beginning of period
1,039,494

 
988,133

Cash and cash equivalents - end of period
$
1,350,613

 
$
848,200

 
 
 
 
Supplemental disclosures of cash flow information: Non-cash foreign exchange losses are attributable to the reclassification of the cumulative translation adjustment related to AXIS Specialty Australia from accumulated other comprehensive income to foreign exchange losses due to the wind-down of this operation which was substantially complete as of March 31, 2017. Also refer to Note 7 'Reserve for Losses and Loss Expenses' and Note 13 'Other Comprehensive Income'.

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, 2017 and the consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for the periods ended September 30, 2017 and 2016 have not been audited. The balance sheet at December 31, 2016 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, 2016. Tabular dollar and share amounts are in thousands, except per share amounts. All amounts are reported in U.S. dollars.

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, 2016.

New Accounting Standards Adopted in 2017

Stock Compensation - Improvements to Employee Share-Based Payment Accounting

Effective January 1, 2017, the Company adopted Accounting Standards Update ("ASU" ) ASU 2016-09, "Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting" which simplifies several aspects of the accounting for share-based payments to employees including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance requires all excess tax benefits and tax deficiencies to be recognized in the income statement with the tax effects of exercised or vested awards to be treated as discrete items in the reporting period in which they occur. Excess tax benefits should be classified along with other income tax cash flows as an operating activity on the statement of cash flows. In addition, companies will be required to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. The guidance allows withholding up to the maximum statutory tax rates in the applicable jurisdictions to cover income taxes on share-based compensation awards without requiring liability classification. Cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. The adoption of this guidance did not have a material impact on our results of operations, financial condition and liquidity.

Issued Accounting Standards Not Yet Adopted

Revenue From Contracts With Customers

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". 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 (for example, insurance contracts are not in scope of the new guidance). 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



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

1.
BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)

those goods or services. In August 2015, the FASB delayed the effective date by one year through the issuance of ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date". This guidance is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted for interim and annual reporting periods beginning after December 15, 2016. Accounting for insurance contracts is outside the scope of ASU 2014-09. The Company generates an insignificant amount of fee income, primarily from strategic capital partners, which is reported in other insurance related income (losses) in the Consolidated Statements of Operations and is subject to this accounting standard update. The Company's current accounting policy to recognize fee income in the period when related services are performed, principally aligns with this update. As a result, the Company does not expect the adoption of this guidance to have a material impact on our results of operations, financial condition and liquidity.

Recently Issued Accounting Standards Not Yet Adopted

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 our results of operations, financial condition and liquidity.

Stock Compensation - Scope of Modification Accounting

In May 2017, the FASB issued ASU 2017-09 "Compensation - Stock Compensation (Topic 718) - Scope of Modification Accounting" to provide clarity and reduce 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: (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; (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 (3) 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. 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. This guidance is effective for interim and annual reporting periods, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the impact of this guidance on our results of operations, financial condition and liquidity.



12

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

2.        BUSINESS COMBINATIONS

On April 1, 2017 ("the closing date" or the "acquisition date"), the Company acquired a 100% ownership interest in Compagnie Belge d'Assurances Aviation NV/SA (“Aviabel”). Aviabel is an insurer operating under Belgian law that has its head office in Belgium, a branch office in the Netherlands and a re-insurance company, Aviabel RE S.A. (“Aviabel RE”), in Luxembourg. The Company acquired Aviabel to increase its scale and relevance in the global aviation market.

The purchase price was allocated to the acquired assets and liabilities of Aviabel based on estimated fair values on the closing date. Consequently, the Company recognized investments with a fair value of $182 million, reserves for losses and loss expenses with a fair value of $79 million, and a bargain purchase gain of $15 million. The bargain purchase gain arose as the fair values of the net identifiable assets acquired exceeded the fair value of the consideration transferred at the acquisition date.

The allocation of the purchase price was based on information included in unaudited financial statements prepared by Aviabel's management at March 31, 2017. The allocation is subject to change if additional information becomes available within the measurement period, which cannot exceed 12 months from the acquisition date. The fair values of the acquired assets and liabilities may be subject to adjustments, which may impact the amounts recorded for the acquired assets and liabilities, as well as the bargain purchase gain.

The underwriting results of Aviabel are included in the underwriting results of the Company's insurance segment from the acquisition date.






13

Table of Contents

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

3.
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.
Insurance
Our insurance segment provides insurance coverage on a worldwide basis. The product lines in this segment are property, marine, terrorism, aviation, credit and political risk, professional lines, liability and accident and health.
 
Reinsurance
Our 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 and marine and other. The reinsurance segment also writes derivative based risk management products designed to address weather and commodity price risks.

The following tables summarize the underwriting results of our reportable segments, as well as the carrying values of allocated goodwill and intangible assets:
 
  
2017
 
2016
 
 
Three months ended and at September 30,
Insurance
 
Reinsurance
 
Total
 
Insurance
 
Reinsurance
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
744,366

 
$
441,208

 
$
1,185,574

 
$
675,430

 
$
284,532

 
$
959,962

 
 
Net premiums written
500,022

 
332,721

 
832,743

 
433,131

 
162,300

 
595,431

 
 
Net premiums earned
496,004

 
521,127

 
1,017,131

 
444,691

 
489,724

 
934,415

 
 
Other insurance related income (losses)
526

 
(3,723
)
 
(3,197
)
 
39

 
5,905

 
5,944

 
 
Net losses and loss expenses
(628,865
)
 
(606,502
)
 
(1,235,367
)
 
(273,226
)
 
(259,102
)
 
(532,328
)
 
 
Acquisition costs
(74,231
)
 
(120,493
)
 
(194,724
)
 
(61,755
)
 
(128,055
)
 
(189,810
)
 
 
General and administrative expenses
(75,038
)
 
(21,658
)
 
(96,696
)
 
(84,588
)
 
(29,635
)
 
(114,223
)
 
 
Underwriting income (loss)
$
(281,604
)
 
$
(231,249
)
 
(512,853
)
 
$
25,161

 
$
78,837

 
103,998

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate expenses
 
 
 
 
(27,933
)
 
 
 
 
 
(28,683
)
 
 
Net investment income
 
 
 
 
95,169

 
 
 
 
 
116,923

 
 
Net realized investment gains
 
 
 
 
14,632

 
 
 
 
 
5,205

 
 
Foreign exchange (losses) gains
 
 
 
 
(32,510
)
 
 
 
 
 
13,795

 
 
Interest expense and financing costs
 
 
 
 
(12,835
)
 
 
 
 
 
(12,839
)
 
 
Transaction related expenses
 
 
 
 
(5,970
)
 
 
 
 
 

 
 
Income (loss) before income taxes and interest in income (loss) of equity method investments
 
 
 
 
$
(482,300
)
 
 
 
 
 
$
198,399

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss and loss expense ratio
126.8
%
 
116.4
%
 
121.5
%
 
61.4
%
 
52.9
%
 
57.0
%
 
 
Acquisition cost ratio
15.0
%
 
23.1
%
 
19.1
%
 
13.9
%
 
26.1
%
 
20.3
%
 
 
General and administrative expense ratio
15.1
%
 
4.2
%
 
12.3
%
 
19.1
%
 
6.1
%
 
15.3
%
 
 
Combined ratio
156.9
%
 
143.7
%
 
152.9
%
 
94.4
%
 
85.1
%
 
92.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill and intangible assets
$
87,206

 
$

 
$
87,206

 
$
85,501

 
$

 
$
85,501

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  



14

Table of Contents

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

3.
SEGMENT INFORMATION (CONTINUED)

 
  
2017
 
2016
 
 
Nine months ended and at September 30,
Insurance
 
Reinsurance
 
Total
 
Insurance
 
Reinsurance
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
2,234,395

 
$
2,225,377

 
$
4,459,772

 
$
2,112,796

 
$
2,126,762

 
$
4,239,558

 
 
Net premiums written
1,533,029

 
1,764,689

 
3,297,718

 
1,433,058

 
1,855,529

 
3,288,587

 
 
Net premiums earned
1,448,270

 
1,488,995

 
2,937,265

 
1,322,649

 
1,461,097

 
2,783,746

 
 
Other insurance related income (losses)
1,077

 
(5,497
)
 
(4,420
)
 
(57
)
 
4,907

 
4,850

 
 
Net losses and loss expenses
(1,241,495
)
 
(1,206,145
)
 
(2,447,640
)
 
(853,771
)
 
(809,813
)
 
(1,663,584
)
 
 
Acquisition costs
(223,665
)
 
(365,214
)
 
(588,879
)
 
(184,982
)
 
(374,588
)
 
(559,570
)
 
 
General and administrative expenses
(253,308
)
 
(82,474
)
 
(335,782
)
 
(252,652
)
 
(99,980
)
 
(352,632
)
 
 
Underwriting income (loss)
$
(269,121
)
 
$
(170,335
)
 
(439,456
)
 
$
31,187

 
$
181,623

 
212,810

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate expenses
 
 
 
 
(97,922
)
 
 
 
 
 
(86,922
)
 
 
Net investment income
 
 
 
 
299,899

 
 
 
 
 
257,818

 
 
Net realized investment losses
 
 
 
 
(14,811
)
 
 
 
 
 
(40,295
)
 
 
Foreign exchange (losses) gains
 
 
 
 
(90,093
)
 
 
 
 
 
69,781

 
 
Interest expense and financing costs
 
 
 
 
(38,377
)
 
 
 
 
 
(38,586
)
 
 
Bargain purchase gain
 
 
 
 
15,044

 
 
 
 
 

 
 
Transaction related expenses
 
 
 
 
(5,970
)
 
 
 
 
 

 
 
Income (loss) before income taxes and interest in income (loss) of equity method investments
 
 
 
 
$
(371,686
)
 
 
 
 
 
$
374,606

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss and loss expense ratio
85.7
%
 
81.0
%
 
83.3
%
 
64.6
%
 
55.4
%
 
59.8
%
 
 
Acquisition cost ratio
15.4
%
 
24.5
%
 
20.0
%
 
14.0
%
 
25.6
%
 
20.1
%
 
 
General and administrative expense ratio
17.6
%
 
5.6
%
 
14.8
%
 
19.0
%
 
6.9
%
 
15.8
%
 
 
Combined ratio
118.7
%
 
111.1
%
 
118.1
%
 
97.6
%
 
87.9
%
 
95.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill and intangible assets
$
87,206

 
$

 
$
87,206

 
$
85,501

 
$

 
$
85,501

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



15

Table of Contents

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

4.
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, 2017
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
1,556,963

 
$
2,729

 
$
(12,374
)
 
$
1,547,318

 
$

 
 
Non-U.S. government
568,223

 
13,961

 
(8,544
)
 
573,640

 

 
 
Corporate debt
4,460,337

 
65,230

 
(21,600
)
 
4,503,967

 

 
 
Agency RMBS(1)
2,313,096

 
12,218

 
(18,492
)
 
2,306,822

 

 
 
CMBS(2)
665,520

 
5,954

 
(1,738
)
 
669,736

 

 
 
Non-Agency RMBS
42,653

 
1,968

 
(804
)
 
43,817

 
(867
)
 
 
ABS(3)
1,285,080

 
4,572

 
(782
)
 
1,288,870

 

 
 
Municipals(4)
151,522

 
1,379

 
(685
)
 
152,216

 

 
 
Total fixed maturities
$
11,043,394

 
$
108,011

 
$
(65,019
)
 
$
11,086,386

 
$
(867
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
Common stocks
$
13,980

 
$
1,415

 
$
(569
)
 
$
14,826

 
 
 
 
Exchange-traded funds
365,412

 
88,782

 

 
454,194

 
 
 
 
Bond mutual funds
183,718

 
8,686

 
(1,673
)
 
190,731

 
 
 
 
Total equity securities
$
563,110

 
$
98,883

 
$
(2,242
)
 
$
659,751

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
1,681,425

 
$
1,648

 
$
(27,004
)
 
$
1,656,069

 
$

 
 
Non-U.S. government
613,282

 
2,206

 
(49,654
)
 
565,834

 

 
 
Corporate debt
4,633,834

 
42,049

 
(75,140
)
 
4,600,743

 

 
 
Agency RMBS(1)
2,487,837

 
13,275

 
(35,977
)
 
2,465,135

 

 
 
CMBS(2)
664,368

 
5,433

 
(3,564
)
 
666,237

 

 
 
Non-Agency RMBS
57,316

 
1,628

 
(2,023
)
 
56,921

 
(823
)
 
 
ABS(3)
1,221,813

 
3,244

 
(2,843
)
 
1,222,214

 

 
 
Municipals(4)
163,441

 
1,510

 
(990
)
 
163,961

 

 
 
Total fixed maturities
$
11,523,316

 
$
70,993

 
$
(197,195
)
 
$
11,397,114

 
$
(823
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
Common stocks
$
379

 
$
41

 
$
(342
)
 
$
78

 
 
 
 
Exchange-traded funds
463,936

 
53,405

 
(2,634
)
 
514,707

 
 
 
 
Bond mutual funds
133,051

 

 
(9,092
)
 
123,959

 
 
 
 
Total equity securities
$
597,366

 
$
53,446

 
$
(12,068
)
 
$
638,744

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(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 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.




16

Table of Contents

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

4.
INVESTMENTS (CONTINUED)

In the normal course of investing activities, we actively manage allocations to non-controlling tranches of structured securities (variable interests) issued by Variable Interest Entities ("VIEs"). These structured securities include RMBS, CMBS and ABS and are included in the above table. Additionally, within our other investments portfolio, we invest in limited partnerships (hedge funds, direct lending funds, private equity funds and real estate funds) and CLO equity tranched securities, which are variable interests issued by VIEs (see Note 4(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, 2017
 
 
 
 
 
 
 
Maturity
 
 
 
 
 
 
 
Due in one year or less
$
434,283

 
$
432,662

 
4.0
%
 
 
Due after one year through five years
3,834,452

 
3,850,174

 
34.7
%
 
 
Due after five years through ten years
2,258,136

 
2,276,190

 
20.5
%
 
 
Due after ten years
210,174

 
218,115

 
2.0
%
 
 
 
6,737,045

 
6,777,141

 
61.2
%
 
 
Agency RMBS
2,313,096

 
2,306,822

 
20.8
%
 
 
CMBS
665,520

 
669,736

 
6.0
%
 
 
Non-Agency RMBS
42,653

 
43,817

 
0.4
%
 
 
ABS
1,285,080

 
1,288,870

 
11.6
%
 
 
Total
$
11,043,394

 
$
11,086,386

 
100.0
%
 
 
 
 
 
 
 
 
 
 
At December 31, 2016
 
 
 
 
 
 
 
Maturity
 
 
 
 
 
 
 
Due in one year or less
$
313,287

 
$
305,972

 
2.8
%
 
 
Due after one year through five years
3,906,190

 
3,850,149

 
33.8
%
 
 
Due after five years through ten years
2,546,299

 
2,510,975

 
22.0
%
 
 
Due after ten years
326,206

 
319,511

 
2.8
%
 
 
 
7,091,982

 
6,986,607

 
61.4
%
 
 
Agency RMBS
2,487,837

 
2,465,135

 
21.6
%
 
 
CMBS
664,368

 
666,237

 
5.8
%
 
 
Non-Agency RMBS
57,316

 
56,921

 
0.5
%
 
 
ABS
1,221,813

 
1,222,214

 
10.7
%
 
 
Total
$
11,523,316

 
$
11,397,114

 
100.0
%
 
 
 
 
 
 
 
 
 




17

Table of Contents

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

4.
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, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
161,425

 
$
(5,641
)
 
$
1,207,943

 
$
(6,733
)
 
$
1,369,368

 
$
(12,374
)
 
 
Non-U.S. government
61,872

 
(7,354
)
 
163,477

 
(1,190
)
 
225,349

 
(8,544
)
 
 
Corporate debt
412,832

 
(12,553
)
 
990,308

 
(9,047
)
 
1,403,140

 
(21,600
)
 
 
Agency RMBS
350,010

 
(8,130
)
 
1,126,956

 
(10,362
)
 
1,476,966

 
(18,492
)
 
 
CMBS
13,919

 
(238
)
 
221,941

 
(1,500
)
 
235,860

 
(1,738
)
 
 
Non-Agency RMBS
8,342

 
(803
)
 
222

 
(1
)
 
8,564

 
(804
)
 
 
ABS
16,816

 
(409
)
 
323,886

 
(373
)
 
340,702

 
(782
)
 
 
Municipals
23,339

 
(474
)
 
40,913

 
(211
)
 
64,252

 
(685
)
 
 
Total fixed maturities
$
1,048,555

 
$
(35,602
)
 
$
4,075,646

 
$
(29,417
)
 
$
5,124,201

 
$
(65,019
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
$
33

 
$
(135
)
 
$
2,939

 
$
(434
)
 
$
2,972

 
$
(569
)
 
 
Exchange-traded funds

 

 

 

 

 

 
 
Bond mutual funds

 

 
24,145

 
(1,673
)
 
24,145

 
(1,673
)
 
 
Total equity securities
$
33

 
$
(135
)
 
$
27,084

 
$
(2,107
)
 
$
27,117

 
$
(2,242
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
54,051

 
$
(2,729
)
 
$
1,340,719

 
$
(24,275
)
 
$
1,394,770

 
$
(27,004
)
 
 
Non-U.S. government
149,360

 
(38,683
)
 
283,796

 
(10,971
)
 
433,156

 
(49,654
)
 
 
Corporate debt
230,218

 
(30,652
)
 
1,948,976

 
(44,488
)
 
2,179,194

 
(75,140
)
 
 
Agency RMBS
76,694

 
(1,101
)
 
1,724,170

 
(34,876
)
 
1,800,864

 
(35,977
)
 
 
CMBS
84,640

 
(749
)
 
193,499

 
(2,815
)
 
278,139

 
(3,564
)
 
 
Non-Agency RMBS
13,642

 
(1,752
)
 
7,194

 
(271
)
 
20,836

 
(2,023
)
 
 
ABS
362,110

 
(1,950
)
 
266,763

 
(893
)
 
628,873

 
(2,843
)
 
 
Municipals
774

 
(29
)
 
68,598

 
(961
)
 
69,372

 
(990
)
 
 
Total fixed maturities
$
971,489

 
$
(77,645
)
 
$
5,833,715

 
$
(119,550
)
 
$
6,805,204

 
$
(197,195
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
$

 
$

 
$
37

 
$
(342
)
 
$
37

 
$
(342
)
 
 
Exchange-traded funds
4,959

 
(461
)
 
87,760

 
(2,173
)
 
92,719

 
(2,634
)
 
 
Bond mutual funds

 

 
123,954

 
(9,092
)
 
123,954

 
(9,092
)
 
 
Total equity securities
$
4,959

 
$
(461
)
 
$
211,751

 
$
(11,607
)
 
$
216,710

 
$
(12,068
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




18

Table of Contents

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

4.
INVESTMENTS (CONTINUED)

Fixed Maturities

At September 30, 2017, 1,625 fixed maturities (2016: 1,881) were in an unrealized loss position of $65 million (2016: $197 million), of which $6 million (2016: $15 million) was related to securities below investment grade or not rated.

At September 30, 2017, 403 (2016: 330) securities had been in a continuous unrealized loss position for 12 months or greater and had a fair value of $1,049 million (2016: $971 million). Following our credit impairment review, we concluded that these securities as well as the remaining securities in an unrealized loss position in the above table were temporarily impaired at September 30, 2017, and were expected to recover in value as the securities approach maturity. Further, at September 30, 2017, we did not intend to sell these securities in an unrealized loss position and it is more likely than not that we will not be required to sell these securities before the anticipated recovery of their amortized costs.

Equity Securities

At September 30, 2017, 31 securities (2016: 23) were in an unrealized loss position of $2 million (2016: $12 million).

At September 30, 2017, 2 securities (2016: 3) was in a continuous unrealized loss position for 12 months or greater. Based on our impairment review process and our ability and intent to hold these securities for a reasonable period of time sufficient for a full recovery, we concluded that the above equities in an unrealized loss position were temporarily impaired at September 30, 2017.

b) Mortgage Loans

The following table provides a breakdown of our mortgage loans held-for-investment:
 
  
September 30, 2017
 
December 31, 2016
 
 
  
Carrying Value
 
% of Total
 
Carrying Value
 
% of Total
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage Loans held-for-investment:
 
 
 
 
 
 
 
 
 
Commercial
$
360,381

 
100
%
 
$
349,969

 
100
%
 
 
 
360,381

 
100
%
 
349,969

 
100
%
 
 
Valuation allowances

 
%
 

 
%
 
 
Total Mortgage Loans held-for-investment
$
360,381

 
100
%
 
$
349,969

 
100
%
 
 
 
 
 
 
 
 
 
 
 

For commercial mortgage loans, the primary credit quality indicator is the debt service coverage ratio (which compares a property’s net operating income to amounts needed to service the principal and interest due under the loan, generally, the lower the debt service coverage ratio, the higher the risk of experiencing a credit loss) and the loan-to-value ratio (loan-to-value ratios compare the unpaid principal balance of the loan to the estimated fair value of the underlying collateral, generally, the higher the loan-to-value ratio, the higher the risk of experiencing a credit loss). The debt service coverage ratio and loan-to-value ratio, as well as the values utilized in calculating these ratios, are updated annually, on a rolling basis.

We have a high quality mortgage portfolio with weighted average debt service coverage ratios in excess of 3.0x and weighted average loan-to-value ratios of less than 60%. There are no credit losses associated with the commercial mortgage loans that we hold at September 30, 2017.

There are no past due amounts at September 30, 2017.
 



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.
INVESTMENTS (CONTINUED)

c) Other Investments

The following table provides a breakdown of our investments in hedge funds, direct lending funds, private equity funds, real estate funds, CLO-Equities and other privately held investments, together with additional information relating to the liquidity of each category:
 
 
Fair Value
 
Redemption Frequency
(if currently eligible)
 
  Redemption  
  Notice Period  
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2017
 

 
 

 
 
 
 
 
 
Long/short equity funds
$
64,067

 
8
%
 
Annually
 
60 days
 
 
Multi-strategy funds
286,452

 
35
%
 
Quarterly, Semi-annually
 
60-95 days
 
 
Event-driven funds
48,578

 
6
%
 
Annually
 
45 days
 
 
Direct lending funds
232,389

 
28
%
 
n/a
 
n/a
 
 
Private equity funds
71,896

 
9
%
 
n/a
 
n/a
 
 
Real estate funds
46,691

 
6
%
 
n/a
 
n/a
 
 
CLO-Equities
36,782

 
3
%
 
n/a
 
n/a
 
 
Other privately held investments
43,398

 
5
%
 
n/a
 
n/a
 
 
Total other investments
$
830,253

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2016
 

 
 

 
 
 
 
 
 
Long/short equity funds
$
118,619

 
14
%
 
Semi-annually, Annually
 
45-60 days
 
 
Multi-strategy funds
285,992

 
34
%
 
Quarterly, Semi-annually
 
60-95 days
 
 
Event-driven funds
93,539

 
11
%
 
Annually
 
45 days
 
 
Direct lending funds
134,650

 
16
%
 
n/a
 
n/a
 
 
Private equity funds
81,223

 
10
%
 
n/a
 
n/a
 
 
Real estate funds
13,354

 
2
%
 
n/a
 
n/a
 
 
CLO-Equities
60,700

 
8
%
 
n/a
 
n/a
 
 
Other privately held investments
42,142

 
5
%
 
n/a
 
n/a
 
 
Total other investments
$
830,219

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
n/a - not applicable

The investment strategies for the above funds are as follows:

Long/short equity funds: Seek to achieve attractive returns primarily by executing an equity trading strategy involving both long and short investments in publicly-traded equities.

Multi-strategy funds: Seek to achieve above-market returns by pursuing multiple investment strategies to diversify risks and reduce volatility. This category includes funds of hedge funds which invest in a large pool of hedge funds across a diversified range of hedge fund strategies.

Event-driven funds: Seek to achieve attractive returns by exploiting situations where announced or anticipated events create opportunities.

Direct lending funds: Seek to achieve attractive risk-adjusted returns, including current income generation, by investing in funds which provide financing directly to borrowers.

Private equity funds: Seek to achieve attractive risk-adjusted returns by investing in private transactions over the course of several years.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.
INVESTMENTS (CONTINUED)

Real estate funds: Seek to achieve attractive risk-adjusted returns by making and managing investments in real estate and real estate securities and businesses.

Two common redemption restrictions which may impact our ability to redeem our hedge funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the fund's net assets which may otherwise hinder the general partner or investment manager's ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. During 2017 and 2016, neither of these restrictions impacted our redemption requests. At September 30, 2017, $64 million (2016: $60 million), representing 16% (2016: 12%) of our total hedge funds, relate to holdings where we are still within the lockup period. The expiration of these lockup periods range from December 2017 to March 2019. 

At September 30, 2017, we had $142 million (2016: $176 million) of unfunded commitments as a limited partner in direct lending funds. Once the full amount of committed capital has been called by the General Partner of each of these funds, the assets will not be fully returned until the completion of the fund's investment term. These funds have investment terms ranging from 5-10 years and the General Partners of certain funds have the option to extend the term by up to 3 years.
At September 30, 2017, we had $16 million (2016: $12 million) of unfunded commitments as a limited partner in multi-strategy hedge funds. Once the full amount of committed capital has been called by the General Partner of each of these funds, the assets will not be fully returned until the completion of the funds' investment term. These funds have investment terms ranging from 2 years to the dissolution of the underlying fund.
At September 30, 2017, we had $120 million (2016: $140 million) of unfunded commitments as a limited partner in funds which invest in real estate and real estate securities and businesses. These funds have investment terms ranging from 7 years to the dissolution of the underlying fund.
 
At September 30, 2017, we had $21 million (2016: $24 million) of unfunded commitments as a limited partner in a private equity fund. The life of the fund is subject to the dissolution of the underlying funds. We expect the overall holding period to be over 10 years.

During 2015, we made a $50 million commitment as a limited partner of a bank revolver opportunity fund. The fund is subject to an investment term of 7 years and the General Partners have the option to extend the term by up to 2 years. At September 30, 2017, this commitment remains unfunded. It is not anticipated that the full amount of this fund will be drawn.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.
INVESTMENTS (CONTINUED)

d) Equity Method Investments

During 2016, we paid $108 million including direct transaction costs to acquire 19% of the common equity of Harrington Reinsurance Holdings Limited ("Harrington"), the parent company of Harrington Re Ltd. ("Harrington Re"), an independent reinsurance company jointly sponsored by AXIS Capital and The Blackstone Group L.P. ("Blackstone"). Through long-term service agreements, AXIS Capital will serve as Harrington Re's reinsurance underwriting manager and Blackstone will serve as exclusive investment management service provider. As an investor, we expect to benefit from underwriting profit generated by Harrington Re and the income and capital appreciation Blackstone seeks to deliver through its investment management services. In addition, we have entered into an arrangement with Blackstone under which underwriting and investment related fees will be shared equally. Harrington is not a variable interest entity. Given that we exercise significant influence over the operating and financial policies of this investee we account for our ownership in Harrington under the equity method of accounting. The Company's proportionate share of the underlying equity in net assets resulted in a basis difference of $5 million which represents initial transactions costs.

During the nine months ended September 30, 2017, we recorded an impairment charge of $9 million, related to a U.S. based insurance company, which reduced the carrying value of the investment to $nil. This charge is included in interest in income (loss) of equity method investments in the Consolidated Statement of Operations.

e) Net Investment Income

Net investment income was derived from the following sources:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
$
74,978

 
$
75,827

 
$
230,603

 
$
229,423

 
 
Other investments
17,373

 
38,248

 
59,973

 
25,770

 
 
Equity securities
3,223

 
4,633

 
11,048

 
12,843

 
 
Mortgage loans
2,895

 
2,191

 
7,970

 
5,683

 
 
Cash and cash equivalents
3,111

 
3,768

 
9,640

 
7,071

 
 
Short-term investments
698

 
337

 
1,797

 
708

 
 
Gross investment income
102,278

 
125,004

 
321,031

 
281,498

 
 
Investment expenses
(7,109
)
 
(8,081
)
 
(21,132
)
 
(23,680
)
 
 
Net investment income
$
95,169

 
$
116,923

 
$
299,899

 
$
257,818

 
 
 
 
 
 
 
 
 
 
 




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.
INVESTMENTS (CONTINUED)

f) Net Realized Investment Gains (Losses)

The following table provides an analysis of net realized investment gains (losses):
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
Gross realized gains
 
 
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
19,297

 
$
26,211

 
$
57,524

 
$
67,833

 
 
Equities
17,980

 
5,570

 
33,794

 
18,804

 
 
Gross realized gains
37,277

 
31,781

 
91,318

 
86,637

 
 
Gross realized losses
 
 
 
 
 
 
 
 
 
Fixed maturities and short-term investments
(15,893
)
 
(21,908
)
 
(83,183
)
 
(90,702
)
 
 
Equities
(45
)
 
(576
)
 
(258
)
 
(15,923
)
 
 
Gross realized losses
(15,938
)
 
(22,484
)
 
(83,441
)
 
(106,625
)
 
 
Net OTTI recognized in earnings
(5,412
)
 
(4,247
)
 
(13,493
)
 
(20,346
)
 
 
Change in fair value of investment derivatives(1)
(1,295
)
 
155

 
(9,195
)
 
39

 
 
Net realized investment gains (losses)
$
14,632

 
$
5,205

 
$
(14,811
)
 
$
(40,295
)
 
 
 
 
 
 
 
 
 
 
 
(1) Refer to Note 6 'Derivative Instruments'

The following table summarizes the OTTI recognized in earnings by asset class:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
Non-U.S. government
$
3,905

 
$
2,456

 
$
8,187

 
$
2,953

 
 
Corporate debt
1,507

 
1,791

 
5,306

 
14,833

 
 
 
5,412

 
4,247

 
13,493

 
17,786

 
 
Equity Securities
 
 
 
 
 
 
 
 
 
Exchange-traded funds

 

 

 
2,560

 
 
 

 

 

 
2,560

 
 
Total OTTI recognized in earnings
$
5,412

 
$
4,247

 
$
13,493

 
$
20,346

 
 
 
 
 
 
 
 
 
 
 



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.
INVESTMENTS (CONTINUED)

The following table provides a roll forward of the credit losses, before income taxes, for which a portion of the OTTI was recognized in AOCI:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
1,481

 
$
1,513

 
$
1,493

 
$
1,506

 
 
Credit impairments recognized on securities not previously impaired

 

 

 

 
 
Additional credit impairments recognized on securities previously impaired
2

 

 
2

 
7

 
 
Change in timing of future cash flows on securities previously impaired

 

 

 

 
 
Intent to sell of securities previously impaired

 

 

 

 
 
Securities sold/redeemed/matured

 
(33
)
 
(12
)
 
(33
)
 
 
Balance at end of period
$
1,483

 
$
1,480

 
$
1,483

 
$
1,480

 
 
 
 
 
 
 
 
 
 
 

g) Reverse Repurchase Agreements

At September 30, 2017, we held $34 million (December 31, 2016: $176 million) of reverse repurchase agreements. These loans are fully collateralized, are generally outstanding for a short period of time and are presented on a gross basis as part of cash and cash equivalents in the Consolidated Balance Sheet. The required collateral for these loans is either cash or U.S. Treasuries at a minimum rate of 102% of the loan principal. Upon maturity, we receive principal and interest income. We monitor the estimated fair value of the securities loaned and borrowed on a daily basis with additional collateral obtained as necessary throughout the duration of the transaction.




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

5.
FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

Fair value is defined as the price to sell an asset or transfer a liability (i.e. the “exit price”) in an orderly transaction between market participants. U.S. GAAP prescribes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement. The hierarchy is broken down into three levels as follows:

Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.

Level 2 - Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.

Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect our own judgments about assumptions that market participants might use.

The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.

Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This may lead us to change the selection of our valuation technique (from market to cash flow approach) or may cause us to use multiple valuation techniques to estimate the fair value of a financial instrument. This circumstance could cause an instrument to be reclassified between levels within the fair value hierarchy.

Valuation Techniques

The valuation techniques, including significant inputs and assumptions generally used to determine the fair values of our financial instruments as well as the classification of the fair values of our financial instruments in the fair value hierarchy are described in detail below.

Fixed Maturities

At each valuation date, we use the market approach valuation technique to estimate the fair value of our fixed maturities portfolio, when possible. This market approach includes, but is not limited to, prices obtained from third party pricing services for identical or comparable securities and the use of “pricing matrix models” using observable market inputs such as yield curves, credit risks and spreads, measures of volatility, and prepayment speeds. Pricing from third party pricing services is sourced from multiple vendors, when available, and we maintain a vendor hierarchy by asset type based on historical pricing experience and vendor expertise. When prices are unavailable from pricing services, we obtain non-binding quotes from broker-dealers who are active in the corresponding markets. The valuation techniques including significant inputs generally used to determine the fair values of our fixed maturities by asset class as well as the classifications of the fair values of these securities in the fair value hierarchy are described in detail below.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5.
FAIR VALUE MEASUREMENTS (CONTINUED)


U.S. government and agency

U.S. government and agency securities consist primarily of bonds issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. As the fair values of U.S. Treasury securities are based on unadjusted market prices in active markets, these securities are classified as Level 1. The fair values of U.S. government agency securities are determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads are observable market inputs, the fair values of U.S. government agency securities are classified as Level 2.

Non-U.S. government

Non-U.S. government securities include bonds issued by non-U.S. governments and their agencies along with supranational organizations (collectively also known as sovereign debt securities). The fair values of these securities are based on prices obtained from international indices or valuation models that include inputs such as interest rate yield curves, cross-currency basis index spreads, and country credit spreads for structures similar to the sovereign bond in terms of issuer, maturity and seniority. As the significant inputs used to price these securities are observable market inputs, the fair values of non-U.S. government securities are classified as Level 2.

Corporate debt

Corporate debt securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As the yields for the risk-free yield curve and the spreads are observable market inputs, the fair values of corporate debt securities are classified as Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, the fair values of these securities are classified as Level 3.

Agency RMBS

Agency RMBS consist of bonds issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. The fair values of these securities are priced using a mortgage pool specific model which uses daily inputs from the active to be announced market and the spread associated with each mortgage pool based on vintage. As the significant inputs used to price these securities are observable market inputs, the fair values of Agency RMBS are classified as Level 2.

CMBS

CMBS include mostly investment-grade bonds originated by non-agencies. The fair values of these securities are determined using a pricing model which uses dealer quotes and other available trade information along with security level characteristics to determine deal specific spreads. As the significant inputs used to price these securities are observable market inputs, the fair values of CMBS securities are classified as Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, the fair values of these securities are classified as Level 3.

Non-Agency RMBS

Non-Agency RMBS include mostly investment-grade bonds originated by non-agencies. The fair values of these securities are determined using an option adjusted spread model or other relevant models, which use inputs including available trade information or broker quotes, prepayment and default projections based on historical statistics of the underlying collateral and current market data. As the significant inputs used to price these securities are observable market inputs, the fair values of Non-Agency RMBS are classified as Level 2.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5.
FAIR VALUE MEASUREMENTS (CONTINUED)

ABS

ABS include mostly investment-grade bonds backed by pools of loans with a variety of underlying collateral, including automobile loan receivables, student loans, credit card receivables, and CLO debt originated by a variety of financial institutions. The fair values of these securities are determined using a model which uses prepayment speeds and spreads sourced primarily from the new issue market. As the significant inputs used to price these securities are observable market inputs, the fair values of ABS are classified as Level 2. Where pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, the fair values of these securities are classified as Level 3.

Municipals

Municipals comprise revenue and general obligation bonds issued by U.S. domiciled state and municipal entities. The fair values of these securities are determined using spreads obtained from the new issue market, trade prices and broker-dealers quotes. As the significant inputs used to price these securities are observable market inputs, the fair values of municipals are classified as Level 2.

Equity Securities

Equity securities include common stocks, exchange-traded funds and bond mutual funds. As the fair values of common stocks and exchange-traded funds are based on unadjusted quoted market prices in active markets, these securities are classified as Level 1.
As bond mutual funds have daily liquidity with redemption based on the Net Asset Values per share ("NAV") of the funds, the fair values of these securities are classified as Level 2.

Other Investments

Other privately held securities include convertible preferred shares, convertible notes and notes payable. These securities are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these securities are determined using an internally developed discounted cash flow model. As the significant inputs used to price these securities are unobservable, the fair value of these securities are classified as Level 3.

Indirect investments in CLO-Equities are classified as Level 3 as the fair values of these securities are estimated using an income approach valuation technique (discounted cash flow model) due to the lack of observable and relevant trades in secondary markets. Direct investments in CLO-Equities are also classified as Level 3 as these securities are estimated using a liquidation valuation.

Short-Term Investments

Short-term investments primarily comprise highly liquid securities with maturities greater than three months but less than one year from the date of purchase. These securities are classified as Level 2 because these securities are typically not actively traded due to their approaching maturity and, as such, their amortized cost approximates fair value.

Derivative Instruments

Derivative Instruments include foreign currency forward contracts, exchange traded interest rate swaps and commodity contracts that are customized to our economic hedging strategies and trade in the over-the-counter derivative market. The fair values of these derivatives are determined using the market approach valuation technique based on significant observable market inputs from third party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. Accordingly, the fair values of these derivatives are classified as Level 2.

Weather derivatives relate to non-exchange traded derivative-based risk management products addressing weather risks. The fair values of these derivatives are determined using observable market inputs and unobservable inputs in combination with industry or internally developed valuation and forecasting techniques. Accordingly, the fair values of these derivatives are classified as Level 3.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5.
FAIR VALUE MEASUREMENTS (CONTINUED)

Other underwriting-related derivatives include insurance and reinsurance contracts that are required to be accounted for as derivatives. These derivative contracts are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these derivatives are determined using internally developed discounted cash flow models. As the significant inputs used to price these derivatives are unobservable, the fair value of these contracts are classified as Level 3.

Insurance-linked Securities

Insurance-linked securities comprise an investment in a catastrophe bond. As pricing is unavailable from pricing services, we obtain non-binding quotes from broker-dealers to estimate the fair values of these securities. Pricing is generally unavailable when there is a low volume of trading activity and current transactions are not orderly. Accordingly, the fair values of these securities are classified as Level 3.

Cash Settled Awards

Cash settled awards comprise restricted stock units that form part of our compensation program. Although the fair values of these awards are determined using observable quoted market prices in active markets, the restricted stock units are not actively traded. Accordingly, the fair values of these liabilities are classified as Level 2.




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

5.
FAIR VALUE MEASUREMENTS (CONTINUED)

The tables below present the financial instruments measured at fair value on a recurring basis for the periods indicated:
 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Fair value based on NAV practical expedient
 
Total Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
1,495,423

 
$
51,895

 
$

 
$

 
$
1,547,318

 
 
Non-U.S. government

 
573,640

 

 

 
573,640

 
 
Corporate debt

 
4,442,951

 
61,016

 

 
4,503,967

 
 
Agency RMBS

 
2,306,822

 

 

 
2,306,822

 
 
CMBS

 
669,736

 

 

 
669,736

 
 
Non-Agency RMBS

 
43,817

 

 

 
43,817

 
 
ABS

 
1,264,855

 
24,015

 

 
1,288,870

 
 
Municipals

 
152,216

 

 

 
152,216

 
 
 
1,495,423

 
9,505,932

 
85,031

 

 
11,086,386

 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
Common stocks
14,826

 

 

 

 
14,826

 
 
Exchange-traded funds
454,194

 

 

 

 
454,194

 
 
Bond mutual funds

 
190,731

 

 

 
190,731

 
 
 
469,020

 
190,731

 

 

 
659,751

 
 
Other investments
 
 
 
 
 
 
 
 
 
 
 
Hedge funds

 

 

 
399,097

 
399,097

 
 
Direct lending funds

 

 

 
232,389

 
232,389

 
 
Private equity funds

 

 

 
71,896

 
71,896

 
 
Real estate funds

 

 

 
46,691

 
46,691

 
 
Other privately held investments

 

 
43,398

 

 
43,398

 
 
CLO-Equities

 

 
36,782

 

 
36,782

 
 
 

 

 
80,180

 
750,073

 
830,253

 
 
Short-term investments

 
15,282

 

 

 
15,282

 
 
Other assets
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments (see Note 6)

 
5,859

 

 

 
5,859

 
 
Insurance-linked securities

 

 
24,976

 

 
24,976

 
 
Total Assets
$
1,964,443

 
$
9,717,804

 
$
190,187

 
$
750,073

 
$
12,622,507

 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments (see Note 6)
$

 
$
1,873

 
$
11,844

 
$

 
$
13,717

 
 
Cash settled awards (see Note 9)

 
18,369

 

 

 
18,369

 
 
 Total Liabilities
$

 
$
20,242

 
$
11,844

 
$

 
$
32,086

 
 
 
 
 
 
 
 
 
 
 
 
 




29

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

5.
FAIR VALUE MEASUREMENTS (CONTINUED)

 
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Fair value based on NAV practical expedient
 
Total Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
1,583,106

 
$
72,963

 
$

 
$

 
$
1,656,069

 
 
Non-U.S. government

 
565,834

 

 

 
565,834

 
 
Corporate debt

 
4,524,868

 
75,875

 

 
4,600,743

 
 
Agency RMBS

 
2,465,135

 

 

 
2,465,135

 
 
CMBS

 
663,176

 
3,061

 

 
666,237

 
 
Non-Agency RMBS

 
56,921

 

 

 
56,921

 
 
ABS

 
1,204,750

 
17,464

 

 
1,222,214

 
 
Municipals

 
163,961

 

 

 
163,961

 
 
 
1,583,106

 
9,717,608

 
96,400

 

 
11,397,114

 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
Common stocks
78

 

 

 

 
78

 
 
Exchange-traded funds
514,707

 

 

 

 
514,707

 
 
Bond mutual funds

 
123,959

 

 

 
123,959

 
 
 
514,785

 
123,959

 

 

 
638,744

 
 
Other investments
 
 
 
 
 
 
 
 
 
 
 
Hedge funds

 

 

 
498,150

 
498,150

 
 
Direct lending funds

 

 

 
134,650

 
134,650

 
 
Private equity funds

 

 

 
81,223

 
81,223

 
 
Real estate funds

 

 

 
13,354

 
13,354

 
 
Other privately held investments

 

 
42,142

 

 
42,142

 
 
CLO-Equities

 

 
60,700

 

 
60,700

 
 
 

 

 
102,842

 
727,377

 
830,219

 
 
Short-term investments

 
127,461

 

 

 
127,461

 
 
Other assets
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments (see Note 6)

 
14,365

 
2,532

 

 
16,897

 
 
Insurance-linked securities

 

 
25,023

 

 
25,023

 
 
Total Assets
$
2,097,891

 
$
9,983,393

 
$
226,797

 
$
727,377

 
$
13,035,458

 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments (see Note 6)
$

 
$
9,076

 
$
6,500

 
$

 
$
15,576

 
 
Cash settled awards (see Note 9)

 
48,432

 

 

 
48,432

 
 
Total Liabilities
$

 
$
57,508

 
$
6,500

 
$

 
$
64,008

 
 
 
 
 
 
 
 
 
 
 
 
 

During 2017 and 2016, there were no transfers between Levels 1 and 2.










30

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

5.
FAIR VALUE MEASUREMENTS (CONTINUED)

Except certain fixed maturities and insurance-linked securities priced using broker-dealer quotes (underlying inputs are not available), the following table quantifies the significant unobservable inputs used in estimating fair values at September 30, 2017 for investments classified as Level 3 in the fair value hierarchy.
 
 
Fair Value
Valuation Technique
Unobservable Input
Range
Weighted
Average
 
 
 
 
 
 
 
 
 
 
Other investments - CLO-Equities
$
32,141

Discounted cash flow
Default rates
3.8%
3.8%
 
 
 
 
 
Loss severity rate
35.0%
35.0%
 
 
 
 
 
Collateral spreads
3.0%
3.0%
 
 
 
 
 
Estimated maturity dates
7 years
7 years
 
 
 
 
 
 
 
 
 
 
 
4,641

Liquidation value
Fair value of collateral
100%
100%
 
 
 
 
 
Discount margin
0% - 17.8%
2.7%
 
 
 
 
 
 
 
 
 
 
Other investments - Other privately held investments
43,398

Discounted cash flow
Discount rate
6.0% - 8.0%
7.5%
 
 
 
 
 
 
 
 
 
 
Derivatives - Other underwriting-related derivatives
$
(11,844
)
Discounted cash flow
Discount rate
2.3%
2.3%
 
 
 
 
 
 
 
 
 

The CLO-Equities market continues to be relatively inactive with only a small number of transactions being observed, particularly as it relates to transactions involving our CLO-Equities. Accordingly, fair values of investments in CLO-Equities are determined using models. Given that all of our direct investments in CLO-Equities are past their reinvestment period, there is uncertainty over the remaining time to maturity. As such our direct investments in CLO-Equities are estimated using a liquidation valuation. Indirect investments in CLO-Equities are valued using a discounted cash flow model prepared by an external manager.

The liquidation valuation is based on the fair values of the net underlying collateral which is determined by applying market discount margins by credit quality bucket. An increase (decrease) in the market discount margin would result in a decrease (increase) in value of our CLO-Equities.

Regarding the discounted cash flow model, the default and loss severity rates are the most judgmental unobservable market inputs to which the valuation of CLO-Equities is most sensitive. A significant increase (decrease) in either of these significant inputs in isolation would result in lower (higher) fair value estimates for investments in CLO-Equities and, in general, a change in default rate assumptions will be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads and estimated maturity dates are less judgmental inputs as they are based on the historical average of actual spreads and the weighted average life of the current underlying portfolios, respectively. A significant increase (decrease) in either of these significant inputs in isolation would result in higher (lower) fair value estimates for investments in CLO-Equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates.

On a quarterly basis, our valuation process for CLO-Equities includes a review of the underlying collateral along with related discount margins by credit quality bucket used in the liquidation valuation and a review of the underlying cash flows and key assumptions used in the discounted cash flow model. The above significant unobservable inputs are reviewed and updated based on information obtained from secondary markets, including information received from the managers of our CLO-Equities portfolio. In order to assess the reasonableness of the inputs we use in our models, we maintain an understanding of current market conditions, historical results, as well as emerging trends that may impact future cash flows. In addition,we update the assumptions we use in our models through regular communication with industry participants and ongoing monitoring of the deals in which we participate (e.g. default and loss severity rate trends).

Other privately held securities are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these securities are determined using internally developed discounted cash flow models. These models include inputs that are specific to each investment. The inputs used in the fair value measurements include dividend or interest rates and appropriate discount rates. The selection of an appropriate discount rate is judgmental and is the most significant unobservable input used in the valuation



31

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

5.
FAIR VALUE MEASUREMENTS (CONTINUED)

of these securities. A significant increase (decrease) in this input in isolation could result in a significantly lower (higher) fair value measurement for other privately held securities. Where relevant, we also consider the contractual agreements which stipulate methodologies for calculating the dividend rate to be paid upon liquidation, conversion or redemption. In order to assess the reasonableness of the inputs we use in the discounted cash flow models, we maintain an understanding of current market conditions, historical results, as well as investee specific information that may impact future cash flows.

Other underwriting-related derivatives are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these derivatives are determined using internally developed discounted cash flow models which uses appropriate discount rates. The selection of an appropriate discount rate is judgmental and is the most significant unobservable input used in the valuation of these derivatives. A significant increase (decrease) in this input in isolation could result in a significantly lower (higher) fair value measurement for the derivative contracts. In order to assess the reasonableness of the inputs we use in the discounted cash flow model, we maintain an understanding of current market conditions, historical results, as well as contract specific information that may impact future cash flows.




32

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

5.
FAIR VALUE MEASUREMENTS (CONTINUED)

The following tables present changes in Level 3 for financial instruments measured at fair value on a recurring basis for the periods indicated:
 
 
Opening
Balance
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Included in
earnings (1)
 
Included
in OCI (2)
 
Purchases
 
Sales
 
Settlements/
Distributions
 
Closing
Balance
 
Change in
unrealized
investment
gain/(loss) (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
$
68,320

 
$

 
$
(1,208
)
 
$
(835
)
 
$
(9
)
 
$

 
$
(2,274
)
 
$
(2,978
)
 
$
61,016

 
$

 
 
CMBS

 

 

 

 

 

 

 

 

 

 
 
ABS
5,999

 

 
(6,001
)
 

 
10

 
24,007

 

 

 
24,015

 

 
 
 
74,319

 

 
(7,209
)
 
(835
)
 
1

 
24,007

 
(2,274
)
 
(2,978
)
 
85,031

 

 
 
Other investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other privately held investments
42,938

 

 

 
460

 

 

 

 

 
43,398

 
460

 
 
CLO - Equities
47,076

 

 

 
1,402

 

 

 

 
(11,696
)
 
36,782

 
1,402

 
 
 
90,014

 

 

 
1,862

 

 

 

 
(11,696
)
 
80,180

 
1,862

 
 
Other assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments

 

 

 

 

 

 

 

 

 

 
 
Insurance-linked securities
25,047

 

 

 
(71
)
 

 

 

 

 
24,976

 
(71
)
 
 
 
25,047

 

 

 
(71
)
 

 

 

 

 
24,976

 
(71
)
 
 
Total assets
$
189,380

 
$

 
$
(7,209
)
 
$
956

 
$
1

 
$
24,007

 
$
(2,274
)
 
$
(14,674
)
 
$
190,187

 
$
1,791

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Other liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments
$
12,209

 
$

 
$

 
$
(291
)
 
$

 
$

 
$

 
$
(74
)
 
$
11,844

 
$
(291
)
 
 
Total liabilities
$
12,209

 
$

 
$

 
$
(291
)
 
$

 
$

 
$

 
$
(74
)
 
$
11,844

 
$
(291
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Corporate debt
$
75,875

 
$
1,536

 
$
(3,112
)
 
$
(762
)
 
$
(392
)
 
$
19,181

 
$
(21,475
)
 
$
(9,835
)
 
$
61,016

 
$

 
 
CMBS
3,061

 

 
(9,418
)
 

 
17

 
9,400

 

 
(3,060
)
 

 

 
 
ABS
17,464

 

 
(24,949
)
 

 
1,493

 
30,007

 

 

 
24,015

 

 
 
 
96,400

 
1,536

 
(37,479
)
 
(762
)
 
1,118

 
58,588

 
(21,475
)
 
(12,895
)
 
85,031

 

 
 
Other investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other privately held investments
42,142

 

 

 
1,256

 

 

 

 

 
43,398

 
1,256

 
 
CLO - Equities
60,700

 

 

 
3,930

 

 

 

 
(27,848
)
 
36,782

 
3,930

 
 
 
102,842

 

 

 
5,186

 

 

 

 
(27,848
)
 
80,180

 
5,186

 
 
Other assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments
2,532

 

 

 
653

 

 

 

 
(3,185
)
 

 

 
 
Insurance-linked securities
25,023

 

 

 
(47
)
 

 

 

 

 
24,976

 
(47
)
 
 
 
27,555

 

 

 
606

 

 

 

 
(3,185
)
 
24,976

 
(47
)
 
 
Total assets
$
226,797

 
$
1,536

 
$
(37,479
)
 
$
5,030

 
$
1,118

 
$
58,588

 
$
(21,475
)
 
$
(43,928
)
 
$
190,187

 
$
5,139

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments
$
6,500

 
$

 
$

 
$
9,991

 
$

 
$
12,135

 
$

 
$
(16,782
)
 
$
11,844

 
$
(291
)
 
 
Total liabilities
$
6,500

 
$

 
$

 
$
9,991

 
$

 
$
12,135

 
$

 
$
(16,782
)
 
$
11,844

 
$
(291
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



33

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

5.
FAIR VALUE MEASUREMENTS (CONTINUED)

 
 
Opening
Balance
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Included in
earnings (1)
 
Included
in OCI (2)
 
Purchases
 
Sales
 
Settlements/
Distributions
 
Closing
Balance
 
Change in
unrealized
investment
gain/(loss) (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
$
62,022

 
$

 
$

 
$
(9
)
 
$
100

 
$
7,563

 
$

 
$
(584
)
 
$
69,092

 
$

 
 
CMBS
10,210

 

 

 

 
(48
)
 

 

 
(1,242
)
 
8,920

 

 
 
ABS

 

 

 

 

 

 

 

 

 

 
 
 
72,232

 

 

 
(9
)
 
52

 
7,563

 

 
(1,826
)
 
78,012

 

 
 
Other investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other privately held investments
41,755

 

 

 
(355
)
 

 
1,500

 

 

 
42,900

 
(355
)
 
 
CLO - Equities
65,883

 

 

 
8,419

 

 

 

 
(10,519
)
 
63,783

 
8,419

 
 
 
107,638

 

 

 
8,064

 

 
1,500

 

 
(10,519
)
 
106,683

 
8,064

 
 
Other assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments
5

 

 

 
665

 

 
1,818

 

 

 
2,488

 
665

 
 
Insurance-linked securities
25,025

 

 

 
258

 

 

 

 

 
25,283

 
258

 
 
 
25,030

 

 

 
923

 

 
1,818

 

 

 
27,771

 
923

 
 
Total assets
$
204,900

 
$

 
$

 
$
8,978

 
$
52

 
$
10,881

 
$

 
$
(12,345
)
 
$
212,466

 
$
8,987

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments
$
1,978

 
$

 
$

 
$
(169
)
 
$

 
$
6,384

 
$

 
$
(9
)
 
$
8,184

 
$
335

 
 
Total liabilities
$
1,978

 
$

 
$

 
$
(169
)
 
$

 
$
6,384

 
$

 
$
(9
)
 
$
8,184

 
$
335

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Corporate debt
$
38,518

 
$
20,412

 
$
(1,955
)
 
$
(988
)
 
$
1,188

 
$
17,107

 
$
(4,015
)
 
$
(1,175
)
 
$
69,092

 
$

 
 
CMBS
10,922

 

 

 

 
(134
)
 

 

 
(1,868
)
 
8,920

 

 
 
ABS

 

 

 

 

 

 

 

 

 

 
 
 
49,440

 
20,412

 
(1,955
)
 
(988
)
 
1,054

 
17,107

 
(4,015
)
 
(3,043
)
 
78,012

 

 
 
Other investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other privately held investments

 

 

 
(1,505
)
 

 
44,405

 

 

 
42,900

 
(1,505
)
 
 
CLO - Equities
27,257

 
36,378

 

 
17,431

 

 

 

 
(17,283
)
 
63,783

 
17,431

 
 
 
27,257

 
36,378

 

 
15,926

 

 
44,405

 

 
(17,283
)
 
106,683

 
15,926

 
 
Other assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments
4,395

 

 

 
3,255

 

 
3,623

 

 
(8,785
)
 
2,488

 
669

 
 
Insurance-linked securities
24,925

 

 

 
358

 

 

 

 

 
25,283

 
358

 
 
 
29,320

 

 

 
3,613

 

 
3,623

 

 
(8,785
)
 
27,771

 
1,027

 
 
Total assets
$
106,017

 
$
56,790

 
$
(1,955
)
 
$
18,551

 
$
1,054

 
$
65,135

 
$
(4,015
)
 
$
(29,111
)
 
$
212,466

 
$
16,953

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments
$
10,937

 
$

 
$

 
$
2,445

 
$

 
$
7,189

 
$

 
$
(12,387
)
 
$
8,184

 
$
457

 
 
Total liabilities
$
10,937

 
$

 
$

 
$
2,445

 
$

 
$
7,189

 
$

 
$
(12,387
)
 
$
8,184

 
$
457

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Gains and losses included in earnings on fixed maturities are included in net realized investment gains (losses). Gains and (losses) included in earnings on other investments are included in net investment income. Gains (losses) on weather derivatives included in earnings are included in other insurance-related income.
(2)
Gains and losses included in other comprehensive income (“OCI”) on fixed maturities are included in unrealized gains (losses) arising during the period.
(3)
Change in unrealized investment gain (loss) relating to assets held at the reporting date.

The transfers into and out of fair value hierarchy levels reflect the fair value of the securities at the end of the reporting period.

Transfers into Level 3 from Level 2

There were no transfers to Level 3 from Level 2 made during the three months ended September 30, 2017. The transfers to Level 3 from Level 2 made during the nine months ended September 30, 2017 were primarily due to the lack of observable market inputs and multiple quotes from pricing vendors and broker-dealers for certain fixed maturities.



34

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

5.
FAIR VALUE MEASUREMENTS (CONTINUED)


There were no transfers to Level 3 from Level 2 made during the three months ended September 30, 2016. The transfers into Level 3 made during the nine months ended September 30, 2016 were primarily due to the lack of observable market inputs and multiple quotes from pricing vendors and broker-dealers for certain fixed maturities and as a result of a change in the valuation methodology used to fair value the CLO-equity fund. An income approach valuation technique (discounted cash flow model) was used to estimate the fair value of the CLO-equity fund at September 30, 2016. As the NAV practical expedient was not used to determine the fair value of the CLO-equity fund, the fair value of the fund was categorized within the fair value hierarchy.

Transfers out of Level 3 into Level 2

The transfers into Level 2 from Level 3 made during the three and nine months ended September 30, 2017 were primarily due to the availability of observable market inputs and quotes from pricing vendors on certain fixed maturities.

There were no transfers to Level 2 from Level 3 made during the three months ended September 30, 2016. The transfers to Level 2 from Level 3 made during the nine months ended September 30, 2016 were primarily due to the availability of observable market inputs and quotes from pricing vendors on certain fixed maturities.

Measuring the Fair Value of Other Investments Using Net Asset Valuations

The fair values of hedge funds, direct lending funds, private equity funds and real estate funds are estimated using NAVs as advised by external fund managers or third party administrators. For these funds, NAVs are based on the manager's or administrator's valuation of the underlying holdings in accordance with the fund's governing documents and in accordance with U.S. GAAP.

If there is a reporting lag between the current period end and reporting date of the latest available fund valuation for any hedge fund, we estimate fair values by starting with the most recently available fund valuation and adjusting for return estimates as well as any subscriptions, redemptions and distributions that took place during the current period. Return estimates are obtained from the relevant fund managers. Accordingly, we do not typically have a reporting lag in fair value measurements of these funds. Historically, our valuation estimates incorporating these return estimates have not significantly diverged from the subsequently received NAVs.

For direct lending funds, private equity funds, real estate funds and two of our hedge funds, valuation statements are typically released on a three month reporting lag therefore we estimate fair value of these funds by starting with the prior quarter-end fund valuations and adjusting for capital calls, redemptions, drawdowns and distributions. Return estimates are not available from the relevant fund managers for these funds. Accordingly, we typically have a reporting lag in our fair value measurements of these funds. In 2017, funds reported on a lag represented 51% (2016: 35%) of our total other investments balance.

We often do not have access to financial information relating to the underlying securities held within the funds, therefore management is unable to corroborate the fair values placed on the securities underlying the asset valuations provided by fund managers or fund administrators. In order to assess the reasonableness of the NAVs, we perform a number of monitoring procedures on a quarterly basis, to assess the quality of the information provided by fund managers and funds administrators. These procedures include, but are not limited to, regular review and discussion of each fund's performance with its manager, regular evaluation of fund performance against applicable benchmarks and the backtesting of our fair value estimates against subsequently received NAVs. Backtesting involves comparing our previously reported fair values for each fund against NAVs per audited financial statements (for year-end values) and final NAVs from fund managers and fund administrators (for interim values).

The fair values of hedge funds, direct lending funds, private equity funds and real estate funds are measured using the NAV practical expedient, therefore the fair values of these funds have not been categorized within the fair value hierarchy.




35

Table of Contents

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

5.
FAIR VALUE MEASUREMENTS (CONTINUED)

Financial Instruments Disclosed, But Not Carried, at Fair Value

The fair value of financial instruments accounting guidance also applies to financial instruments disclosed, but not carried, at fair value, except for certain financial instruments, including insurance contracts.
 
The carrying values of cash and cash equivalents (including restricted amounts), accrued investment income, receivable for investments sold, certain other assets, payable for investments purchased and certain other liabilities approximated their fair values at September 30, 2017, due to their respective short maturities. As these financial instruments are not actively traded, their fair values are classified as Level 2.

The carrying value of mortgage loans held-for-investment approximated their fair value at September 30, 2017. The fair values of mortgage loans are primarily determined by estimating expected future cash flows and discounting them using current interest rates for similar mortgage loans with similar credit risk, or are determined from pricing for similar loans. As mortgage loans are not actively traded their fair values are classified as Level 3.

At September 30, 2017, senior notes are recorded at amortized cost with a carrying value of $994 million (2016: $993 million) and a fair value of $1.1 billion (2016: $1.0 billion). The fair values of these notes are based on prices obtained from a third party pricing service and are determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As these spreads and the yields for the risk-free yield curve are observable market inputs, the fair values of senior notes are classified as Level 2.

6.
DERIVATIVE INSTRUMENTS

The following table summarizes the balance sheet classification of derivatives recorded at fair value. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and is presented in the table to quantify the volume of our derivative activities. Notional amounts are not reflective of credit risk.

None of our derivative instruments are designated as hedges under current accounting guidance.
 
  
September 30, 2017
 
December 31, 2016
 
 
  
Derivative
Notional
Amount
 
Derivative
Asset
Fair
Value(1)
 
Derivative
Liability
Fair
Value(1)
 
Derivative
Notional
Amount
 
Derivative
Asset
Fair
Value(1)
 
Derivative
Liability
Fair
Value(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Relating to investment portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
$
147,015

 
$

 
$
439

 
$
195,979

 
$
12,331

 
$
87

 
 
Interest rate swaps
180,000

 
393

 

 

 

 

 
 
Relating to underwriting portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
479,818

 
5,466

 
1,434

 
492,899

 
2,034

 
8,989

 
 
Weather-related contracts

 

 

 
67,957

 
2,532

 
6,500

 
 
Commodity contracts

 

 

 

 

 

 
 
Other underwriting-related contracts
85,000

 

 
11,844

 

 

 

 
 
Total derivatives
 
 
$
5,859

 
$
13,717

 
 
 
$
16,897

 
$
15,576

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Asset and liability derivatives are classified within other assets and other liabilities in the Consolidated Balance Sheets.




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

6.
DERIVATIVE INSTRUMENTS (CONTINUED)

Offsetting Assets and Liabilities

Our derivative instruments are generally traded under International Swaps and Derivatives Association master netting agreements, which establish terms that apply to all transactions. In the event of a bankruptcy or other stipulated event, master netting agreements provide that individual positions be replaced with a new amount, usually referred to as the termination amount, determined by taking into account market prices and converting into a single currency. Effectively, this contractual close-out netting reduces credit exposure from gross to net exposure. The table below presents a reconciliation of our gross derivative assets and liabilities to the net amounts presented in the Consolidated Balance Sheets, with the difference being attributable to the impact of master netting agreements.
 
 
September 30, 2017
 
December 31, 2016
 
 
 
Gross Amounts
Gross Amounts Offset
Net
Amounts(1)
 
Gross Amounts
Gross Amounts Offset
Net
Amounts(1)
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
$
9,682

$
(3,823
)
$
5,859

 
$
22,270

$
(5,373
)
$
16,897

 
 
Derivative liabilities
$
17,540

$
(3,823
)
$
13,717

 
$
20,949

$
(5,373
)
$
15,576

 
 
 
 
 
 
 
 
 
 
 
(1)
Net asset and liability derivatives are classified within other assets and other liabilities in the Consolidated Balance Sheets.

Refer to Note 4 'Investments' for information on reverse repurchase agreements.

a) Relating to Investment Portfolio

Foreign Currency Risk

Within our investment portfolio we are exposed to foreign currency risk. Accordingly, the fair values of our investment portfolio are partially influenced by the change in foreign exchange rates. We may enter into foreign currency exchange forward contracts to manage the effect of this foreign currency risk. These foreign currency hedging activities are not designated as specific hedges for financial reporting purposes.

Interest Rate Risk

Our investment portfolio contains a large percentage of fixed maturities which exposes us to significant interest rate risk. As part of our overall management of this risk, we may use interest rate swaps.

b) Relating to Underwriting Portfolio

Foreign Currency Risk

Our (re)insurance subsidiaries and branches operate in various foreign countries. Consequently, some of our business is written in currencies other than the U.S. dollar and, therefore, our underwriting portfolio is exposed to significant foreign currency risk. We manage foreign currency risk by seeking to match our foreign-denominated net liabilities under (re)insurance contracts with cash and investments that are denominated in such currencies. We may also use derivative instruments, specifically forward contracts and currency options, to economically hedge foreign currency exposures.




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

6.
DERIVATIVE INSTRUMENTS (CONTINUED)

Weather Risk

We write derivative-based risk management products designed to address weather risks with the objective of generating profits on a portfolio basis. The majority of this business consists of receiving a payment at contract inception in exchange for bearing the risk of variations in a quantifiable weather-related phenomenon, such as temperature. Where a client wishes to minimize the upfront payment, these transactions may be structured as swaps or collars. In general, our portfolio of such derivative contracts is of short duration, with contracts being predominantly seasonal in nature. In order to economically hedge a portion of this portfolio, we may also purchase weather derivatives.

Commodity Risk

Within our (re)insurance portfolio we are exposed to commodity price risk. We may hedge a portion of this price risk by entering into commodity derivative contracts.

Other Underwriting-related Risks

We enter into insurance and reinsurance contracts that are required to be accounted for as derivatives. These insurance or reinsurance contract provides indemnification to an insured or cedant as a result of a change in a variable as opposed to a change in an identifiable insured event. We consider these contracts to be part of our underwriting operations.

The total unrealized and realized gains (losses) recognized in earnings for derivatives not designated as hedges were as follows:  
 
  
Location of Gain (Loss) Recognized in Income on Derivative
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Relating to investment portfolio:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
Net realized investment gains (losses)
$
(1,815
)
 
$
155

 
$
(6,534
)
 
$
39

 
 
Interest rate swaps
Net realized investment gains (losses)
520

 

 
(2,661
)
 

 
 
Relating to underwriting portfolio:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
Foreign exchange losses (gains)
(12,481
)
 
(182
)
 
(26,109
)
 
(2,958
)
 
 
Weather-related contracts
Other insurance related income (losses)

 
833

 
(9,629
)
 
809

 
 
Commodity contracts
Other insurance related income (losses)

 
1,799

 

 
1,499

 
 
Other underwriting-related contracts
Other insurance related income (losses)
514

 

 
852

 

 
 
Total
 
$
(13,262
)
 
$
2,605

 
$
(44,081
)
 
$
(611
)
 
 
 
 
 
 
 
 
 
 
 
 



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

7.    RESERVE FOR LOSSES AND LOSS EXPENSES

Reserve Roll-Forward

The following table presents a reconciliation of our beginning and ending gross reserve for losses and loss expenses and net reserve for unpaid losses and loss expenses for the periods indicated:
 
 
 
 
 
 
 
Nine months ended September 30,
2017
 
2016
 
 
 
 
 
 
 
 
Gross reserve for losses and loss expenses, beginning of period
$
9,697,827

 
$
9,646,285

 
 
Less reinsurance recoverable on unpaid losses, beginning of period
(2,276,109
)
 
(2,031,309
)
 
 
Net reserve for unpaid losses and loss expenses, beginning of period
7,421,718

 
7,614,976

 
 
 
 
 
 
 
 
Net incurred losses and loss expenses related to:
 
 
 
 
 
Current year
2,591,135

 
1,887,715

 
 
Prior years
(143,495
)
 
(224,131
)
 
 
 
2,447,640

 
1,663,584

 
 
Net paid losses and loss expenses related to:
 
 
 
 
 
Current year
(328,751
)
 
(233,124
)
 
 
Prior years
(1,384,510
)
 
(1,334,772
)
 
 
 
(1,713,261
)
 
(1,567,896
)
 
 
 
 
 
 
 
 
Foreign exchange and other
333,456

 
(112,649
)
 
 
 
 
 
 
 
 
Net reserve for unpaid losses and loss expenses, end of period
8,489,553

 
7,598,015

 
 
Reinsurance recoverable on unpaid losses, end of period
2,298,022

 
2,276,792

 
 
Gross reserve for losses and loss expenses, end of period
$
10,787,575

 
$
9,874,807

 
 
 
 
 
 
 

We write business with loss experience generally characterized as low frequency and high severity in nature, which can result in volatility in our financial results. During the nine months ended September 30, 2017 and 2016, we recognized aggregate net losses and loss expenses, net of reinstatement premiums of $702 million and $145 million, respectively, in relation to catastrophe and weather related events.

The transfer of the insurance business of AXIS Specialty Australia to a reinsurer was approved by the Irish High Court on February 1, 2017 and the Federal Court of Australia on February 10, 2017. Consequently, the insurance policies, assets and liabilities of AXIS Specialty Australia were transferred to the reinsurer with effect from February 13, 2017. This resulted in the reduction of reserves for losses and loss expenses by $223 million and a reduction in reinsurance recoverables on unpaid and paid losses by $223 million.

On April 1, 2017, the Company acquired a 100% ownership interest in Aviabel. Foreign exchange and other includes reserves for losses and loss expenses of $79 million and reinsurance recoverables on unpaid and paid losses of $5 million related to this acquisition.

 






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AXIS CAPITAL HOLDINGS LIMITED
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7.
RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED)

Prior Year Development

Prior year reserve development arises from changes to loss and loss expense estimates related to losses incurred in previous calendar years. Such development is summarized by segment in the following table:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
$
2,603

 
$
20,688

 
$
30,740

 
$
43,181

 
 
Reinsurance
45,165

 
55,331

 
112,755

 
180,950

 
 
Total
$
47,768

 
$
76,019

 
$
143,495

 
$
224,131

 
 
 
 
 
 
 
 
 
 
 

Net favorable prior year reserve development for the three months ended September 30, 2017 included significant contributions from our medium and long tail reserve classes. Net favorable prior year reserve development for the nine months ended September 30, 2017 included significant contributions from short, medium, and long tail reserve classes. Net favorable prior year reserve development for the three and nine months ended September 30, 2016 included significant contributions from our short and long tail reserve classes.

Our short tail business includes the underlying exposures in our property and other, marine and aviation reserve classes within our insurance segment, and the property and other reserve class within our reinsurance segment. Development from these classes contributed $5 million and $41 million of net favorable prior year reserve development for the three and nine months ended September 30, 2017, respectively. These short-tail lines contributed $41 million and $116 million of net favorable prior year reserve development for the three and nine months ended September 30, 2016, respectively. The net favorable development for these classes primarily reflected the recognition of better than expected loss emergence.

Our medium-tail business consists primarily of professional insurance and reinsurance reserve classes, credit and political risk insurance reserve class, and credit and surety reinsurance reserve class. For the three months ended September 30, 2017, the professional reinsurance reserve class contributed net favorable prior year reserve development of $9 million. For the nine months ended September 30, 2017, the professional insurance and reinsurance reserve class contributed net favorable prior year reserve development of $54 million. For the three and nine months ended September 30, 2017, the credit and surety reinsurance reserve class recorded net favorable prior year development of $17 million and $18 million, respectively. This net favorable prior year reserve development reflected the recognition of generally better than expected loss emergence. For the three and nine months ended September 30, 2016, the professional reserve classes contributed net favorable prior year reserve development of $12 million and $28 million, respectively. The net favorable prior year reserve development on these reserve classes reflected generally favorable experience as we continued to transition to more experience based methods.

Our long-tail business consists primarily of liability and motor reserve classes. For the nine months ended September 30, 2017, the liability reinsurance reserve class contributed net favorable prior year reserve development of $40 million. For the three and nine months ended and September 30, 2016, the liability reinsurance reserve class contributed net favorable prior year development of $10 million and $32 million, respectively. The net favorable prior year reserve development for our liability reinsurance reserve class in both years primarily reflected the progressively increased weight given by management to experience based indications on older accident years, which has generally been favorable. For the nine months ended September 30, 2017, the liability insurance reserve class recorded net adverse prior year reserve development of $6 million, primarily attributable to reserve strengthening within our run-off Bermuda excess casualty book of business.

For the three and nine months ended September 30, 2017, the motor reinsurance reserve class recorded net favorable prior year development of $16 million and net adverse prior year reserve development of $4 million, respectively. For the three months ended September 30, 2017, the net favorable prior year reserve development related to favorable loss emergence trends on several classes of business spanning multiple accident years. For the nine months ended, the net adverse prior year development was driven by the U.K. Ministry of Justice’s recent announcement of a decrease in the discount rate used to calculate lump sum awards in U.K. bodily injury cases, known as the Ogden rate. Effective March 20, 2017, the Ogden rate changed from plus 2.5% to minus 0.75%. For the three and nine months ended September 30, 2016, the motor reinsurance reserve class contributed $7 million and $40 million, respectively, of net favorable prior year reserve development related to favorable loss emergence trends on several classes of business spanning multiple accident years.



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

7.
RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED)


Our September 30, 2017 net reserves for losses and loss expenses includes estimated amounts for numerous catastrophe events. We caution that the magnitude and/or complexity of losses arising from certain of these events, in particular Hurricanes Harvey, Irma and Maria and the two earthquakes in Mexico, as well as Hurricane Matthew, the Fort McMurray wildfires, Storm Sandy, the 2011 Japanese earthquake and tsunami, the 2010-11 New Zealand earthquakes and the Tianjin port explosion, inherently increases the level of uncertainty and, therefore, the level of management judgment involved in arriving at our estimated net reserves for losses and loss expenses. As a result, our actual losses for these events may ultimately differ materially from our current estimates.

8.
EARNINGS PER COMMON SHARE

The following table presents a comparison of basic and diluted earnings per common share:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings (loss) per common share
 
 
 
 
 
 
 
 
 
Net income (loss)
$
(457,084
)
 
$
186,613

 
$
(341,541
)
 
$
364,460

 
 
Less: preferred share dividends
10,656

 
9,969

 
36,154

 
29,906

 
 
Net income (loss) available to common shareholders
(467,740
)
 
176,644

 
(377,695
)
 
334,554

 
 
Weighted average common shares outstanding - basic (1)
83,305

 
89,621

 
84,479

 
91,852

 
 
Basic earnings (loss) per common share
$
(5.61
)
 
$
1.97

 
$
(4.47
)
 
$
3.64

 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share
 
 
 
 
 
 
 
 
 
Net income (loss) available to common shareholders
$
(467,740
)
 
$
176,644

 
$
(377,695
)
 
$
334,554

 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic (1)
83,305

 
89,621

 
84,479

 
91,852

 
 
Share-based compensation plans (2)

 
730

 

 
727

 
 
Weighted average common shares outstanding - diluted (1)
83,305

 
90,351

 
84,479

 
92,579

 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share
$
(5.61
)
 
$
1.96

 
$
(4.47
)
 
$
3.61

 
 
 
 
 
 
 
 
 
 
 
 
Anti-dilutive shares excluded from the dilutive computation
425

 

 
712

 
226

 
 
 
 
 
 
 
 
 
 
 
(1)
On August 17, 2015, the Company entered into an Accelerated Share Repurchase (“ASR”) agreement (see 'Note 10 - Shareholders' Equity' for additional detail). The weighted-average number of shares outstanding used in the computation of basic and diluted earnings per share reflects the Company’s receipt of 4,149,378 common shares delivered to the Company on August 20, 2015, and 1,358,380 common shares delivered to the company on January 15, 2016 under the Company's ASR agreement.
(2) Due to the net loss incurred in the three and nine months ended September 30, 2017, all the share equivalents were anti-dilutive.




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

9.
SHARE-BASED COMPENSATION

For the three months ended September 30, 2017, the Company incurred share-based compensation costs of $13 million (2016: $14 million) related to restricted stock awards, share-settled restricted stock units, and cash-settled restricted stock units and recorded associated tax benefits of $3 million (2016: $3 million).

For the nine months ended September 30, 2017, the Company incurred share-based compensation costs of $57 million (2016: $50 million). In addition, the Company recorded associated tax benefits of $20 million (2016: $11 million), including $7 million related to excess tax benefits associated with the vesting of restricted stock units.

The fair value of share-settled restricted stock units and cash-settled restricted stock units that vested during the nine months ended September 30, 2017 was $125 million (2016: $66 million), including $44 million attributable to a grant of 3 year cliff vesting service-based awards made in 2014. At September 30, 2017 there were $99 million of unrecognized compensation costs (2016 $104 million), which are expected to be recognized over the weighted average period of 2.5 years.

Share-settled Awards

The following table provides a reconciliation of the beginning and ending balance of nonvested share-settled restricted stock units for the nine months ended September 30, 2017:
 
 
Performance-based Stock Awards
 
Service-based Stock Awards
 
 
 
Number of
Restricted
Stock Units
 
Weighted 
Average
Grant Date
Fair Value(1)
 
Number of
Restricted
Stock Units
 
Weighted  Average
Grant Date
Fair Value(1)
 
 
 
 
 
 
 
 
 
 
 
 
Nonvested restricted stock - beginning of period
283

 
$
51.27

 
1,593

 
$
48.88

 
 
     Granted
87

 
64.58

 
525

 
64.22

 
 
     Vested(2)
(119
)
 
49.14

 
(881
)
 
47.37

 
 
     Forfeited

 

 
(69
)
 
54.66

 
 
Nonvested restricted stock - end of period
251

 
$
56.88

 
1,168

 
$
57.08

 
 
 
 
 
 
 
 
 
 
 
(1) Fair value is based on the closing price of our common shares on the grant approval date.
(2) Share-settled restricted stock units vested during the nine months ended September 30, 2017 included 313,391 restricted stock units attributable to a grant of 3 year cliff vesting service-based awards made in 2014.




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

9.    SHARE-BASED COMPENSATION (CONTINUED)

Cash-settled awards

The following table provides a reconciliation of the beginning and ending balance of nonvested cash-settled restricted stock units for the nine months ended September 30, 2017:
 
 
Performance-based Cash Settled Awards
 
Service-based Cash Settled Awards
 
 
 
Number of
Restricted
Stock Units
 
Number of
Restricted
Stock Units
 
 
 
 
 
 
 
 
Nonvested restricted stock units - beginning of period
68

 
1,392

 
 
     Granted
15

 
427

 
 
     Vested(1)
(38
)
 
(755
)
 
 
     Forfeited

 
(60
)
 
 
Nonvested restricted stock units - end of period
45

 
1,004

 
 
 
 
 
 
 
(1) Cash settled restricted stock units vested during the nine months ended September 30, 2017 included 307,556 restricted stock units attributable to a grant of 3 year cliff vesting service-based awards made in 2014.

At September 30, 2017, the liability for cash-settled restricted stock units, included in other liabilities in the Consolidated Balance Sheets, was $18 million (2016: $34 million).




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

10.    SHAREHOLDERS' EQUITY

The following table presents common shares issued and outstanding:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
Shares issued, balance at beginning of period
176,580

 
176,575

 
176,580

 
176,240

 
 
Shares issued

 

 

 
335

 
 
Total shares issued at end of period
176,580

 
176,575

 
176,580

 
176,575

 
 
 
 
 
 
 
 
 
 
 
 
Treasury shares, balance at beginning of period
(93,377
)
 
(85,921
)
 
(90,139
)
 
(80,174
)
 
 
Shares repurchased
(51
)
 
(2,252
)
 
(4,284
)
 
(8,499
)
 
 
Shares reissued from treasury
5

 
37

 
1,000

 
537

 
 
Total treasury shares at end of period
(93,423
)
 
(88,136
)
 
(93,423
)
 
(88,136
)
 
 
 
 
 
 
 
 
 
 
 
 
Total shares outstanding
83,157

 
88,439

 
83,157

 
88,439

 
 
 
 
 
 
 
 
 
 
 

Treasury Shares

The following table presents share repurchases:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
In the open market:
 
 
 
 
 
 
 
 
 
Total shares(1)
49

 
2,232

 
3,932

 
8,236

 
 
Total cost
$
3,237

 
$
124,948

 
$
261,180

 
$
434,948

 
 
Average price per share(2)
$
65.80

 
$
56.00

 
$
66.43

 
$
52.81

 
 
 
 
 
 
 
 
 
 
 
 
From employees:(3)
 
 
 
 
 
 
 
 
 
Total shares
2

 
20

 
352

 
263

 
 
Total cost
$
110

 
$
1,088

 
$
24,479

 
$
14,137

 
 
Average price per share(2)
$
64.04

 
$
54.13

 
$
69.53

 
$
53.68

 
 
 
 
 
 
 
 
 
 
 
 
Total shares repurchased:
 
 
 
 
 
 
 
 
 
Total shares
51

 
2,252

 
4,284

 
8,499

 
 
Total cost
$
3,347

 
$
126,036

 
$
285,659

 
$
449,085

 
 
Average price per share(2)
$
65.74

 
$
55.98

 
$
66.68

 
$
52.84

 
 
 
 
 
 
 
 
 
 
 
(1)
Total shares repurchased in the open market for the nine months ended September 30, 2016 includes 1,358,380 common shares acquired under the accelerated share repurchase program (see below for more detail).
(2)
Calculated using whole numbers.
(3)
To satisfy withholding tax liabilities upon the vesting of restricted stock and restricted stock units.











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

10.
SHAREHOLDERS' EQUITY (CONTINUED)

Accelerated Share Repurchase Program

On August 17, 2015, the Company entered into an Accelerated Share Repurchase agreement with Goldman, Sachs & Co. (“Goldman Sachs”) to repurchase an aggregate of $300 million of the Company’s ordinary shares under an accelerated share repurchase program.

During August, 2015, under the terms of this agreement, the Company paid $300 million to Goldman Sachs and initially repurchased 4,149,378 ordinary shares. The initial shares acquired represented 80% of the $300 million total paid to Goldman Sachs and were calculated using the Company’s stock price at activation of the program. The ASR program is accounted for as an equity transaction. Accordingly, at December 31, 2015, $240 million of common shares repurchased were included as treasury shares in the Consolidated Balance Sheet with the remaining $60 million included as a reduction to additional paid-in capital.

On January 15, 2016, Goldman Sachs early terminated the ASR agreement and delivered 1,358,380 additional common shares to the Company, resulting in the reduction from additional paid-in capital of $60 million being reclassified to treasury shares. In total, the Company repurchased 5,507,758 common shares under the ASR agreement at an average price of $54.47.

Preferred Shares

On April 17, 2017, the Company redeemed the remaining 14,042,955 of its 6.875% Series C preferred shares, for an aggregate liquidation preference of $351 million.


11. DEBT AND FINANCING ARRANGEMENTS

On March 27, 2017, the $250 million credit facility entered into by AXIS Capital and certain of its subsidiaries and a syndication of lenders expired.

On March 27, 2017, certain of AXIS Capital’s operating subsidiaries (the "Participating Subsidiaries") amended their existing $500 million secured letter of credit facility (the “LOC Facility”) with Citibank Europe plc (“Citibank”) to include an additional
$250 million of secured letter of credit capacity (the “$250 Million Facility”) pursuant to a Committed Facility Letter and an amendment to the Master Reimbursement Agreement (the “LOC Facility Documents”). Under the terms of the $250 Million Facility, letters of credit to a maximum aggregate amount of $250 million are available for issuance on behalf of the Participating Subsidiaries. These letters of credit will principally be used to support the reinsurance obligations of the Participating Subsidiaries. The $250 Million Facility is subject to certain covenants, including the requirement to maintain sufficient collateral, as defined in the LOC Facility Documents, to cover all of the obligations under the LOC Facility.

Such obligations include contingent reimbursement obligations for outstanding letters of credit and fees payable to Citibank. In the event of default, Citibank may exercise certain remedies, including the exercise of control over pledged collateral and the termination of the availability of the LOC Facility to any or all of the Participating Subsidiaries. The $250 million Facility expires March 31, 2018. The terms and conditions of the $500 million Facility remain unchanged. 




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


12.
COMMITMENTS AND CONTINGENCIES

Reinsurance Agreements

We purchase reinsurance and retrocessional protection for our insurance and reinsurance lines of business. The minimum reinsurance premiums are contractually due in advance on a quarterly basis. At September 30, 2017, we have unrecorded outstanding reinsurance purchase commitments of $97 million, of which $15 million is due in 2017 and the remaining $82 million is due in 2018 and later years. Actual payments under the reinsurance contracts will depend on the underlying subject premium and may exceed the minimum premium.

Investments

Refer to Note 4 - 'Investments' for information on commitments related to our other investments.

13.
OTHER COMPREHENSIVE INCOME

The tax effects allocated to each component of other comprehensive income were as follows:
 
 
2017
 
2016
 
 
 
Before Tax Amount
 
Tax (Expense) Benefit
 
Net of Tax Amount
 
Before Tax Amount
 
Tax (Expense) Benefit
 
Net of Tax Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized investment gains arising during the period
$
64,431

 
$
(1,926
)
 
$
62,505

 
$
40,125

 
$
(3,789
)
 
$
36,336

 
 
Adjustment for reclassification of net realized investment gains and OTTI losses recognized in net income
(15,925
)
 
2,639

 
(13,286
)
 
(5,050
)
 
2,408

 
(2,642
)
 
 
Unrealized investment gains arising during the period, net of reclassification adjustment
48,506

 
713

 
49,219

 
35,075

 
(1,381
)
 
33,694

 
 
Non-credit portion of OTTI losses

 

 

 

 

 

 
 
Foreign currency translation adjustment
8,088

 

 
8,088

 
1,722

 

 
1,722

 
 
Total other comprehensive income, net of tax
$
56,594

 
$
713

 
$
57,307

 
$
36,797

 
$
(1,381
)
 
$
35,416

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized investment gains arising during the period
$
215,360

 
$
(8,899
)
 
$
206,461

 
$
263,235

 
$
(24,579
)
 
$
238,656

 
 
Adjustment for reclassification of net realized investment losses and OTTI losses recognized in net income
8,269

 
1,900

 
10,169

 
40,338

 
2,282

 
42,620

 
 
Unrealized investment gains arising during the period, net of reclassification adjustment
223,629

 
(6,999
)
 
216,630

 
303,573

 
(22,297
)
 
281,276

 
 
Non-credit portion of OTTI losses

 

 

 

 

 

 
 
Foreign currency translation adjustment
46,824

 

 
46,824

 
5,694

 

 
5,694

 
 
Total other comprehensive income, net of tax
$
270,453

 
$
(6,999
)
 
$
263,454

 
$
309,267

 
$
(22,297
)
 
$
286,970

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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

13.
OTHER COMPREHENSIVE INCOME (CONTINUED)

Reclassifications out of AOCI into net income (loss) available to common shareholders were as follows:
 
 
 
Amount Reclassified from AOCI(1)
 
 
Details About AOCI Components
Consolidated Statement of Operations Line Item That Includes Reclassification
Three months ended September 30,
 
Nine months ended September 30,
 
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized investment gains (losses) on available for sale investments
 
 
 
 
 
 
 
 
 
 
 
Other realized investment gains(losses)
$
21,337

 
$
9,297

 
$
5,224

 
$
(19,992
)
 
 
 
OTTI losses
(5,412
)
 
(4,247
)
 
(13,493
)
 
(20,346
)
 
 
 
Total before tax
15,925

 
5,050

 
(8,269
)
 
(40,338
)
 
 
 
Income tax expense
(2,639
)
 
(2,408
)
 
(1,900
)
 
(2,282
)
 
 
 
Net of tax
$
13,286

 
$
2,642

 
$
(10,169
)
 
$
(42,620
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange loss
$

 
$

 
$
(24,149
)
 
$

 
 
 
Income tax expense

 

 

 

 
 
 
Net of tax
$

 
$

 
$
(24,149
)
 
$

 
 
 
 
 
 
 
 
 
 
 
 
(1)
Amounts in parentheses are debits to net income (loss) available to common shareholders.

On March 27, 2017, as part of the wind down of our Australia operation, the Australia Prudential Regulation Authority revoked the authorization of AXIS Specialty Australia to carry on insurance business in Australia. As this resulted in the substantial liquidation of AXIS Specialty Australia, we have released the cumulative translation adjustment related to AXIS Specialty Australia of $24 million from accumulated other comprehensive income in the Consolidated Balance Sheet to foreign exchange losses in the Consolidated Statement of Operations.

14. SUBSEQUENT EVENTS

Acquisition of Novae Group plc

On July 5, 2017, the Company and the board of directors of Novae Group plc (“Novae”), a public limited company incorporated in England and Wales, announced that it had agreed on the terms of a recommended cash offer of 700 pence per share to be made by AXIS Capital to acquire the entire issued and to be issued share capital of Novae.

On August 24, 2017, the Company and the board of directors of Novae announced that it had agreed on the terms of an increased recommended cash offer of 715 pence per share (the "Offer") to be made by AXIS Capital for the acquisition of the entire issued and to be issued share capital of Novae.

The acquisition was effected by way of a Scheme of Arrangement (the “Scheme”) under the laws of the United Kingdom (“U.K.”) which requires the approval of a U.K. court and approval of a majority of Novae’s shareholders, representing at least 75% of the votes cast. The Scheme is also subject to receipt of certain regulatory approvals and other customary conditions. On August 29, 2017, Novae shareholders approved the Scheme.

On October 2, 2017, AXIS Capital acquired the shares of Novae for £462.9 million (approximately $615.6 million). The results of Novae will be included in the results of the Company's insurance and reinsurance segments from this date (the "Closing date").

On October 6, 2017, AXIS Capital received clearance from all applicable regulators, including the European Commission, and commenced management control and integration of the combined businesses from this date.




47






14.    SUBSEQUENT EVENTS (CONTINUED)

Novae is a diversified property and casualty (re)insurance business operating through Syndicate 2007 at Lloyd’s of London. The acquisition of Novae is expected to accelerate the growth strategy of the Company's international insurance business, and significantly scale up its capabilities to enable the Company to even better serve its clients and brokers.

The Company incurred transaction related expenses including due diligence, legal, accounting, and investment banking fees and expenses, as well as integration expenses of $6 million in the three months ended September 30, 2017 related to the acquisition of Novae. In addition, the Company was contractually obligated to pay investment banking fees on the Closing date of the transaction. The Company expects substantially all of the integration costs related to the acquisition to be incurred in 2018. In addition, the Company expects to begin realizing cost savings in 2018.

The Company is currently in the process of determining the fair values of the underlying assets and liabilities at the acquisition date. Given the timing of the acquisition, a preliminary allocation of purchase price is not yet complete. The Company will include amounts recognized for net assets and liabilities acquired, together with goodwill, as of the acquisition date in the Company's Annual Report on Form 10-K.

California Wildfires

In October 2017, Northern California was impacted by a series of devastating wildfires ("California Wildfires") which caused widespread residential and commercial property damage. Current estimated industry insured losses for this event range between $4 billion and $8 billion.

Our preliminary pre-tax net loss estimate for this event is in the range of $35 million to $45 million. The Company's loss estimate is primarily based on a ground-up assessment of losses from individual contracts and treaties exposed to the affected regions, including preliminary information from clients, brokers and loss adjusters. Industry insured loss estimates, market share analyses and catastrophe modeling analyses were also taken into account where appropriate.
                                                                                                                                                                                                                                                        
Due to the preliminary nature of the information available to prepare these estimates, the actual net ultimate amount of losses for this event may be materially different from the current estimate.




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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of our financial condition and results of operations. This should be read in conjunction with the consolidated financial statements and related notes included in Item 1 of this report and also our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2016. Tabular dollars are in thousands, except per share amounts. Amounts in tables may not reconcile due to rounding differences.
 
 
Page  
 
 
Third Quarter 2017 Financial Highlights
Executive Summary
Underwriting Results – Group
Results by Segment: For the three and nine months ended September 30, 2017 and 2016
i) Insurance Segment
ii) Reinsurance Segment
Other Expenses (Revenues), Net
Net Investment Income and Net Realized Investment Gains (Losses)
Cash and Investments
Liquidity and Capital Resources
Critical Accounting Estimates
Recent Accounting Pronouncements
Off-Balance Sheet and Special Purpose Entity Arrangements




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THIRD QUARTER 2017 FINANCIAL HIGHLIGHTS

Third Quarter 2017 Consolidated Results of Operations
 
Net loss attributable to common shareholders of $468 million, or $(5.61) per common share and diluted common share
Non-GAAP operating loss(1) of $446 million, or $(5.35) per diluted common share(1)
Gross premiums written of $1.2 billion
Net premiums written of $833 million
Net premiums earned of $1 billion
Net favorable prior year reserve development of $48 million
Estimated catastrophe and weather-related pre-tax net losses, net of reinstatement premiums, of $617 million or 61.4 points on current accident year loss ratio compared to $22 million, or 2.3 points for the third quarter of 2016:
Third quarter estimated catastrophe pre-tax losses, net of reinstatement premiums, of $617 million (Insurance: $315 million and Reinsurance: $302 million) included Hurricanes Harvey, Irma and Maria and the two earthquakes in Mexico;
Third quarter estimated weather-related pre-tax net losses of $6 million (Insurance: $4 million and Reinsurance: $2 million);
Favorable development on prior quarters' estimated catastrophe and weather related pre-tax net losses of $6 million (Insurance: $2 million and Reinsurance: $4 million) largely related to U.S. weather-related events
Underwriting loss(2) of $513 million and combined ratio of 152.9%
Net investment income of $95 million and net realized investment gains of $15 million
Foreign exchange losses of $33 million

Third Quarter 2017 Consolidated Financial Condition 
Total cash and investments of $14.7 billion; fixed maturities, cash and short-term securities comprise 87% of total cash and investments and have an average credit rating of AA-
Total assets of $21.8 billion
Reserve for losses and loss expenses of $10.8 billion and reinsurance recoverable of $2.4 billion
Total debt of $1.0 billion and the debt to total capital ratio of 15.4%
Total common shares repurchased for $3 million.
At November 8, 2017 the remaining authorization under the repurchase program approved by our Board of Directors was $739 million. Following the offer to acquire Novae Group plc ("Novae") on July 5, 2017, the Company suspended its open mark share repurchase program.
Common shareholders’ equity of $4.7 billion and diluted book value per common share of $55.33
(1)
Non-GAAP operating income (loss) and non-GAAP operating income (loss) per diluted common share are non-GAAP financial measures as defined in SEC Regulation G. The reconciliations of non-GAAP measures to the most comparable GAAP financial measures (net income (loss) available to common shareholders and diluted earnings per common share, respectively) are provided in the 'Results of Operations', which is included in the 'Executive Summary' section of this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A").
(2)
Consolidated underwriting income (loss) is a non-GAAP financial measure as defined in SEC Regulation G. The reconciliation to net income (loss) before income taxes and interest in income (loss) of equity method investments, the most comparable GAAP measure, is presented in the 'Results of Operations', which is included in the 'Executive Summary' section of this MD&A.



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EXECUTIVE SUMMARY


Business Overview

We are a Bermuda-based global provider of specialty lines insurance and treaty reinsurance products with operations in Bermuda, the United States ("U.S."), Europe, Singapore, Canada, Latin America and the Middle East. Our underwriting operations are organized around our two global underwriting platforms, AXIS Insurance and AXIS Re.

Our mission is to provide our clients and distribution partners with a broad range of risk transfer products and services and meaningful capacity, backed by significant financial strength. We manage our portfolio holistically, aiming to construct the optimum consolidated portfolio of funded and unfunded risks, consistent with our risk appetite and development of our franchise. We nurture an ethical, entrepreneurial and disciplined culture that promotes outstanding client service, intelligent risk taking and the achievement of superior risk-adjusted returns for our shareholders. We believe that the achievement of our objectives will position us as a global leader in specialty risks. Our execution on this strategy for the first nine months of 2017 included: 

continued growth of our accident and health lines, which is focused on specialty accident and health products;

growth of our syndicate at Lloyd's which provides us with access to Lloyd's worldwide licenses and an extensive distribution network. During the first quarter of 2016 we commenced writing business through our underwriting division at Lloyd's in China. On July 14, 2017, we announced that we had received final authorization from Lloyd’s, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) for our own Lloyd’s managing agent, AXIS Managing Agency Limited (“AXIS Managing Agency”). Effective August 4, 2017, AXIS Managing Agency assumed management of AXIS Syndicate 1686 at Lloyd’s, replacing the Company’s third-party managing agency agreement with Asta Managing Agency Limited, which had been in place since 2014;

continued implementation of a more focused distribution strategy and increased our scale and relevance in key markets;

continued rebalancing of our portfolio towards less volatile lines of business that carry attractive rates;

continued improvement in the effectiveness and efficiency of our operating platforms and processes;

increased investment in data and analytics; and

broadened risk-funding sources and developed vehicles that utilize third-party capital including:

Our investment in Harrington Reinsurance Holdings Limited ("Harrington"), the parent company of Harrington Re Ltd. ("Harrington Re"), an independent reinsurance company jointly sponsored by AXIS Capital and The Blackstone Group L.P. ("Blackstone"). Harrington Re’s strategy is to combine a multi-line reinsurance portfolio with a diversified allocation to alternative investment strategies to earn attractive risk-adjusted returns. Harrington has developed a portfolio that optimizes the risk-reward characteristics of both assets and liabilities, leveraging the respective strengths of AXIS Capital and Blackstone while deploying a disciplined and fully integrated approach to both underwriting and investing; and

AXIS Ventures Reinsurance Limited, which manages capital for investors interested in deploying funds directly into the property-catastrophe and other short-tail business.

On April 1, 2017, the Company acquired general aviation insurer and reinsurer Aviabel, increasing the Company's scale and relevance in the global aviation market. The Company will continue to maintain Aviabel's physical presence in Brussels and Amsterdam.

On April 17, 2017, the Company redeemed the remaining $351 million of its 6.875% Series C preferred shares. The execution of this transaction reduced the weighted average annual dividend rate on our preferred equity capital base by 88 basis points to 5.50%.




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Effective July 1, 2017, our reinsurance segment no longer writes derivative-based risk management products which address weather risks.

On July 5, 2017 the Company announced that it had agreed on the terms of a recommended offer to acquire Novae Group plc (“Novae”), a diversified specialty (re)insurer that operates through Lloyd’s of London. On October 2, 2017, the Company acquired the shares of Novae. The results of Novae will be included in the results of the Company's insurance and reinsurance segments from this date (the "Closing date"). On October 6, 2017, AXIS Capital received clearance from all applicable regulators, including the European Commission, and commenced management control and integration of the combined businesses from this date.

On July 6, 2017, S&P Global Ratings affirmed its 'A-' long-term counterparty credit and senior debt ratings of AXIS Capital, and its 'A+' long-term counterparty credit and financial strength ratings of the Company's core operating subsidiaries. At the same time, S&P Global Ratings revised its outlook on AXIS Capital to negative from stable based on the planned acquisition of Novae.

Outlook

We are committed to being a leader in specialty risk, an area in which we already have depth of talent and experience, and have earned an outstanding reputation. Committed to its hybrid strategy, AXIS Capital has developed substantial platforms in both insurance and reinsurance, providing it with balance and diversification. Management believes its positioning, franchise, expert underwriters and strong relationships with distributors and clients will provide opportunities in 2018, with variances amongst our lines driven by our tactical response to market conditions. At the same time, we are broadening our risk-funding sources and developing vehicles that utilize the industry’s abundant third party capital. Therefore, we expect that our net premiums written will not grow as much as our gross premiums written, as we intend to share more of our risk with strategic capital partners.
 
Competitive conditions continue to impact worldwide insurance markets with greatest pressures impacting catastrophe exposed property and certain global specialty lines of business. We have observed greater competitiveness for large accounts compared to smaller risks. These competitive pressures have led to price reductions across most lines of business, with decreases in international markets generally more severe than those observed in the U.S. During the month of September, our industry experienced substantial natural catastrophe loss activity, comparable to full year levels incurred in 2005 and 2011, which were the highest catastrophe loss years on record. We believe markets conditions will remain uncertain through the end of the year and possibly beyond as carriers assess pricing, portfolio construction and account preferences. In this challenging market environment, we are focusing on lines and markets that remain adequately priced and we will continue to assess pricing adequacy as market conditions and trends evolve. Where necessary we also continue to shift our business mix toward smaller, less volatile risk accounts which we believe will enable us to achieve better, more stable attritional loss experience. In addition, our recent acquisition of Novae increases our scale and relevance in the London marketplace, and we expect to be well-positioned to capitalize on new opportunities and benefit from improved market conditions emerging through the international specialty insurance market, including Lloyd’s of London.

The reinsurance markets' trading environment remains challenging in the many of lines of business and geographical regions. The market continues to be influenced by excess capacity, strong balance sheets of established market participants and a consolidation of reinsurance purchasing. As noted above, our industry experienced substantial natural catastrophe loss activity during the month of September, which we believe will favorably impact pricing in our upcoming renewal cycle. The improvements will differ between lines of business and by geographical regions. These factors, combined with AXIS' customer-centric approach and opportunities in specific lines of business and geographies allow us to execute on our targeted growth strategy. We will continue to protect the quality and profitability of our existing book, targeting larger shares of the more attractive treaties, managing the overall volatility of our reinsurance book, and expanding our already strong group of strategic capital partners with whom to share our risks.





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Non-GAAP Financial Measure

We present our results of operations in the way we believe will be most meaningful and useful to investors, analysts, rating agencies and others who use our financial information to evaluate our performance. Some of the measurements we use are "non-GAAP financial measures" under Securities and Exchange Commission rules and regulations. In this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we present underwriting-related general and administrative expenses, consolidated underwriting income, non-GAAP operating income (in total and on a per share basis), amounts presented on a constant currency basis, and pre-tax total return on cash and investments excluding foreign exchange movements, which are “non-GAAP financial measures” as defined in SEC Regulation G. We believe that these non-GAAP measures, which may be defined and calculated differently by other companies, better explain and enhance the understanding of our results of operations. However, these measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP.

Underwriting-Related General and Administrative Expenses

Underwriting-related general and administrative expenses include those general and administrative expenses that are incremental and/or directly attributable to our individual underwriting operations. While this measure is presented in Item 1, Note 3 to the Consolidated Financial Statements 'Segment Information', it is considered a non-GAAP financial measure when presented elsewhere on a consolidated basis.

Corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As these costs are not incremental and/or directly attributable to our individual underwriting operations, we exclude them from underwriting-related general and administrative expenses and, therefore, consolidated underwriting income. Our total general and administrative expenses, the most comparable GAAP financial measure to underwriting-related general and administrative expenses, includes corporate expenses.

The reconciliation of underwriting-related general and administrative expenses to general and administrative expenses, the most comparable GAAP measure is presented in the 'Results of Operations'.

Consolidated Underwriting Income

Consolidated underwriting income is a pre-tax measure of underwriting profitability that takes into account net premiums earned and other insurance related income (losses) as revenues and net losses and loss expenses, acquisition costs and underwriting-related general and administrative costs as expenses. While this measure is presented in Item 1, Note 3 to the Consolidated Financial Statements 'Segment Information', it is considered a non-GAAP financial measure when presented elsewhere on a consolidated basis.

We evaluate our underwriting results separately from the performance of our investment portfolio. As such, we believe it appropriate to exclude net investment income and net realized investment gains (losses) from our underwriting profitability measure. Interest expense and financing costs primarily relate to interest payable on our senior notes and are excluded from consolidated underwriting income for the same reason.

Foreign exchange losses (gains) in our Consolidated Statements of Operations primarily relate to our net insurance-related liabilities. However, we manage our investment portfolio in such a way that unrealized and realized foreign exchange losses (gains) on our investment portfolio generally offset a large portion of the foreign exchange losses (gains) arising from our underwriting portfolio. As a result, we believe that foreign exchange losses (gains) are not a meaningful contributor to our underwriting performance and, therefore, exclude them from consolidated underwriting income.

Bargain purchase gain reflects the excess of the fair value of the net identifiable assets acquired over the fair value of consideration transferred. The bargain purchase gain is unrelated to underwriting operations and for this reason it is excluded from consolidated underwriting income.

Transaction related expenses are driven by business decisions, the nature and timing of which are unrelated to the underwriting process and for this reason they are excluded from consolidated underwriting income.

We believe that presentation of underwriting-related general and administrative expenses and consolidated underwriting income provides investors with an enhanced understanding of our results of operations, by highlighting the underlying pre-tax profitability of



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our underwriting activities. The reconciliation of consolidated underwriting income to income before income taxes and interest in income (loss) of equity method investments, the most comparable GAAP measure is presented in the 'Results of Operations'.

Non-GAAP Operating Income

Non-GAAP operating income represents after-tax operational results without consideration of after-tax net realized investment gains (losses), foreign exchange losses (gains), bargain purchase gain, and transaction related expenses.

Although the investment of premiums to generate income and realized investment gains (losses) is an integral part of our operations, the determination to realize investment gains (losses) is independent of the underwriting process and is heavily influenced by the availability of market opportunities. Furthermore, many users believe that the timing of the realization of investment gains (losses) is somewhat opportunistic for many companies.

Foreign exchange losses (gains) in our Consolidated Statements of Operations are primarily driven by the impact of foreign exchange rate movements on net insurance related-liabilities. However, this movement is only one element of the overall impact of foreign exchange rate fluctuations on our financial position. In addition, we recognize unrealized foreign exchange losses (gains) on our available-for-sale investments in other comprehensive income and foreign exchange losses (gains) realized upon the sale of these investments in net realized investments gains (losses). These unrealized and realized foreign exchange losses (gains) generally offset a large portion of the foreign exchange losses (gains) reported separately in net income (loss), thereby minimizing the impact of foreign exchange rate movements on total shareholders' equity. As such, the Statement of Operations foreign exchange losses (gains) in isolation is not a fair representation of the performance of our business.

Bargain purchase gain reflects the excess of the fair value of the net identifiable assets acquired over the fair value of consideration transferred and is not indicative of future revenues of the company.

Transaction related expenses are primarily driven by business decisions, the nature and timing of which are unrelated to the underwriting process and which are not representative of underlying business performance.

Certain users of our financial statements evaluate earnings excluding after-tax net realized investment gains (losses), foreign exchange losses (gains), bargain purchase gain, and transaction related expenses to understand the profitability of recurring sources of income.

We believe that showing net income available to common shareholders exclusive of net realized gains (losses), foreign exchange losses (gains), bargain purchase gain, and transaction related expenses reflects the underlying fundamentals of our business. In addition, we believe that this presentation enables investors and other users of our financial information to analyze performance in a manner similar to how our management analyzes the underlying business performance. We also believe this measure follows industry practice and, therefore, facilitates comparison of our performance with our peer group. We believe that equity analysts and certain rating agencies that follow us, and the insurance industry as a whole, generally exclude these items from their analyses for the same reasons. The reconciliation of non-GAAP operating income to net income available to common shareholders, the most comparable GAAP measure is presented in the 'Results of Operations'.

Constant Currency Basis

We present gross premiums written, net premiums written and net premiums earned on a constant currency basis in this MD&A. The amounts presented on a constant currency basis are calculated by applying the average foreign exchange rate from the current year to the prior year amounts. We believe this presentation enables investors and other users of our financial information to analyze performance in a manner similar to how our management analyzes the underlying business performance. The reconciliation to gross premiums written, net premiums written and net premiums earned on a GAAP basis is presented in the 'Group Underwriting Results' section of this MD&A.

Pre-Tax Total Return on Cash and Investments excluding Foreign Exchange Movement

Pre-tax total return on cash and investments excluding foreign exchange movements measures net investment income (loss), net realized investments gains (losses), interest in income (loss) of equity method investments, and pre-tax change in unrealized gains (losses) generated by our average cash and investment balances. The reconciliation to pre-tax total return on cash and investments, the most comparable GAAP financial measure is presented in the 'Net Investment Income and Net Realized Investment Gains (Losses)'



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section of this release. We believe this presentation enables investors and other users of our financial information to analyze the performance of our investments.

Results of Operations
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
% Change
 
2016
 
2017
 
% Change
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
$
1,017,131

 
9%
 
$
934,415

 
$
2,937,265

 
6%
 
$
2,783,746

 
 
Other insurance related income (losses)
(3,197
)
 
nm
 
5,944

 
(4,420
)
 
nm
 
4,850

 
 
Underwriting expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses and loss expenses
(1,235,367
)
 
132%
 
(532,328
)
 
(2,447,640
)
 
47%
 
(1,663,584
)
 
 
Acquisition costs
(194,724
)
 
3%
 
(189,810
)
 
(588,879
)
 
5%
 
(559,570
)
 
 
Underwriting general and administrative expenses(1)
(96,696
)
 
(15%)
 
(114,223
)
 
(335,782
)
 
(5%)
 
(352,632
)
 
 
Underwriting Income (Loss)
$
(512,853
)
 
 
 
$
103,998

 
$
(439,456
)
 
 
 
$
212,810

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate expenses(1)
(27,933
)
 
(3%)
 
(28,683
)
 
(97,922
)
 
13%
 
(86,922
)
 
 
Net investment income
95,169

 
(19%)
 
116,923

 
299,899

 
16%
 
257,818

 
 
Net realized investment gains (losses)
14,632

 
nm
 
5,205

 
(14,811
)
 
(63%)
 
(40,295
)
 
 
Other (expenses) revenues, net
(45,345
)
 
nm
 
956

 
(128,470
)
 
nm
 
31,195

 
 
Bargain purchase gain

 
nm
 

 
15,044

 
nm
 

 
 
Transaction related expenses
(5,970
)
 
nm
 

 
(5,970
)
 
nm
 

 
 
Income (loss) before income taxes and interest in income (loss) of equity method investments
(482,300
)
 
 
 
198,399

 
(371,686
)
 
 
 
374,606

 
 
Income tax (expense) benefit
25,877

 
 
 
(9,352
)
 
38,547

 
 
 
(7,712
)
 
 
Interest in loss of equity method investments
(661
)
 
nm
 
(2,434
)
 
(8,402
)
 
nm
 
(2,434
)
 
 
Net income (loss)
$
(457,084
)
 
 
 
$
186,613

 
$
(341,541
)
 
 
 
$
364,460

 
 
Preferred share dividends
(10,656
)
 
7%
 
(9,969
)
 
(36,154
)
 
21%
 
(29,906
)
 
 
Net income (loss) available to common shareholders
$
(467,740
)
 
nm
 
$
176,644

 
$
(377,695
)
 
nm
 
$
334,554

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net realized investment gains (losses), net of tax(2)
$
(11,975
)
 
 
 
$
(2,726
)
 
$
16,703

 
 
 
$
42,667

 
 
Foreign exchange gains (losses), net of tax(3)
28,071

 
 
 
(13,229
)
 
85,851

 
 
 
(67,771
)
 
 
Bargain purchase gain(4)

 
 
 

 
(15,044
)
 
 
 

 
 
Transaction related expenses, net of tax
5,749

 
 
 

 
5,749

 
 
 

 
 
Non-GAAP operating income (loss)
$
(445,895
)
 
nm
 
$
160,689

 
$
(284,436
)
 
nm
 
$
309,450

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
nm – not meaningful
(1)
Underwriting-related general and administrative expenses is a non-GAAP measure as defined in SEC Regulation G. The reconciliation to total general and administrative expenses, the most comparable GAAP measure, also included corporate expenses of ($27,933) and ($28,683) for the three months ended September 30, 2017 and 2016, respectively, and ($97,922) and ($86,922) for the nine months ended September 30, 2017 and 2016, respectively. Refer to 'Other (expenses) revenues, net' for additional information related to the corporate expenses. Also, refer to 'Non-GAAP Financial Measures' for additional information.
(2)
Tax cost (benefit) of $2,657 and $2,479 for the three months ended September 30, 2017 and 2016, respectively, and $1,892 and $2,372 for the nine months ended September 30, 2017 and 2016, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize capital losses.
(3)
Tax cost (benefit) of ($4,439) and $566 for the three months ended September 30, 2017 and 2016, respectively, and $(4,242) and $2,010 for the nine months ended September 30, 2017 and 2016, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the tax status of specific foreign exchange transactions.
(4)
Tax impact is nil.









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Non-GAAP Financial Measures

We also present non-GAAP operating income per diluted common share and annualized non-GAAP operating return on average common equity (“annualized non-GAAP operating ROACE”), which are derived from the non-GAAP operating income measure and can be reconciled to the most comparable GAAP financial measures as follows:

 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) available to common shareholders
$
(467,740
)
 
$
176,644

 
$
(377,695
)
 
$
334,554

 
 
Non-GAAP operating income (loss)
(445,895
)
 
160,689

 
(284,436
)
 
309,450

 
 
Weighted average common shares and common share equivalents - diluted(1)
83,305

 
90,351

 
84,479

 
92,579

 
 
 
 
 
 
 
 
 
 
 
 
Earnings (loss) per common share - diluted
$
(5.61
)
 
$
1.96

 
$
(4.47
)
 
$
3.61

 
 
Non-GAAP operating income (loss) per common share - diluted
$
(5.35
)
 
$
1.78

 
$
(3.37
)
 
$
3.34

 
 
 
 
 
 
 
 
 
 
 
 
Average common shareholders’ equity
$
4,898,698

 
$
5,369,921

 
$
4,912,998

 
$
5,319,849

 
 
 
 
 
 
 
 
 
 
 
 
Annualized return on average common equity(2)
nm

 
13.2
%
 
(10.3
%)
 
8.4
%
 
 
Annualized Non-GAAP operating return on average common equity(3)
nm

 
12.0
%
 
(7.7
%)
 
7.8
%
 
 
 
 
 
 
 
 
 
 
 
nm – not meaningful
(1)
Refer to Item 1, Note 8 to our Consolidated Financial Statements 'Earnings per Common Share' for further details on the dilution calculation.
(2)
Return on average common equity ("ROACE") is calculated by dividing annualized net income available to common shareholders for the period by the average shareholders' equity determined by using the common shareholders' equity balances at the beginning and end of the period.
(3)
Non-GAAP operating ROACE, a non-GAAP financial measure as defined in SEC Regulation G, is calculated by dividing annualized operating income for the period by the average common shareholders' equity.










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Underwriting Results

Total underwriting loss for the three months ended September 30, 2017 was $513 million, a decrease of $617 million compared to the underwriting income of $104 million for the three months ended September 30, 2016. The decrease in underwriting income was primarily driven by an increase in catastrophe and weather-related losses, a decrease in net favorable prior year reserve development, an increase in the current accident year loss ratio excluding catastrophe and weather-related losses, partially offset by a decrease in general and administrative expenses.

The reinsurance segment underwriting loss increased by $310 million for the three months ended September 30, 2017, compared to the three months ended September 30, 2016. The decrease in underwriting income was primarily driven by an increase in catastrophe and weather-related losses, an increase in the current accident year loss ratio excluding catastrophe and weather-related losses and a decrease in net favorable prior year reserve development, partially offset by a decrease acquisition costs.

The insurance segment underwriting loss increased by $307 million for the three months ended September 30, 2017, compared to the three months ended September 30, 2016. The decrease in underwriting income was primarily driven by an increase in catastrophe and weather-related losses, and a decrease in net favorable prior year reserve development.

Total underwriting loss in the nine months ended September 30, 2017 was $439 million, a decrease to underwriting income of $652 million compared to $213 million in the nine months ended September 30, 2016. The decrease in underwriting income was primarily driven by an increase in catastrophe and weather-related losses, an increase in the current accident year loss ratio excluding catastrophe and weather-related losses, decrease in net favorable prior year reserve development, partially offset by a decrease in general and administrative expenses.
The reinsurance segment underwriting income decreased by $352 million in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The decrease in underwriting income was primarily driven by an increase in catastrophe and weather-related losses, decrease in net favorable prior year reserve development, an increase in the current accident year loss ratio excluding catastrophe and weather-related losses, partially offset by a decrease in general and administrative expenses.
The insurance segment underwriting loss increased by $300 million in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. The increase in underwriting income was primarily driven by an increase in catastrophe and weather-related losses, and an increase in acquisition costs.
Net Investment Income

Net investment income for the three and nine months ended September 30, 2017 was $95 million and $300 million, respectively, a decrease of $22 million and an increase of $42 million, respectively, compared to the three and nine months ended September 30, 2016 primarily attributable to our alternative investments portfolio.

Net Realized Investment Gains (Losses)

Net realized investment gains were $15 million for the three months ended September 30, 2017 compared to net realized investment gains of $5 million for for the same period of 2016. The net realized investment gains for the three months ended September 30, 2017 were mainly attributable to gains on sales of ETFs, partially offset by an other than temporary impairment ("OTTI") charge of $5 million. The net realized investment gains for the three months ended September 30, 2016 were attributable to sales of fixed income and equities which benefited from improved pricing in 2016.

Net realized investment losses were $15 million in the nine months ended September 30, 2017, compared to net realized investment losses of $40 million for the same period of 2016. The net realized investment losses for the nine months ended September 30, 2017 and 2016 were primarily attributable to foreign currency losses (net of forward contracts) on the sale of non-U.S. government and corporate debt securities as a result of the strengthening of the U.S. dollar and OTTI.

Corporate Expenses

Corporate expenses were $28 million for the three months ended September 30, 2017, compared to $29 million for the three months ended September 30, 2016. The decrease was primarily attributable to a decrease in performance related compensation costs and an



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increase in the allocation of corporate costs to the insurance and reinsurance segments, largely offset by an increase in personnel expenses.

Corporate expenses were $98 million for the nine months ended September 30, 2017 compared to $87 million in the same period in 2016. The increase was primarily attributable to an increase in personnel expenses.

Other Expenses (Revenues), Net

The foreign exchange losses of $33 million and $90 million for the three and nine months ended September 30, 2017, respectively, were primarily attributable to the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities mainly denominated in pound sterling and euro. For the nine months ended September 30, 2017 compared to the same period in 2016, foreign exchange losses also included the reclass of the cumulative translation adjustment of $24 million related to the wind-down of AXIS Specialty Australia from accumulated other comprehensive income to foreign exchange losses.

The foreign exchange gains of $14 million and $70 million for the three and nine months ended September 30, 2016, respectively, were primarily driven by the impact of the strengthening of the U.S. dollar on the remeasurement of net insurance-related liabilities mainly denominated against the pound sterling.

The financial results for the three and nine months ended September 30, 2017 resulted in a tax benefit of $26 million and $39 million, respectively. The tax benefit of $26 million recognized in the three months ended September 30, 2017 was primarily driven by an underwriting loss recognized in our U.S. operations. The tax benefit of $39 million recognized in the nine months ended September 30, 2017 was primarily driven by an underwriting loss recognized in our U.S. operations, share based compensation excess tax benefits which were recognized in the income statement, and a tax adjustment related to the bargain purchase gain recognized in connection with the acquisition of Aviabel.

The financial results for the three and nine months ended and 2016 resulted in a tax expense of $9 million and $8 million, respectively, was primarily driven by the generation of consolidated pre-tax net income in our European operations.

Bargain Purchase Gain

On April 1, 2017, the Company acquired general aviation insurer and reinsurer, Aviabel. The purchase price was allocated to the acquired assets and liabilities of Aviabel based on estimated fair values on the closing date and a bargain purchase gain of $15 million was recognized in the nine months ended September 30, 2017.

Transaction Related Expenses

The Company incurred transaction related expenses including due diligence, legal, accounting, and investment banking fees and expenses, as well as integration expenses of $6 million in the three months ended September 30, 2017 related to the acquisition of Novae. In addition, the Company was contractually obligated to pay investment banking fees on the closing date of the transaction. The Company expects substantially all of the integration costs related to the acquisition to be incurred in 2018. In addition, the Company expects to begin realizing cost savings in 2018.

Interest in Loss of Equity Method Investments

Interest in loss of equity method investments was $1 million and $8 million for the three and nine months ended September 30, 2017, respectively. The nine months ended September 30, 2017 included impairment losses of $9 million related to an investment in a U.S. based insurance company, partially offset by income of $1 million related to the Company’s aggregate share of profits in a company in which it has significant influence over the operating and financial policies.





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Financial Measures

We believe the following financial indicators are important in evaluating our performance and measuring the overall growth in value generated for our common shareholders:
 
  
Three months ended and at September 30,
 
Nine months ended and at September 30,
 
 
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
ROACE (annualized)(1)
nm

 
13.2
%
 
(10.3
%)
 
8.4
%
 
 
Non-GAAP operating ROACE (annualized)(2)
nm

 
12.0
%
 
(7.7
%)
 
7.8
%
 
 
Diluted book value per common share(3)
$
55.33

 
$
59.77

 
$
55.33

 
$
59.77

 
 
Cash dividends declared per common share
0.38

 
0.35

 
1.14

 
1.05

 
 
Increase (decrease) in diluted book value per common share adjusted for dividends
$
(4.74
)
 
$
2.50

 
$
(1.80
)
 
$
6.74

 
 
 
 
 
 
 
 
 
 
 
nm – not meaningful
(1) Return on average common equity (“ROACE”) is calculated by dividing annualized net income available to common shareholders for the period by the average shareholders’ equity determined by using the common shareholders’ equity balances at the beginning and end of the period.
(2) Non-GAAP operating ROACE is calculated by dividing annualized operating income for the period by the average common shareholders’ equity determined by using the common shareholders’ equity balances at the beginning and end of the period. Annualized non-GAAP operating ROACE is a non-GAAP financial measure as defined in SEC Regulation G. The reconciliation to ROACE, the most comparable GAAP measure, is presented in the 'Results of Operations'.
(3) Diluted book value per common share represents total common shareholders’ equity divided by the number of common shares and diluted common share equivalents outstanding, determined using the treasury stock method. Cash settled awards are excluded from the denominator.
Return on Equity
ROACE reflects the impact of net income attributable to common shareholders including net realized investment gains (losses), foreign exchange losses (gains), a bargain purchase gain related to the acquisition of Aviabel, and transaction related expenses associated with the acquisition of Novae.
The decrease in ROACE for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, was primarily driven by a decrease in underwriting income and net investment income together with foreign exchange losses, partially offset by a tax benefit compared to a tax expense in 2016 and an increase in net realized investment gains .
The decrease in ROACE in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, was primarily driven by a decrease in underwriting income and foreign exchange losses, partially offset by a tax benefit compared to a tax expense in 2016, an increase in net investment income, a decrease in net realized investment losses, and the bargain purchase gain.
Non-GAAP operating ROACE excludes the impact of net realized investment gains (losses), foreign exchange losses (gains), the bargain purchase gain and transaction related expenses.
The decrease in non-GAAP operating ROACE for the three months ended September 30, 2017, compared to the three months ended September 30, 2016, was primarily driven by a decrease in underwriting income and net investment income partially offset by a tax benefit compared to a tax expense in 2016.
The decrease in non-GAAP operating ROACE in the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016, was primarily driven by a decrease in underwriting income, partially offset by a tax benefit compared to a tax expense in 2016 and an increase in net investment income.

Diluted Book Value per Common Share
Diluted book value per common share decreased by 7% to $55.33 at September 30, 2017, from $59.77 at September 30, 2016, which primarily reflected net losses attributable to common shareholders generated over the past twelve months of $247 million and common share dividends declared.




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Cash Dividends Declared per Common Share
We believe in returning excess capital to our shareholders by way of dividends (as well as share repurchases) accordingly, our dividend policy is an integral part of the value we create for our shareholders. Our cumulatively strong earnings have permitted our Board of Directors to approve thirteen successive increases in quarterly common share dividends.
Diluted Book Value per Common Share Adjusted for Dividends
Diluted book value per common share adjusted for dividends decreased by $4.74 or 8% per common share for the three months ended September 30, 2017, by $1.80 or 3% per common share for the nine months ended September 30, 2017, and $2.92, or 5%, per common share over the past twelve months.
Taken together, we believe that growth in diluted book value per common share and common share dividends declared represent the total value created for our common shareholders. As companies in the insurance industry have differing dividend payout policies, we believe investors use the diluted book value per common share adjusted for dividends metric to measure comparable performance across the industry.

During the three and nine months ended September 30, 2017, respectively, the decrease in diluted book value per common share adjusted for dividends was primarily attributable to net loss generated in both periods and common share dividends declared, partially offset by an increase in unrealized gains on investments reported in accumulated other comprehensive income.

During the three and nine months ended September 30, 2016, respectively, total value created consisted primarily of net income and an increase in unrealized gains on investments reported in accumulated other comprehensive income, partially offset by common share dividends declared.




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UNDERWRITING RESULTS – GROUP


The following table provides our group underwriting results for the periods indicated. Underwriting income is a pre-tax measure of underwriting profitability that takes into account net premiums earned and other insurance related income as revenues and net losses and loss expenses, acquisition costs and underwriting-related general and administrative costs as expenses.
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
% Change
 
2016
 
2017
 
% Change
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
1,185,574

 
24%
 
$
959,962

 
$
4,459,772

 
5%
 
$
4,239,558

 
 
Net premiums written
832,743

 
40%
 
595,431

 
3,297,718

 
—%
 
3,288,587

 
 
Net premiums earned
1,017,131

 
9%
 
934,415

 
2,937,265

 
6%
 
2,783,746

 
 
Other insurance related income (losses)
(3,197
)
 
nm
 
5,944

 
(4,420
)
 
nm
 
4,850

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Current year net losses and loss expenses
(1,283,135
)
 

 
(608,347
)
 
(2,591,135
)
 

 
(1,887,715
)
 
 
Prior year reserve development
47,768

 

 
76,019

 
143,495

 

 
224,131

 
 
Acquisition costs
(194,724
)
 

 
(189,810
)
 
(588,879
)
 

 
(559,570
)
 
 
Underwriting-related general and administrative
 
 
 
 
 
 
 
 
 
 
 
 
 
expenses(1)
(96,696
)
 

 
(114,223
)
 
(335,782
)
 

 
(352,632
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)(2)
$
(512,853
)
 
nm
 
$
103,998

 
$
(439,456
)
 
nm
 
$
212,810

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative expenses(1)
$
124,629

 

 
$
142,906

 
$
433,704

 

 
$
439,554

 
 
Income (loss) before income taxes and interest in income (loss) of equity method investments(2)
$
(482,300
)
 

 
$
198,399

 
$
(371,686
)
 

 
$
374,606

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
nm – not meaningful
(1)
Underwriting-related general and administrative expenses is a non-GAAP measure as defined in SEC Regulation G. The reconciliation to general and administrative expenses, the most comparable GAAP measure, is presented in the 'Results of Operations', which is included in the 'Executive Summary' section of this MD&A.
(2)
Group (or consolidated) underwriting income (loss) is a non-GAAP financial measure as defined in SEC Regulation G. The reconciliation to net income (loss before tax and interest in income (loss) of equity investments), the most comparable GAAP measure, is presented in the "Results of Operations', which is included in the 'Executive Summary' section of this MD&A.




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UNDERWRITING REVENUES

Gross and net premiums written, by segment, were as follows:
 
  
Gross Premiums Written
 
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
% Change
 
2016
 
2017
 
% Change
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
$
744,366

 
10%
 
$
675,430

 
$
2,234,395

 
6%
 
$
2,112,796

 
 
Reinsurance
441,208

 
55%
 
284,532

 
2,225,377

 
5%
 
2,126,762

 
 
Total
$
1,185,574

 
24%
 
$
959,962

 
$
4,459,772

 
5%
 
$
4,239,558

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Constant currency(3)
$
1,188,100

 
24%
 
$
959,962

 
$
4,522,500

 
7%
 
$
4,239,558

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
% ceded
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
33%
 
(3) pts
 
36%
 
31%
 
(1) pts
 
32%
 
 
Reinsurance
25%
 
(18) pts
 
43%
 
21%
 
8 pts
 
13%
 
 
Total
30%
 
(8) pts
 
38%
 
26%
 
4 pts
 
22%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Premiums Written
 
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
% Change
 
2016
 
2017
 
% Change
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
$
500,022

 
15%
 
$
433,131

 
$
1,533,029

 
7%
 
$
1,433,058

 
 
Reinsurance
332,721

 
105%
 
162,300

 
1,764,689

 
(5%)
 
1,855,529

 
 
Total
$
832,743

 
40%
 
$
595,431

 
$
3,297,718

 
—%
 
$
3,288,587

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Constant currency(3)
$
835,600

 
40%
 
$
595,431

 
$
3,360,300

 
2%
 
$
3,288,587

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(3)
Amounts presented on a constant currency basis are non-GAAP financial measures as defined in SEC Regulation G. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to the prior year balance.

Gross Premiums Written:

Gross premiums written for the three and nine months ended September 30, 2017 increased by $226 million or 24% ($228 million or 24% on a constant currency basis) and $220 million or 5% ($283 million or 7% on a constant currency basis), respectively, compared to the three and nine months ended September 30, 2016, respectively. The increase for the three and nine months ended September 30, 2017 compared to the same periods in 2016, was due to an increase in both the insurance and reinsurance segments.

The reinsurance segment's gross premiums written increased by $157 million or 55% ($160 million or 56% on a constant currency basis) and $99 million or 5% ($150 million or 7% on a constant currency basis) for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016.

The increase in the reinsurance segment gross premiums written for the three months ended September 30, 2017 compared to the same period of 2016, was primarily driven by our liability, catastrophe, property and motor lines. The increase in our liability lines was due to timing differences. The increase in our catastrophe lines was largely due to reinstatement premiums associated with the third quarter catastrophe losses. The increase in our property and motor lines was primarily driven by new business. Timing differences also contributed to the increase in premiums written in our motor lines.

The increase for the nine months ended September 30, 2017 compared to the same period in 2016, was primarily driven by our catastrophe, agriculture, property and motor lines, partially offset by a decrease in our credit and surety lines. The increase in our catastrophe and property lines was driven by new business. Favorable premium adjustments and reinstatement premiums contributed to the increase in premiums written in our catastrophe and agriculture lines. The increase in our motor lines was driven by new business and favorable premium adjustments, partially offset by a lower level of premiums written on a multi-year basis during 2017



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compared to 2016, together with the impact of foreign exchange movements. The decrease in our credit and surety lines was primarily due to a lower level of premiums written on a multi-year basis.

The insurance segment's gross premiums written increased by $69 million or 10% and $122 million or 6% ($133 million on a constant currency basis) for the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016.

The increase in the insurance segment gross premiums written for the three months ended September 30, 2017 was attributable to our liability lines, and our credit and political risk lines driven by new business opportunities, together with an increase in our aviation lines associated with our recent acquisition of Aviabel. These increases were partially offset by a reduction in premiums written in our property lines following our exit from some U.S. retail insurance operations last year.

The increase in the nine months ended September 30, 2017 was attributable to our liability, accident and health lines and our professional lines, primarily driven by new business opportunities, together with an increase in our aviation lines associated with our recent acquisition of Aviabel. These increases were partially offset by a decrease in premiums written in our property lines following our exit from some U.S. retail insurance operations last year.
 
Ceded Premiums Written:

Ceded premiums written for the three and nine months ended September 30, 2017 were $353 million or 30% and $1.2 billion or 26% of gross premiums written, respectively, compared to $365 million or 38% and $951 million or 22% of gross premiums written for the three and nine months ended September 30, 2016, respectively. The decrease in the ratio of ceded premiums written to gross premiums written for the three months ended September 30, 2017 and increase for the nine months ended September 30, 2017, compared to the same period in 2016, was primarily attributable to the reinsurance segment.

The decrease in the reinsurance segment ratio of ceded premiums written to gross premiums written for the three months ended September 30, 2017 compared to the same period in 2016, was primarily due to an increase in gross premiums written in the quarter together with a decrease in premiums ceded to our strategic capital partners. The decrease in premiums ceded was attributable to our professional and liability lines, partially offset by an increase in premiums ceded in our catastrophe lines.

The increase in the reinsurance segment ratio of ceded premiums written to gross premiums written for the nine months ended September 30, 2017 compared to the same period in 2016, primarily due to an increase in premiums ceded in our catastrophe, agriculture, credit and surety lines as well as our liability lines, partially offset by an increase in gross premiums written.

In June 2017, the Company obtained catastrophe protection for its insurance and reinsurance segments through a reinsurance agreement with Northshore Re II Limited ("Northshore"). In connection with the reinsurance agreement, Northshore issued notes to unrelated investors in an amount equal to the full $350 million of coverage provided under the reinsurance agreement covering a three year period. At the time of the agreement, the Company performed an evaluation of Northshore to determine if it meets the definition of a variable interest entity ("VIE"). The Company concluded that Northshore is a VIE but that the Company does not have a variable interest in the entity, as the variability in results is expected to be absorbed entirely by the investors in Northshore. Accordingly, Northshore is not consolidated in the Company's consolidated financial statements. The premium ceded to Northshore during the nine months ended September 30, 2017 was $27 million.



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Net Premiums Earned:

Net premiums earned by segment were as follows:
 
  
Three months ended September 30,
 
 
 
Nine months ended September 30,
 
 
 
 
  
2017
 
 
 
2016
 
 
 
%
Change
 
2017
 
 
 
2016
 
 
 
%
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
$
496,004

 
49
%
 
$
444,691

 
48
%
 
12%
 
$
1,448,270

 
49
%
 
$
1,322,649

 
48
%
 
9%
 
 
Reinsurance
521,127

 
51
%
 
489,724

 
52
%
 
6%
 
1,488,995

 
51
%
 
1,461,097

 
52
%
 
2%
 
 
Total
$
1,017,131

 
100
%
 
$
934,415

 
100
%
 
9%
 
$
2,937,265

 
100
%
 
$
2,783,746

 
100
%
 
6%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Constant currency(3)
$
1,027,050

 
 
 
$
934,415

 


 
10%
 
$
2,999,050

 
 
 
$
2,783,746

 
 
 
8%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(3)
Amounts presented on a constant currency basis are non-GAAP financial measures as defined in SEC Regulation G. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to the prior year balance.

Changes in net premiums earned reflect period to period changes in net premiums written and business mix, together with normal variability in premium earning patterns.

Net premiums earned for the three and nine months ended September 30, 2017 increased by $83 million or 9% ($93 million or 10% on a constant currency basis) and $154 million or 6% ($215 million or 8% on a constant currency basis), respectively, compared to the three and nine months ended September 30, 2016, respectively. The increases for both periods compared to the same periods in 2016, were driven by increases in both the insurance and reinsurance segments.

The increase in net premiums earned in the insurance segment for the three and nine months ended September 30, 2017 compared to the same periods in 2016, were driven by strong premium growth in our accident and health lines, as well as our aviation lines in recent periods, together with a decrease in ceded premiums earned in our property lines. Net premiums earned for the nine months ended September 30, 2017 was also impacted by strong premium growth in our property lines in recent periods.

The increase in net premiums earned in the reinsurance segment for the three months ended September 30, 2017 compared to the same periods in 2016, was primarily driven by strong premium growth in our motor lines, as well as favorable reinstatement premiums impacting our catastrophe lines, and favorable premium estimate adjustments impacting our agriculture lines, partially offset by an increase in ceded premiums earned in our catastrophe, agriculture and professional lines, as well as a decrease in gross premium earned in our professional lines.

The increase in net premiums earned in the reinsurance segment for the nine months ended September 30, 2017, compared to the same periods in 2016, driven by an increase in gross premium earned in our motor and agriculture lines, partially offset by an increase in ceded premiums earned in our agriculture and professional lines, together with a decrease in gross premiums earned in our professional lines.

Other Insurance Related Income (Losses):

Other insurance related losses was $3 million for the three months ended September 30, 2017, compared to other insurance related income of $6 million for the same period in 2016. The decrease in other insurance related income of $9 million was driven by the reinsurance segment and reflected a decrease in profit commissions associated with retrocessional agreements with strategic capital partner related to the third quarter catastrophe losses.

Other insurance related losses for the nine months ended September 30, 2017 was $4 million, compared to other insurance related income of $5 million for the same period in 2016. The decrease in other insurance related income of $9 million was driven by the reinsurance segment and reflected net realized losses on our weather and commodities derivative portfolio partially offset by fees from our strategic capital partners.






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UNDERWRITING EXPENSES

The following table provides a breakdown of our combined ratio:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
% Point
Change
 
2016
 
2017
 
% Point
Change
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year loss ratio
126.2
%
 
61.1
 
65.1
%
 
88.2
%
 
20.4
 
67.8
%
 
 
Prior year reserve development
(4.7
%)
 
3.4
 
(8.1
%)
 
(4.9
%)
 
3.1
 
(8.0
%)
 
 
Acquisition cost ratio
19.1
%
 
(1.2)
 
20.3
%
 
20.0
%
 
(0.1)
 
20.1
%
 
 
General and administrative expense ratio(1)
12.3
%
 
(3.0)
 
15.3
%
 
14.8
%
 
(1.0)
 
15.8
%
 
 
Combined ratio
152.9
%
 
60.3
 
92.6
%
 
118.1
%
 
22.4
 
95.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
The general and administrative expense ratio includes corporate expenses not allocated to reportable segments of 2.7% and 3.1% for the three months ended September 30, 2017 and 2016, respectively, and 3.3% and 3.1% for the six months ended September 30, 2017 and 2016, respectively. These costs are further discussed in the ‘Other Expenses (Revenues), Net’ section.

Current Accident Year Loss Ratio:

The current accident year loss ratio increased to 126.2% and 88.2% for the three and nine months ended September 30, 2017, respectively, from 65.1% and 67.8% for the three and nine months ended September 30, 2016, respectively.

The increase in the current accident year loss ratio for the three and nine months ended September 30, 2017 compared to the same period in 2016, was impacted by a higher level of catastrophe and weather-related losses. During the three and nine months ended September 30, 2017 we incurred pre-tax catastrophe and weather-related losses, net of reinstatement premiums, of $617 million or 61.4 points and $702 million or 24.1 points, respectively, primarily attributable to Hurricanes Harvey, Irma and Maria, the two earthquakes in Mexico and U.S. weather-related events. Comparatively, during the three and nine months ended September 30, 2016 we incurred pre-tax catastrophe and weather-related losses, net of reinstatement premiums of $22 million, or 2.3 points, and $145 million, or 5.3 points, respectively.

After adjusting for the impact of the catastrophe and weather-related losses, our current accident year loss ratio for the three and nine months ended September 30, 2017 was 64.8% and 64.1%, respectively, compared to 62.8% and 62.5% in the three and nine months ended September 30, 2016, respectively.

The increase in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses for the three months ended September 30, 2017 compared to the same period in 2016, was mainly due to higher attritional losses in our insurance property lines, higher mid-size loss experience in our reinsurance credit and surety lines, the ongoing impact of the Ogden rate change on our reinsurance motor lines together with the adverse impact on rate and trend.

The increase in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses for the nine months ended September 30, 2017 compared to the same period in 2016, was mainly due to higher loss experience in our insurance and reinsurance property lines, the adverse impact on rate and trend and the ongoing impact of the Ogden rate change on our reinsurance motor lines.

For further discussion on current accident year loss ratios, refer to the insurance and reinsurance segment discussions below.

Estimates of Significant Catastrophe Events

Our September 30, 2017 net reserves for losses and loss expenses includes estimated amounts for numerous catastrophe events. We caution that the magnitude and/or complexity of losses arising from certain of these events, in particular Hurricanes Harvey, Irma and Maria and the two earthquakes in Mexico as well as Hurricane Matthew, the Fort McMurray wildfires, Storm Sandy, the 2011 Japanese earthquake and tsunami, the 2010-11 New Zealand earthquakes and the Tianjin port explosion, inherently increases the level of uncertainty and, therefore, the level of management judgment involved in arriving at our estimated net reserves for losses and loss expenses. As a result, our actual losses for these events may ultimately differ materially from our current estimates.



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Our estimated net losses in relation to the catastrophe events described above were derived from ground-up assessments of our in-force contracts and treaties providing coverage in the affected regions. These assessments take into account the latest information available from clients, brokers and loss adjusters. In addition, we consider industry insured loss estimates, market share analyses and catastrophe modeling analyses, when appropriate. Our estimates remain subject to change, as additional loss data becomes available.

We continue to monitor paid and incurred loss development for catastrophe events of prior years and update our estimates of ultimate losses accordingly.

Prior Year Reserve Development:

Our favorable prior year reserve development was the net result of several underlying reserve developments on prior accident years, identified during our quarterly reserve review process. The following table provides a breakdown of prior year reserve development by segment:

 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
$
2,603

 
$
20,688

 
$
30,740

 
$
43,181

 
 
Reinsurance
45,165

 
55,331

 
112,755

 
180,950

 
 
Total
$
47,768

 
$
76,019

 
$
143,495

 
$
224,131

 
 
 
 
 
 
 
 
 
 
 

Overview

Our short tail business includes the underlying exposures in our property and other, marine and aviation reserve classes within our insurance segment, and the property and other reserve class within our reinsurance segment. Development from these classes contributed $5 million and $41 million of net favorable prior year reserve development for the three and nine months ended September 30, 2017, respectively. These short-tail lines contributed $41 million and $116 million of net favorable prior year reserve development for the three and nine months ended September 30, 2016, respectively. The net favorable development for these classes primarily reflected the recognition of better than expected loss emergence.

Our medium-tail business consists primarily of professional insurance and reinsurance reserve classes, credit and political risk insurance reserve class, and credit and surety reinsurance reserve class. For the three months ended September 30, 2017, the professional reinsurance reserve class contributed net favorable prior year reserve development of $9 million. For the nine months ended September 30, 2017, the professional insurance and reinsurance reserve classes contributed net favorable prior year reserve development of $54 million. For the three and nine months ended September 30, 2017 the credit and surety reinsurance reserve class recorded net favorable prior year reserve development of $17 million and $18 million, respectively. This net favorable prior year reserve development reflected the recognition of generally better than expected loss emergence.

For the three and nine months ended September 30, 2016, the professional reserve classes contributed net favorable prior year reserve development of $12 million and $28 million, respectively. The net favorable prior year reserve development on these reserve classes reflected the generally favorable experience as we continued to transition to more experience based methods.

Our long-tail business consists primarily of liability and motor reserve classes. For the nine months ended September 30, 2017, the liability reinsurance reserve class contributed net favorable prior year reserve development of $40 million. For the three and nine months ended and September 30, 2016, the liability reinsurance reserve class contributed net favorable prior year development of $10 million and $32 million, respectively. The net favorable prior year reserve development for our liability reinsurance reserve class in both years primarily reflected the progressively increased weight given by management to experience based indications on older accident years, which has generally been favorable. For the nine months ended September 30, 2017, the liability insurance reserve class recorded net adverse prior year reserve development of $6 million, primarily attributable to reserve strengthening within our run-off Bermuda excess casualty book of business.

For the three and nine months ended September 30, 2017, the motor reinsurance reserve class recorded net favorable prior year reserve development of $16 million and net adverse prior year reserve development of $4 million, respectively. For the three months ended September 30, 2017, the net favorable prior year reserve development related to favorable loss emergence trends on several classes of



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business spanning multiple accident years. For the nine months ended, the net adverse prior year development was driven by the U.K. Ministry of Justice’s recent announcement of a decrease in the discount rate used to calculate lump sum awards in U.K. bodily injury cases, known as the Ogden rate. Effective March 20, 2017, the Ogden rate changed from plus 2.5% to minus 0.75%. For the three and nine months ended September 30, 2016, the motor reinsurance reserve class contributed $7 million and $40 million, respectively, of net favorable prior year reserve development related to favorable loss emergence trends on several classes of business spanning multiple accident years.

We caution that conditions and trends that impacted the development of our liabilities in the past may not necessarily occur in the future.

The following sections provide further details on prior year reserve development by segment, reserving class and accident year.

Insurance Segment:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
Property and other
$
432

 
$
10,061

 
$
4,434

 
$
24,048

 
 
Marine
2,461

 
4,682

 
17,957

 
8,382

 
 
Aviation
(831
)
 
517

 
(4,344
)
 
437

 
 
Credit and political risk
(18
)
 
(25
)
 
(53
)
 
(232
)
 
 
Professional lines
(261
)
 
3,378

 
18,489

 
8,956

 
 
Liability
820

 
2,075

 
(5,743
)
 
1,590

 
 
Total
$
2,603

 
$
20,688

 
$
30,740

 
$
43,181

 
 
 
 
 
 
 
 
 
 
 

For the three months ended September 30, 2017 we recognized $3 million of net favorable prior year reserve development, the principal component of which was: 

$2 million of net favorable prior year reserve development on marine business, primarily related to accident year 2015 and primarily driven by better than expected development.

For the three months ended September 30, 2016 we recognized $21 million of net favorable prior year reserve development, the principal components of which were: 

$10 million of net favorable prior year reserve development on property and other business, driven by better than expected loss emergence, primarily driven by reductions in mid-size loss estimates impacting accident year 2015 and favorable loss experience in our accident and health lines impacting accident year 2014.

$5 million of net favorable prior year reserve development on marine business, driven by better than expected loss emergence, primarily driven by reductions in mid-size loss estimates impacting accident year 2015.

For the nine months ended September 30, 2017 we recognized $31 million of net favorable prior year reserve development, the principal components of which were: 

$18 million of net favorable prior year reserve development on professional lines business, primarily related to accident years 2013 and 2014 due to the recognition of better than expected development.

$18 million of net favorable prior year reserve development on marine business, primarily related to accident years 2013, 2015 and 2016 driven by better than expected loss emergence.

$6 million of net adverse prior year development on liability lines, primarily attributable to reserve strengthening on two large claims within our run-off Bermuda excess casualty book of business impacting 2014 and prior accident years.




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For the nine months ended September 30, 2016 we recognized $43 million of net favorable prior year reserve development, the principal components of which were: 

$24 million of net favorable prior year reserve development on property and other business, driven by better than expected loss emergence primarily related to accident year 2014.

$9 million of net favorable prior year reserve development on professional lines business, driven by better than expected
development related to various accident years, partially offset by reserve strengthening relating to updated information on one specific claim impacting accident year 2010.

$8 million of net favorable prior year reserve development on marine business, driven by better than expected loss emergence, primarily driven by reductions in mid-size loss estimates impacting accident year 2015.

Reinsurance Segment:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
Property and other
$
3,041

 
$
25,831

 
$
22,482

 
$
83,522

 
 
Credit and surety
16,838

 
3,900

 
18,361

 
6,761

 
 
Professional lines
8,918

 
8,761

 
35,764

 
18,918

 
 
Motor
15,653

 
6,653

 
(3,963
)
 
39,794

 
 
Liability
715

 
10,186

 
40,111

 
31,955

 
 
Total
$
45,165

 
$
55,331

 
$
112,755

 
$
180,950

 
 
 
 
 
 
 
 
 
 
 

For the three months ended September 30, 2017 we recognized $45 million of net favorable prior year reserve development, the principal components of which were:

$17 million of net favorable prior year reserve development on credit and surety, primarily related to accident years 2012 through 2015 driven by better than expected loss emergence.

$16 million of net favorable prior year reserve development on motor business, due to better than expected loss emergence emanating from all accident years, partially offset by the adverse impact of the recent change in Ogden rate.

$9 million of net favorable prior year reserve development on professional lines business, primarily related to earlier accident year 2009 for reasons discussed in the overview.

For the three months ended September 30, 2016 we recognized $55 million of net favorable prior year reserve development, the principal components of which were:

$26 million of net favorable prior year reserve development on property and other business, related to 2011 through 2015 accident years driven by better than expected loss emergence including a reserve reduction of $7 million related to Storm Sandy.

$10 million of net favorable prior year reserve development on liability business, primarily related to the 2007 through 2010 accident years, for reasons discussed in the overview.

$9 million of net favorable prior year reserve development on professional lines business, primarily related to the 2005 through 2010 accident years, for reasons discussed in the overview.

$7 million of net favorable prior year reserve development on motor business, related to non-proportional business spanning multiple accident years, driven by better than expected loss emergence.




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For the nine months ended September 30, 2017 we recognized $113 million of net favorable prior year reserve development, the principal components of which were:

$40 million of net favorable prior year reserve development on liability business, primarily related to accident years 2008 through 2010, for reasons discussed in the overview.

$36 million of net favorable prior year reserve development on professional lines business, primarily related to accident years 2008 through 2012, for reasons discussed in the overview.

$22 million of net favorable prior year reserve development on property and other business, primarily related to 2013, 2014 and 2016 accident years driven by overall better than expected loss emergence.

$18 million of net favorable prior year reserve development on credit and surety business, primarily related to accident year 2012 driven by better than expected loss emergence.

$4 million of net adverse prior year reserve development on motor business related to the impact of the recent change in Ogden rate, largely offset by continued better than expected loss emergence spanning multiple accident years.

For the nine months ended September 30, 2016 we recognized $181 million of net favorable prior year reserve development, the principal components of which were:

$84 million of net favorable prior year reserve development on property and other business, primarily related to the 2010 through 2015 accident years driven by better than expected loss emergence.

$40 million of net favorable prior year reserve development on motor business, primarily related to non-proportional business spanning multiple accident years, driven by better than expected loss emergence.

$32 million of net favorable prior year reserve development on liability business, primarily related to the 2006 through 2011 accident years, for reasons discussed in the overview.

$19 million of net favorable prior year reserve development on professional lines business, primarily related to the 2005 through 2010 accident years, for reasons discussed in the overview.

Acquisition Cost Ratio:

The acquisition cost ratio decreased to 19.1% and 20.0% for the three and nine months ended September 30, 2017, respectively, from 20.3% and 20.1% in the three and nine months ended September 30, 2016, respectively, driven by our reinsurance segment and primarily attributable to changes in business mix.

General and Administrative Expense Ratio:

The general and administrative expense ratio decreased to 12.3% and 14.8%for the three and nine months ended September 30, 2017, from 15.3% and 15.8% in the three and nine months ended September 30, 2016 respectively, primarily reflecting a decrease in performance related compensation costs and an increase in fees from strategic capital partners.






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RESULTS BY SEGMENT


INSURANCE SEGMENT

Results from our insurance segment were as follows:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
% Change
 
2016
 
2017
 
% Change
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
744,366

 
10%
 
$
675,430

 
$
2,234,395

 
6%
 
$
2,112,796

 
 
Net premiums written
500,022

 
15%
 
433,131

 
1,533,029

 
7%
 
1,433,058

 
 
Net premiums earned
496,004

 
12%
 
444,691

 
1,448,270

 
9%
 
1,322,649

 
 
Other insurance related income (losses)
526

 
nm
 
39

 
1,077

 
nm
 
(57
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Current year net losses and loss expenses
(631,468
)
 
 
 
(293,914
)
 
(1,272,235
)
 
 
 
(896,952
)
 
 
Prior year reserve development
2,603

 
 
 
20,688

 
30,740

 
 
 
43,181

 
 
Acquisition costs
(74,231
)
 
 
 
(61,755
)
 
(223,665
)
 
 
 
(184,982
)
 
 
General and administrative expenses
(75,038
)
 
 
 
(84,588
)
 
(253,308
)
 
 
 
(252,652
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
$
(281,604
)
 
nm
 
$
25,161

 
$
(269,121
)
 
nm
 
$
31,187

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
% Point
Change
 
 
 
 
 
% Point
Change
 
 
 
 
Current accident year loss ratio
127.3
%
 
61.2
 
66.1
%
 
87.8
%
 
20.0
 
67.8
%
 
 
Prior year reserve development
(0.5
%)
 
4.2
 
(4.7
%)
 
(2.1
%)
 
1.1
 
(3.2
%)
 
 
Acquisition cost ratio
15.0
%
 
1.1
 
13.9
%
 
15.4
%
 
1.4
 
14.0
%
 
 
General and administrative expense ratio
15.1
%
 
(4.0)
 
19.1
%
 
17.6
%
 
(1.4)
 
19.0
%
 
 
Combined ratio
156.9
%
 
62.5
 
94.4
%
 
118.7
%
 
21.1
 
97.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
nm – not meaningful




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Gross Premiums Written:

The following table provides gross premiums written by line of business:
 
  
Three months ended September 30,
 
 
 
Nine months ended September 30,
 
 
 
 
  
2017
 
 
 
2016
 
 
 
% Change
 
2017
 
 
 
2016
 
 
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property
$
154,882

 
19
%
 
$
164,605

 
25
%
 
(6%)
 
$
498,127

 
22
%
 
$
522,380

 
24
%
 
(5%)
 
 
Marine
42,483

 
6
%
 
33,677

 
5
%
 
26%
 
182,005

 
8
%
 
191,298

 
9
%
 
(5%)
 
 
Terrorism
12,147

 
2
%
 
9,394

 
1
%
 
29%
 
34,470

 
2
%
 
28,090

 
1
%
 
23%
 
 
Aviation
23,814

 
3
%
 
9,684

 
1
%
 
nm
 
59,434

 
3
%
 
37,111

 
2
%
 
60%
 
 
Credit and Political Risk
19,793

 
3
%
 
5,423

 
1
%
 
nm
 
51,105

 
2
%
 
34,299

 
2
%
 
49%
 
 
Professional Lines
213,009

 
29
%
 
204,926

 
30
%
 
4%
 
612,597

 
27
%
 
590,417

 
28
%
 
4%
 
 
Liability
131,975

 
18
%
 
108,447

 
16
%
 
22%
 
359,304

 
16
%
 
310,797

 
15
%
 
16%
 
 
Accident and Health
146,263

 
20
%
 
139,274

 
21
%
 
5%
 
437,353

 
20
%
 
398,404

 
19
%
 
10%
 
 
Total
$
744,366

 
100
%
 
$
675,430

 
100
%
 
10%
 
$
2,234,395

 
100
%
 
$
2,112,796

 
100
%
 
6%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Constant currency(1)
$
743,500

 
 
 
$
675,430

 
 
 
10%
 
$
2,245,400

 
 
 
$
2,112,796

 
 
 
6%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
nm – not meaningful
(1)
Amounts presented on a constant currency basis are non-GAAP financial measures as defined in SEC Regulation G. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to the prior year balance.

Gross premiums written for the three months ended September 30, 2017 increased by $69 million or 10% compared to the three months ended September 30, 2016. The increase in gross premiums written was attributable to our liability lines, and our credit and political risk lines driven by new business opportunities, together with an increase in our aviation lines associated with our recent acquisition of Aviabel. These increases were partially offset by a reduction in premiums written in our property lines following our exit from some retail insurance operations in the U.S. last year.

Gross premiums written for the nine months ended September 30, 2017 increased by $122 million or 6% compared to the nine months ended September 30, 2016. The increase in gross premiums written was attributable to our liability, our accident and health lines, and our professional lines primarily driven by new business opportunities, together with an increase in our aviation lines associated with our recent acquisition of Aviabel. These increases were partially offset by a reduction in premiums written in our property lines following our exit from some U.S. retail insurance operations last year.

Ceded Premiums Written:

Ceded premiums written for the three and nine months ended September 30, 2017 were $244 million or 33% of gross premiums written and $701 million or 31% of gross premiums written, respectively, compared to $242 million or 36% of gross premiums written and $680 million or 32% of gross premiums written for the three and nine months ended September 30, 2016, respectively.

The decrease in the ratio of ceded premiums written to gross premiums written for the three and nine months ended September 30, 2017 compared to the same periods in 2016, was primarily due to an increase in gross premiums written together with a decrease in premiums ceded in our property lines, partially offset by an increase in premiums ceded in our liability lines.





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Net Premiums Earned:

The following table provides net premiums earned by line of business:
 
  
Three months ended September 30,
 
 
 
Nine months ended September 30,
 
 
 
 
  
2017
 
 
 
2016
 
 
 
% Change
 
2017
 
 
 
2016
 
 
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property
$
116,771

 
22
%
 
$
106,578

 
25
%
 
10%
 
$
355,392

 
24
%
 
$
312,804

 
23
%
 
14%
 
 
Marine
34,217

 
7
%
 
36,218

 
8
%
 
(6%)
 
108,822

 
8
%
 
113,693

 
9
%
 
(4%)
 
 
Terrorism
8,790

 
2
%
 
8,276

 
2
%
 
6%
 
25,577

 
2
%
 
26,011

 
2
%
 
(2%)
 
 
Aviation
22,500

 
5
%
 
9,015

 
2
%
 
nm
 
53,265

 
4
%
 
33,528

 
3
%
 
59%
 
 
Credit and Political Risk
9,073

 
2
%
 
12,274

 
3
%
 
(26%)
 
29,957

 
2
%
 
42,661

 
3
%
 
(30%)
 
 
Professional Lines
126,946

 
26
%
 
126,574

 
28
%
 
—%
 
379,426

 
26
%
 
386,241

 
29
%
 
(2%)
 
 
Liability
48,135

 
10
%
 
42,205

 
9
%
 
14%
 
134,467

 
9
%
 
126,429

 
10
%
 
6%
 
 
Accident and Health
129,572

 
26
%
 
103,551

 
23
%
 
25%
 
361,364

 
25
%
 
281,282

 
21
%
 
28%
 
 
Total
$
496,004

 
100
%
 
$
444,691

 
100
%
 
12%
 
$
1,448,270

 
100
%
 
$
1,322,649

 
100
%
 
9%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Constant currency(1)
$
497,350

 
 
 
$
444,691

 
 
 
12%
 
$
1,458,850

 
 
 
$
1,322,649

 
 
 
10%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
nm - not meaningful
(1)
Amounts presented on a constant currency basis are non-GAAP financial measures as defined in SEC Regulation G. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to the prior year balance.

Net premiums earned for the three and nine months ended September 30, 2017 increased by $51 million or 12%, and $126 million or 9% ($136 million or 10% on a constant currency basis) compared to the three and nine months ended September 30, 2016, respectively.

The increase for the three and nine months ended September 30, 2017 compared to the same periods in 2016, was driven by strong premium growth in our accident and health lines as well as our aviation lines in recent periods, together with a decrease in ceded premiums earned in our property lines. Net premiums earned for the nine months ended September 30, 2017, was also impacted by strong premium growth in our property lines in recent periods.

Loss Ratio:

The table below shows the components of our loss ratio:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
 
2017
 
% Point
Change
 
2016
 
2017
 
% Point
Change
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year
127.3
%
 
61.2
 
66.1
%
 
87.8
%
 
20.0
 
67.8
%
 
 
Prior year reserve development
(0.5
%)
 
4.2
 
(4.7
%)
 
(2.1
%)
 
1.1
 
(3.2
%)
 
 
Loss ratio
126.8
%
 
65.4
 
61.4
%
 
85.7
%
 
21.1
 
64.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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Current Accident Year Loss Ratio:

The current accident year loss ratios increased to 127.3% and 87.8% for the three and nine months ended September 30, 2017, respectively, from 66.1% and 67.8% for the three and nine months ended September 30, 2016, respectively.

The increase in the current accident year loss ratios for the three and nine months ended September 30, 2017 compared to the same period in 2016, was impacted by a higher level of catastrophe and weather-related losses. During the three and nine months ended September 30, 2017 we incurred $317 million, or 64.0 points, and $379 million, or 26.1 points, respectively, in pre-tax catastrophe and weather-related losses, primarily attributable to Hurricanes Harvey, Irma and Maria and the two earthquakes in Mexico and U.S. weather-related events. Comparatively, during the three and nine months ended September 30, 2016, we incurred $15 million, or 3.3 points, and $73 million, or 5.5 points, respectively.

After adjusting for the impact of the catastrophe and weather-related losses, our current accident year loss ratio for the three and nine months ended September 30, 2017 was 63.3% and 61.7%, respectively, compared to 62.8% and 62.3% for the three and nine months ended September 30, 2016, respectively.

The increase in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses for the three months ended September 30, 2017 compared to the same period in 2016, was principally due to an increase in attritional loss experience in our property lines, together with the adverse impact of rate and trend, partially offset by changes in business mix.

The decrease in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses for the nine months ended September 30, 2017 compared to the same period in 2016, was principally due to the recognition of better than expected attritional loss experience in our professional lines, partially offset by the adverse impact of rate and trend.

Refer to the ‘Prior Year Reserve Development’ section for further details.

Acquisition Cost Ratio:

The acquisition cost ratio increased to 15.0% and 15.4% for the three and nine months ended September 30, 2017, respectively, from 13.9% and 14.0% for the three and nine months ended September 30, 2016, respectively, attributable to changes in business mix in our accident and health lines. In addition, for the three months ended September 30, 2017 the increase in the acquisition cost ratio was related to an increase in variable acquisition costs associated with on certain lines of business, partially offset by an increase in ceding commissions following increased cessions in our liability lines.

General and Administrative Expense Ratio:

The general and administrative expense ratio decreased to 15.1% and 17.6% for the three and nine months ended September 30, 2017, respectively, from 19.1% and 19.0% for the three and nine months ended September 30, 2016, respectively, reflecting a decrease in performance-related compensation costs and an increase in net premiums earned, partially offset by increases in the allocation of certain corporate expenses and information technology fees.




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REINSURANCE SEGMENT

Results from our reinsurance segment were as follows:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
% Change
 
2016
 
2017
 
% Change
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
441,208

 
55%
 
$
284,532

 
$
2,225,377

 
5%
 
$
2,126,762

 
 
Net premiums written
332,721

 
105%
 
162,300

 
1,764,689

 
(5%)
 
1,855,529

 
 
Net premiums earned
521,127

 
6%
 
489,724

 
1,488,995

 
2%
 
1,461,097

 
 
Other insurance related income (losses)
(3,723
)
 
nm
 
5,905

 
(5,497
)
 
nm
 
4,907

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Current year net losses and loss expenses
(651,667
)
 
 
 
(314,433
)
 
(1,318,900
)
 
 
 
(990,763
)
 
 
Prior year reserve development
45,165

 
 
 
55,331

 
112,755

 
 
 
180,950

 
 
Acquisition costs
(120,493
)
 
 
 
(128,055
)
 
(365,214
)
 
 
 
(374,588
)
 
 
General and administrative expenses
(21,658
)
 
 
 
(29,635
)
 
(82,474
)
 
 
 
(99,980
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income (loss)
$
(231,249
)
 
nm
 
$
78,837

 
$
(170,335
)
 
nm
 
$
181,623

 
 
Ratios:
 
 
% Point
Change
 
 
 
 
 
% Point
Change
 
 
 
 
Current accident year loss ratio
125.0
%
 
60.8
 
64.2
%
 
88.6
%
 
20.8
 
67.8
%
 
 
Prior year reserve development
(8.6
%)
 
2.7
 
(11.3
%)
 
(7.6
%)
 
4.8
 
(12.4
%)
 
 
Acquisition cost ratio
23.1
%
 
(3.0)
 
26.1
%
 
24.5
%
 
(1.1)
 
25.6
%
 
 
General and administrative expense ratio
4.2
%
 
(1.9)
 
6.1
%
 
5.6
%
 
(1.3)
 
6.9
%
 
 
Combined ratio
143.7
%
 
58.6
 
85.1
%
 
111.1
%
 
23.2
 
87.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
nm – not meaningful




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Gross Premiums Written:

The following table provides gross premiums written by line of business for the periods indicated:
 
  
Three months ended September 30,
 
 
 
Nine months ended September 30,
 
 
 
 
  
2017
 
 
 
2016
 
 
 
Change
 
2017
 
 
 
2016
 
 
 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophe
$
89,510

 
19
%
 
$
46,338

 
16
%
 
93%
 
$
411,004

 
18
%
 
$
316,692

 
15
%
 
30%
 
 
Property
90,001

 
20
%
 
61,957

 
22
%
 
45%
 
341,265

 
15
%
 
283,555

 
13
%
 
20%
 
 
Professional Lines
20,175

 
5
%
 
19,479

 
7
%
 
4%
 
217,772

 
10
%
 
235,094

 
11
%
 
(7%)
 
 
Credit and Surety
38,216

 
9
%
 
36,174

 
13
%
 
6%
 
183,284

 
8
%
 
315,102

 
15
%
 
(42%)
 
 
Motor
40,385

 
9
%
 
13,344

 
5
%
 
nm
 
373,901

 
17
%
 
338,403

 
16
%
 
10%
 
 
Liability
139,083

 
32
%
 
91,387

 
32
%
 
52%
 
368,999

 
17
%
 
365,380

 
17
%
 
1%
 
 
Agriculture
11,152

 
3
%
 
1,286

 
%
 
nm
 
218,437

 
10
%
 
151,315

 
7
%
 
44%
 
 
Engineering
10,120

 
2
%
 
13,588

 
5
%
 
(26%)
 
58,000

 
3
%
 
56,719

 
3
%
 
2%
 
 
Marine and Other
2,566

 
1
%
 
979

 
%
 
nm
 
52,715

 
2
%
 
64,502

 
3
%
 
(18%)
 
 
Total
$
441,208

 
100
%
 
$
284,532

 
100
%
 
55%
 
$
2,225,377

 
100
%
 
$
2,126,762

 
100
%
 
5%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Constant currency(1)
$
444,600

 
 
 
$
284,532

 
 
 
56%
 
$
2,277,100

 
 
 
$
2,126,762

 
 
 
7%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
nm – not meaningful
(1)
Amounts presented on a constant currency basis are non-GAAP financial measures as defined in SEC Regulation G. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to the prior year balance.

Gross premiums written increased by $157 million, or 55% (56% on a constant currency basis), for the three months ended September 30, 2017 compared to the same period in 2016. The increase was attributable to our liability, catastrophe, property and motor lines. The increase in our liability lines was primarily due to timing differences related to the restructuring of large quota share treaties which affected the timing of premium recognition. The increase in our catastrophe lines was largely due to reinstatement premiums associated with the third quarter catastrophe losses. The increase in our property and motor lines was primarily driven by new business opportunities. Timing differences also contributed to the increase in premiums written in our motor lines.

Gross premiums written increased by $99 million, or 5% (7% on a constant currency basis), for the nine months ended September 30, 2017 compared to the same period in 2016. The increase in gross premiums written was attributable to our catastrophe, agriculture, property and motor lines, partially offset by a decrease in our credit and surety lines. The increase in our catastrophe and property lines was driven by new business spread across several cedants. The increase in our agriculture lines was due to increased participation on a renewing treaty, which more than offset the cancellation of a large treaty. Reinstatement premiums and favorable premium estimate adjustments also contributed to the increase in premiums written in our catastrophe and agriculture lines. The increase in our motor lines was driven by new business and favorable premium adjustments, partially offset by a lower level of premiums written on a multi-year basis during 2017 compared to 2016, together with the impact of foreign exchange movements as the strengthening of the U.S. dollar drove comparative premium decreases in treaties denominated in foreign currencies. The decrease in our credit and surety lines was primarily due to a lower level of premiums written on a multi-year basis.

Ceded Premiums Written:

Ceded premiums written for the three and nine months ended September 30, 2017 were $108 million or 25% of gross premiums written and $461 million or 21% of gross premiums written, respectively, compared to $122 million or 43% of gross premiums written and $271 million or 13% of gross premiums written for the three and nine months ended September 30, 2016, respectively.

The decrease in the ratio of ceded premiums written to gross premiums written for the three months ended September 30, 2017 compared to the same period in 2016, was primarily due to an increase in gross premiums written in the quarter together with a decrease in premiums ceded to our strategic capital partners. The decrease in premiums ceded was attributable to our professional and liability lines, due to the timing of premiums ceded to the retrocessional cover entered into with Harrington Re Ltd., in the same period in 2016, partially offset by an increase in premiums ceded in our catastrophe lines.




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The increase in the ratio of ceded premiums written to gross premiums written for the nine months ended September 30, 2017 compared to the same period in 2016, was primarily due to an increase in premiums ceded in our catastrophe, agriculture and our credit and surety lines, together with the impact of the retrocessional cover entered into with Harrington Re Ltd., which increased premiums ceded in our liability lines, partially offset by an increase in gross premiums written.

Net Premiums Earned:

The following table provides net premiums earned by line of business:
 
  
Three months ended September 30,
 
 
 
Nine months ended September 30,
 
 
 
 
  
2017
 
  
 
2016
 
  
 
% Change
 
2017
 
  
 
2016
 
  
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophe
$
63,032

 
11
%
 
$
48,799

 
10
%
 
29%
 
$
150,134

 
12
%
 
$
151,416

 
12
%
 
(1%)
 
 
Property
81,522

 
16
%
 
71,649

 
15
%
 
14%
 
228,043

 
15
%
 
208,179

 
14
%
 
10%
 
 
Professional Lines
52,390

 
10
%
 
73,109

 
15
%
 
(28%)
 
170,438

 
11
%
 
225,813

 
15
%
 
(25%)
 
 
Credit and Surety
62,215

 
12
%
 
67,430

 
14
%
 
(8%)
 
176,754

 
12
%
 
192,135

 
13
%
 
(8%)
 
 
Motor
92,147

 
18
%
 
77,786

 
16
%
 
18%
 
273,568

 
18
%
 
232,383

 
16
%
 
18%
 
 
Liability
89,927

 
17
%
 
80,137

 
16
%
 
12%
 
258,500

 
17
%
 
247,103

 
17
%
 
5%
 
 
Agriculture
45,688

 
9
%
 
36,704

 
7
%
 
24%
 
138,554

 
9
%
 
106,251

 
7
%
 
30%
 
 
Engineering
18,529

 
4
%
 
18,573

 
4
%
 
—%
 
49,577

 
3
%
 
51,024

 
3
%
 
(3%)
 
 
Marine and Other
15,677

 
3
%
 
15,537

 
3
%
 
1%
 
43,427

 
3
%
 
46,793

 
3
%
 
(7%)
 
 
Total
$
521,127

 
100
%
 
$
489,724

 
100
%
 
6%
 
$
1,488,995

 
100
%
 
$
1,461,097

 
100
%
 
2%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Constant currency(1)
$
529,700

 
 
 
$
489,724

 
 
 
8%
 
$
1,540,200

 
 
 
$
1,461,097

 
 
 
5%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
nm – not meaningful
(1)
Amounts presented on a constant currency basis are non-GAAP financial measures as defined in SEC Regulation G. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to the prior year balance.

Net premiums earned increased by $31 million, or 6% ($40 million or 8% on a constant currency basis), and $28 million, or 2% ($79 million or 5% on a constant currency basis), for the three and nine months ended September 30, 2017, compared to the same periods in 2016, respectively.

The increase in net premiums earned for the three months ended September 30, 2017 compared to the same period in 2016, was primarily driven by strong premium growth in our motor lines, as well as favorable reinstatement premiums impacting our catastrophe lines, and favorable premium estimate adjustments impacting our agriculture lines. These increases were partially offset by an increase in ceded premiums earned in our catastrophe and agriculture lines, together with the impact of the retrocession to Harrington Re, which increased ceded premiums earned in our professional lines, as well as a decrease in gross premium earned in our professional lines.

The increase in net premiums earned for the nine months ended September 30, 2017 compared to the same period in 2016, was primarily driven by an increase in gross premiums earned in our motor and agriculture lines, partially offset by an increase in ceded premiums earned in our agriculture and professional lines, together with a decrease in gross premiums earned in our professional lines.

Other Insurance Related Income (Losses):

Other insurance related losses was $4 million for the three months ended September 30, 2017, compared to other insurance related income of $6 million for the same period in 2016. The decrease of $10 million for the three months ended September 30, 2017 compared to the same period in 2016, reflected a decrease in profit commissions associated with retrocessional agreements with strategic capital partners related to the third quarter catastrophe losses.

Other insurance related losses was $5 million for the nine months ended September 30, 2017, compared to other insurance related income of $5 million for the same period in 2016. The decrease of $10 million for the nine months ended September 30, 2017 compared to the same period in 2016, reflected net realized losses on our weather and commodities derivative portfolio, partially offset by fees from our strategic capital partners.



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Table of Contents




Loss Ratio:

The table below shows the components of our loss ratio:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
% Point
Change
 
2016
 
2017
 
% Point
Change
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year
125.0
%
 
60.8
 
64.2
%
 
88.6
%
 
20.8
 
67.8
%
 
 
Prior year reserve development
(8.6
%)
 
2.7
 
(11.3
%)
 
(7.6
%)
 
4.8
 
(12.4
%)
 
 
Loss ratio
116.4
%
 
63.5
 
52.9
%
 
81.0
%
 
25.6
 
55.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Current Accident Year Loss Ratio:

The current accident year loss ratio increased to 125.0% and 88.6% for the three and nine months ended September 30, 2017, respectively, from 64.2% and 67.8% for the three and nine months ended September 30, 2016, respectively.

The increase in the current accident year loss ratios for the three and nine months ended September 30, 2017 compared to the same period in 2016, was impacted by a higher level of catastrophe and weather-related losses. During the three and nine months ended September 30, 2017, we incurred pre-tax catastrophe and weather-related losses, net of reinstatement premiums, of $299 million, or 58.7 points, and $323 million, or 22.2 points, respectively, attributable to Hurricanes Harvey, Irma and Maria, the two earthquakes in Mexico and U.S. weather-related events. Comparatively, during the three and nine months ended September 30, 2016 we incurred pre-tax catastrophe and weather-related losses, net of reinstatement premiums of $7 million, or 1.5 points, and $72 million, or 5.0 points, respectively.

After adjusting for the impact of the catastrophe and weather-related losses, our current accident year loss ratio for the three and nine months ended September 30, 2017 was 66.3% and 66.4%, respectively, compared to 62.7% and 62.8% for the three and nine months ended September 30, 2016, respectively. The increase in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses for the three months ended September 30, 2017 compared to the same period in 2016, was principally due to an increase in mid-size loss experience in our credit and surety lines, the ongoing impact of the Ogden rate change on our motor lines, and the adverse impact of rate and trend.

The increase in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses for the nine months ended September 30, 2017 compared to the same period in 2016 was principally due to a large risk loss in our property lines, the ongoing impact of the Ogden rate change on our motor lines, and the adverse impact of rate and trend.

Refer ‘Prior Year Reserve Development’ for further details. 

Acquisition Cost Ratio:

The acquisition cost ratio decreased to 23.1% for the three months ended September 30, 2017 compared to 26.1% for the three months ended September 30, 2016 attributable to changes in business mix and the impact of favorable reinstatement premiums.

The acquisition cost ratio decreased to 24.5% for the nine months ended September 30, 2017 compared to 25.6% for the nine months ended September 30, 2016, attributable to changes in business mix, partially offset by the impact of retrocessional contracts.

General and Administrative Expense Ratio:

The general and administrative expense ratio decreased to 4.2% and 5.6% for the three and nine months ended September 30, 2017, respectively, from 6.1% and 6.9% for the three and nine months ended September 30, 2016, respectively, reflecting a decrease performance-related compensation costs, together with an increase in fees from strategic capital partners.





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Table of Contents




OTHER EXPENSES (REVENUES), NET


The following table provides a breakdown of our other expenses (revenues), net:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
% Change
 
2016
 
2017
 
% Change
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate expenses
$
27,933

 
(3%)
 
$
28,683

 
$
97,922

 
13%
 
$
86,922

 
 
Foreign exchange losses (gains)
32,510

 
nm
 
(13,795
)
 
90,093

 
nm
 
(69,781
)
 
 
Interest expense and financing costs
12,835

 
—%
 
12,839

 
38,377

 
(1%)
 
38,586

 
 
Income tax expense (benefit)
(25,877
)
 
nm
 
9,352

 
(38,547
)
 
nm
 
7,712

 
 
Total
$
47,401

 
nm
 
$
37,079

 
$
187,845

 
nm
 
$
63,439

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
nm – not meaningful

Corporate Expenses:

Our corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As a percentage of net premiums earned, corporate expenses were 2.7% and 3.3% for the three and nine months ended September 30, 2017, respectively, compared to 3.1% and 3.1% for the same periods in 2016, respectively.

The decrease in corporate expenses for the three months ended September 30, 2017 was primarily driven by a decrease in performance related compensation costs, an increase in the allocation of corporate costs to the insurance and reinsurance segments, and a decrease in professional fees, partially offset by higher personnel expenses.

The increase in corporate expenses for the nine months ended September 30, 2017 was primarily driven by an increase in personnel expenses and information technology costs, partially offset by an increase in the allocation of corporate expenses to the insurance and reinsurance segments and a decrease in performance related compensation costs.

Foreign Exchange Losses (Gains):

Some of our business is written in currencies other than the U.S. dollar. Foreign exchange losses of $33 million for the three months ended September 30, 2017 were primarily attributable to the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities mainly denominated in pound sterling and euro.

Foreign exchange losses of $90 million for the nine months ended September 30, 2017 were primarily attributable to the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities mainly denominated in pound sterling and euro and the reclass of a cumulative translation adjustment balance of $24 million related to the wind-down of AXIS Specialty Australia from accumulated other comprehensive income to foreign exchange losses.

Foreign exchange gains $14 million and $70 million for the three and nine months ended September 30, 2016, respectively, were primarily attributable to the impact the strengthening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling.




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Table of Contents



Income Tax Expense (Benefit):

Income tax primarily results from income generated by our foreign operations in the U.S. and Europe. Our effective tax rate is calculated as income tax expense divided by net income before tax including interest in loss of equity method investments. This effective rate can vary between periods depending on the distribution of net income amongst tax jurisdictions, as well as other factors.

The tax benefit of $26 million recognized in the three months ended September 30, 2017 was primarily driven by an underwriting loss associated with catastrophe losses recognized in our U.S. operations.

The tax benefit of $39 million recognized in the nine months ended September 30, 2017 was primarily driven by an underwriting loss associated with catastrophe losses recognized in our U.S. operations, share based compensation excess tax benefits which were recognized in the income statement, and a tax adjustment related to the bargain purchase gain recognized in connection with the acquisition of Aviabel.

Income tax expenses recognized in the three and nine months ended September 30, 2016 were primarily driven by the generation of consolidated pre-tax net income in our European operations.




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Table of Contents




NET INVESTMENT INCOME AND NET REALIZED INVESTMENT GAINS (LOSSES)


Net Investment Income

The following table provides a breakdown of income earned from our cash and investment portfolio by major asset class:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
% Change
 
2016
 
2017
 
% Change
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
$
74,978

 
(1%)
 
$
75,827

 
$
230,603

 
1%
 
$
229,423

 
 
Other investments
17,373

 
(55%)
 
38,248

 
59,973

 
nm
 
25,770

 
 
Equity securities
3,223

 
(30%)
 
4,633

 
11,048

 
(14%)
 
12,843

 
 
Mortgage loans
2,895

 
32%
 
2,191

 
7,970

 
40%
 
5,683

 
 
Cash and cash equivalents
3,111

 
(17%)
 
3,768

 
9,640

 
36%
 
7,071

 
 
Short-term investments
698

 
nm
 
337

 
1,797

 
nm
 
708

 
 
Gross investment income
102,278

 
(18%)
 
125,004

 
321,031

 
14%
 
281,498

 
 
Investment expense
(7,109
)
 
(12%)
 
(8,081
)
 
(21,132
)
 
(11%)
 
(23,680
)
 
 
Net investment income
$
95,169

 
(19%)
 
$
116,923

 
$
299,899

 
16%
 
$
257,818

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax yield:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
2.7
%
 
 
 
2.7
%
 
2.7
%
 
 
 
2.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
nm - not meaningful
(1)
Pre-tax yield is annualized and calculated as net investment income divided by the average month-end amortized cost balances for the periods indicated.

Fixed Maturities

Net investment income attributable to fixed maturities for the three and nine months ended September 30, 2017 was comparable to same periods in 2016.

Other Investments

The following table provides a breakdown of total net investment income from other investments:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
Hedge, direct lending, private equity and real estate funds
$
14,786

 
$
29,459

 
$
52,526

 
$
6,127

 
 
Other privately held investments
1,185

 
370

 
3,517

 
177

 
 
CLO - Equities
1,402

 
8,419

 
3,930

 
19,466

 
 
Total net investment income from other investments
$
17,373

 
$
38,248

 
$
59,973

 
$
25,770

 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax return on other investments(1)
2.1
%
 
4.5
%
 
7.5
%
 
3.1
%
 
 
 
 
 
 
 
 
 
 
 
(1)
The pre-tax return on other investments is non-annualized and calculated by dividing total net investment income from other investments by the average month-end fair value balances held for the periods indicated.

Net investment income attributable to other investments was $17 million and $60 million for the three and nine months ended September 30, 2017, respectively, compared to net investment income of $38 million and $26 million for the three and nine months ended September 30, 2016, respectively, as the improvement in the performance of the global equity and credit markets translated into higher valuations of our hedge and direct lending funds.




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Net Realized Investment Gains (Losses)

The following table provides a breakdown of net realized investment gains (losses):
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
On sale of investments:
 
 
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
3,404

 
$
4,303

 
$
(25,659
)
 
$
(22,869
)
 
 
Equity securities
17,935

 
4,994

 
33,536

 
2,881

 
 
 
21,339

 
9,297

 
7,877

 
(19,988
)
 
 
OTTI charges recognized in earnings
(5,412
)
 
(4,247
)
 
(13,493
)
 
(20,346
)
 
 
Change in fair value of investment derivatives
(1,295
)
 
155

 
(9,195
)
 
39

 
 
Net realized investment gains (losses)
$
14,632

 
$
5,205

 
$
(14,811
)
 
$
(40,295
)
 
 
 
 
 
 
 
 
 
 
 

On sale of investments

Generally, sales of individual securities occur when there are changes in the relative value, credit quality or duration of a particular issue. We may also sell to re-balance our investment portfolio in order to change exposure to particular asset classes or sectors.

Net realized investment gains for the three months ended September 30, 2017 were $15 million compared to net realized investment gains of $5 million for the three months ended September 30, 2016, an increase of $9 million. For the three months ended September 30, 2017, net realized investment gains were primarily due to improved pricing on equity securities. For the three months ended September 30, 2016, net realized investment gains were driven by improved pricing on fixed maturities and equity securities.

Net realized investment losses for the nine months ended September 30, 2017 were $15 million compared to net realized investment losses of $40 million for the nine months ended September 30, 2016, a decrease of $25 million. For the nine months ended September 30, 2017 and 2016, net realized investment losses were primarily due to foreign exchange losses on non-U.S. denominated securities.

OTTI charges

The OTTI charges for the three months ended September 30, 2017 were $5 million, compared to $4 million for the three months ended September 30, 2016, a decrease of $1 million. The OTTI charges for the nine months ended September 30, 2017 were $13 million, compared to $20 million for the nine months ended September 30, 2016, a decrease of $7 million. For all periods presented the OTTI charges were primarily due to impairments on non-U.S. denominated securities as a result of the decline in foreign exchange rates against the U.S. dollar.

Change in fair value of investment derivatives

From time to time, we may economically hedge the foreign exchange exposure of non-U.S. denominated securities by entering into foreign exchange forward contracts.

During 2017, we also introduced the use of interest rate swaps to reduce duration risk of our fixed income portfolio.

For the three months ended September 30, 2017, we recorded losses of $2 million relating to foreign exchange contracts and gains of $1 million relating to interest rates swaps. For the three months ended September 30, 2016 the fair value of foreign exchange contracts was unchanged.

For the nine months ended September 30, 2017, we recorded losses of $6 million relating to foreign exchange contracts and losses of $3 million relating to interest rates swaps. For the nine months ended September 30, 2016 the fair value of foreign exchange contracts was unchanged.



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Total Return

The following table provides a breakdown of the total return on cash and investments for the period indicated:
 
  
Three months ended September 30,
 
Nine months ended September 30,
 
 
  
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
$
95,169

 
$
116,923

 
$
299,899

 
$
257,818

 
 
Net realized investments gains (losses)
14,632

 
5,205

 
(14,811
)
 
(40,295
)
 
 
Change in net unrealized gains (losses)(1)
48,506

 
35,075

 
223,630

 
303,573

 
 
Interest in loss of equity method investments
(661
)
 
(2,434
)
 
(8,402
)
 
(2,434
)
 
 
Total
$
157,646

 
$
154,769

 
$
500,316

 
$
518,662

 
 
 
 
 
 
 
 
 
 
 
 
Average cash and investments(2)
$
14,533,027

 
$
14,470,231

 
$
14,519,902

 
$
14,457,978

 
 
 
 
 
 
 
 
 
 
 
 
Total return on average cash and investments, pre-tax:
 
 
 
 
 
 
 
 
 
Inclusive of investment related foreign exchange movements
1.1
%
 
1.1
%
 
3.4
%
 
3.6
%
 
 
Exclusive of investment related foreign exchange movements(3)
0.9
%
 
1.1
%
 
3.0
%
 
3.9
%
 
 
 
 
 
 
 
 
 
 
 
(1)
Change in net unrealized gains (losses) is calculated by taking net unrealized gains (losses) at period end less net unrealized gains (losses) at the prior period end.
(2)
The average cash and investments balance is calculated by taking the average of the month-end fair value balances held for the periods indicated.
(3)
Pre-tax return on cash and investments excluding foreign exchange movements is a non-GAAP financial measure as defined in SEC Regulation G. The reconciliation to pre-tax total return on cash and investments, the most comparable GAAP financial measure included foreign exchange gains (losses) of $22 million and $(8) million for the three months ended September 30, 2017 and 2016, respectively, and foreign exchange gains (losses) of $62 million and $(39) million for the nine months ended September 30, 2017 and 2016, respectively.



CASH AND INVESTMENTS


The table below provides a breakdown of our cash and investments:
 
  
September 30, 2017
 
December 31, 2016
 
 
  
 
Fair Value
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
$
11,086,386

 
 
$
11,397,114

 
 
Equity securities
 
659,751

 
 
638,744

 
 
Mortgage loans
 
360,381

 
 
349,969

 
 
Other investments
 
830,253

 
 
830,219

 
 
Equity method investments
 
108,597

 
 
116,000

 
 
Short-term investments
 
15,282

 
 
127,461

 
 
Total investments
 
$
13,060,650

 
 
$
13,459,507

 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents(1)
 
$
1,631,127

 
 
$
1,241,507

 
 
 
 
 
 
 
 
 
(1)
Includes restricted cash and cash equivalents of $281 million and $202 million at September 30, 2017 and at December 31, 2016, respectively.




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Overview

The fair value of total investments decreased by $399 million for the nine months ended September 30, 2017, due to the funding of financing and operating activities, partially offset by the improvement in valuations of fixed income and equity securities.

The following provides a further analysis on our investment portfolio by asset classes:

Fixed Maturities

The following provides a breakdown of our investment in fixed maturities:
 
  
September 30, 2017
 
December 31, 2016
 
 
  
Fair Value
 
% of Total
 
Fair Value
 
% of Total
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
1,547,318

 
14
%
 
$
1,656,069

 
15
%
 
 
Non-U.S. government
573,640

 
5
%
 
565,834

 
5
%
 
 
Corporate debt
4,503,967

 
41
%
 
4,600,743

 
40
%
 
 
Agency RMBS
2,306,822

 
21
%
 
2,465,135

 
22
%
 
 
CMBS
669,736

 
6
%
 
666,237

 
6
%
 
 
Non-Agency RMBS
43,817

 
%
 
56,921

 
%
 
 
ABS
1,288,870

 
12
%
 
1,222,214

 
11
%
 
 
Municipals(1)
152,216

 
1
%
 
163,961

 
1
%
 
 
Total
$
11,086,386

 
100
%
 
$
11,397,114

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
Credit ratings:
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
1,547,318

 
14
%
 
$
1,656,069

 
15
%
 
 
AAA(2)
4,381,049

 
40
%
 
4,165,226

 
36
%
 
 
AA
875,668

 
8
%
 
1,124,167

 
10
%
 
 
A
1,659,488

 
15
%
 
1,747,857

 
15
%
 
 
BBB
1,602,395

 
14
%
 
1,563,352

 
14
%
 
 
Below BBB(3)
1,020,468

 
9
%
 
1,140,443

 
10
%
 
 
Total
$
11,086,386

 
100
%
 
$
11,397,114

 
100
%
 
 
 
 
 
 
 
 
 
 
 
(1)
Includes bonds issued by states, municipalities, and political subdivisions.
(2)
Includes U.S. government-sponsored agency RMBS and CMBS.
(3)
Non-investment grade and non-rated securities.

At September 30, 2017, fixed maturities had a weighted average credit rating of AA- (2016: AA-) and an average duration of 3.3 years (2016: 3.5 years), and duration inclusive of interest rate swaps of 3.2 years. At September 30, 2017, inclusive of the short-term investments and cash and cash equivalents, the average credit rating was AA- (2016: AA-) and duration (including interest rate swaps) was 2.8 years (2016: 3.2 years).

Net unrealized investment gains on fixed maturities were $43 million at September 30, 2017 compared to net unrealized investment losses of $126 million at December 31, 2016, primarily due to the strengthening of the pound sterling and the euro against U.S. dollar which positively impacted valuations of non-U.S. denominated fixed maturity securities, together with the impact of the tightening of credit spreads on investment grade and high yield corporate debt.

Equity Securities

Net unrealized investment gains on equity securities were $41 million at December 31, 2016 compared to $97 million at September 30, 2017, an increase of $56 million due to an improvement in valuations reflective of performance of the global equity markets.




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Mortgage Loans

During the nine months ended September 30, 2017, our investment in commercial mortgage loans was comparable to December 31, 2016. The commercial mortgage loans are high quality and collateralized by a variety of commercial properties and are diversified both geographically throughout the U. S. and by property type to reduce the risk of concentration. At September 30, 2017, there were no credit losses associated with our commercial mortgage loans portfolio.

Other Investments

The composition of our other investments portfolio is summarized as follows:
 
 
 
 
 
 
 
 
 
 
 
  
September 30, 2017
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
Hedge funds
 
 
 
 
 
 
 
 
 
Long/short equity funds
$
64,067

 
8
%
 
$
118,619

 
14
%
 
 
Multi-strategy funds
286,452

 
35
%
 
285,992

 
34
%
 
 
Event-driven funds
48,578

 
6
%
 
93,539

 
11
%
 
 
Total hedge funds
399,097

 
49
%
 
498,150

 
59
%
 
 
 
 
 
 
 
 
 
 
 
 
Direct lending funds
232,389

 
28
%
 
134,650

 
16
%
 
 
Private equity funds
71,896

 
9
%
 
81,223

 
10
%
 
 
Real estate funds
46,691

 
6
%
 
13,354

 
2
%
 
 
Total hedge, direct lending, private equity and real estate funds
750,073

 
92
%
 
727,377

 
87
%
 
 
 
 
 
 
 
 
 
 
 
 
Other privately held investments
43,398

 
5
%
 
42,142

 
5
%
 
 
CLO - Equities
36,782

 
3
%
 
60,700

 
8
%
 
 
Total other investments
$
830,253

 
100
%
 
$
830,219

 
100
%
 
 
 
 
 
 
 
 
 
 
 

The fair value of total hedge funds decreased by $99 million during the nine month period ended September 30, 2017 driven by $127 million of net redemptions offset by $28 million of price appreciation. Certain of these funds may be subject to restrictions on redemptions which may limit our ability to liquidate these investments in the short term. See Note 4(c) to the Consolidated Financial Statements 'Investments' for further details on these restrictions and details on unfunded commitments relating to our other investment portfolio.

Equity Method Investments

During 2016, we paid $108 million including direct transactions costs to acquire 19% of the common equity of Harrington, the parent company of Harrington Re, an independent reinsurance company jointly sponsored by AXIS Capital and Blackstone. Harrington is not a variable interest entity. Given that we exercise significant influence over this investee we account for our ownership in Harrington under the equity method of accounting.

During the nine months ended September 30, 2017, we recorded an impairment charge of $9 million, related to a U.S. based insurance company, which reduced its carrying value to $nil. This charge is included in interest in income (loss) of equity method investments in the Consolidated Statement of Operations.




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LIQUIDITY AND CAPITAL RESOURCES


Refer to the ‘Liquidity and Capital Resources’ section included under Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016 for a general discussion of our liquidity and capital resources. During the nine months ended September 30, 2017, we:

redeemed the remaining $351 million of 6.875% Series C preferred shares on April 17, 2017; and

suspended our open market share repurchase program following the announcement of the offer to acquire Novae on July 5, 2017.

The following table summarizes our consolidated capital at:
 
 
September 30, 2017
 
December 31, 2016
 
 
 
 
 
 
 
 
Senior notes
$
993,797

 
$
992,950

 
 
 
 
 
 
 
 
Preferred shares
775,000

 
1,126,074

 
 
Common equity
4,679,699

 
5,146,296

 
 
Shareholders’ equity
5,454,699

 
6,272,370

 
 
Total capital
$
6,448,496

 
$
7,265,320

 
 
 
 
 
 
 
 
Ratio of debt to total capital
15.4
%
 
13.7
%
 
 
 
 
 
 
 
 
Ratio of debt and preferred equity to total capital
27.4
%
 
29.2
%
 
 
 
 
 
 
 

We finance our operations with a combination of debt and equity capital. Our debt to total capital and debt and preferred equity to total capital ratios provide an indication of our capital structure, along with some insight into our financial strength. A company with higher ratios in comparison to industry average may show weak financial strength because the cost of its debts may adversely affect results of operations and/or increase its default risk.

Our consolidated balance sheet at September 30, 2017 reflected a decrease in preferred equity due to redemption of the remaining $351 million of 6.875% Series C preferred shares on April 17, 2017.

We believe that our financial flexibility remains strong.

Credit Facilities

On March 27, 2017, the $250 million credit facility entered into by AXIS Capital and certain of its subsidiaries and a syndication of lenders expired.

On March 27, 2017, certain of AXIS Capital’s operating subsidiaries (the "Participating Subsidiaries") amended their existing $500 million secured letter of credit facility (the “LOC Facility”) with Citibank Europe plc (“Citibank”) to include an additional
$250 million of secured letter of credit capacity (the “$250 Million Facility”) pursuant to a Committed Facility Letter and an amendment to the Master Reimbursement Agreement (the “LOC Facility Documents”). Under the terms of the $250 Million Facility, letters of credit to a maximum aggregate amount of $250 million are available for issuance on behalf of the Participating Subsidiaries. These letters of credit will principally be used to support the reinsurance obligations of the Participating Subsidiaries. The $250 Million Facility is subject to certain covenants, including the requirement to maintain sufficient collateral, as defined in the LOC Facility Documents, to cover all of the obligations under the LOC Facility.



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Such obligations include contingent reimbursement obligations for outstanding letters of credit and fees payable to Citibank. In the event of default, Citibank may exercise certain remedies, including the exercise of control over pledged collateral and the termination of the availability of the LOC Facility to any or all of the Participating Subsidiaries. The $250 million Facility expires March 31, 2018. The terms and conditions of the $500 million Facility remain unchanged. 

Common Equity

During the nine months ended September 30, 2017, our common equity decreased by $467 million. The following table reconciles our opening and closing common equity positions:
 
Nine months ended September 30,
2017
 
 
 
 
 
 
Common equity - opening
$
5,146,296

 
 
Net loss
(341,541
)
 
 
Shares repurchased for treasury
(285,659
)
 
 
Change in unrealized appreciation on available for sale investments, net of tax
216,630

 
 
Common share dividends
(98,273
)
 
 
Preferred share dividends
(36,154
)
 
 
Share-based compensation expense recognized in equity
30,692

 
 
Foreign currency translation adjustment
46,824

 
 
Cost of treasury shares reissued
884

 
 
Common equity - closing
$
4,679,699

 
 
 
 
 

During the nine months ended September 30, 2017, we repurchased 4.3 million common shares, repurchased for a total of $286 million (including $261 million pursuant to our Board-authorized share repurchase program and $25 million relating to shares purchased in connection with the vesting of restricted stock awards granted under our 2007 Long-Term Equity Compensation Plan).
At November 8, 2017, the remaining authorization under the common share repurchase program approved by our Board of Directors was $739 million (refer to Part II, Item 2 'Unregistered Sales of Equity Securities and Use of Proceeds' for additional information).
However, following the Company's announcement of the offer to acquire Novae on July 5, 2017, the Company suspended its open market share repurchase program.

We continue to expect that cash flows generated from our operations, combined with the liquidity provided by our investment portfolio, will be sufficient to cover our required cash outflows and other contractual commitments through the foreseeable future.




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CRITICAL ACCOUNTING ESTIMATES


Our Consolidated Financial Statements include certain amounts that are inherently uncertain and judgmental in nature. As a result, we are required to make assumptions and best estimates in order to determine the reported values. We consider an accounting estimate to be critical if: (1) it requires that significant assumptions be made in order to deal with uncertainties and (2) changes in the estimate could have a material impact on our results of operations, financial condition or liquidity.

As disclosed in our 2016 Annual Report on Form 10-K, we believe that the material items requiring such subjective and complex estimates are our:

reserves for losses and loss expenses;

reinsurance recoverable balances;

premiums;

fair value measurements for our financial assets and liabilities; and

assessments of other-than-temporary impairments.

We believe that the critical accounting estimates discussion in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016, continues to describe the significant estimates and judgments included in the preparation of our Consolidated Financial Statements.


RECENT ACCOUNTING PRONOUNCEMENTS


Refer to Item 1, Note 1 'Basis of Presentation and Accounting Policies' to the Consolidated Financial Statements and Item 8, Note 2 'Significant Accounting Policies' to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016, for a discussion of recently issued accounting pronouncements that we have not yet adopted.
 

OFF-BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS

At September 30, 2017, we have not entered into any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K.




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ITEM 3.     QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 


Refer to Item 7A included in our 2016 Form 10-K. With the exception of the changes in exposure to foreign currency risk presented below, there have been no material changes to this item since December 31, 2016.

Foreign Currency Risk
The table below provides a sensitivity analysis of our total net foreign currency exposures.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
AUD
 
NZD
 
CAD
 
EUR
 
GBP
 
JPY
 
Other
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net managed assets (liabilities), excluding derivatives
$
(29,134
)
 
$
(9,733
)
 
$
85,047

 
$
(177,485
)
 
$
167,796

 
$
38,025

 
$
156,473

 
$
230,989

 
 
Foreign currency derivatives, net
12,702

 
7,221

 
(101,930
)
 
249,587

 
89,740

 
(8,879
)
 
9,880

 
258,321

 
 
Net managed foreign currency exposure
(16,432
)
 
(2,512
)
 
(16,883
)
 
72,102

 
257,536

 
29,146

 
166,353

 
489,310

 
 
Other net foreign currency exposure
1

 

 
(49
)
 
1,558

 
1,049

 

 
83,283

 
85,842

 
 
Total net foreign currency exposure
$
(16,431
)
 
$
(2,512
)
 
$
(16,932
)
 
$
73,660

 
$
258,585

 
$
29,146

 
$
249,636

 
$
575,152

 
 
Net foreign currency exposure as a percentage of total shareholders’ equity
(0.3
%)
 
%
 
(0.3
%)
 
1.4
%
 
4.7
%
 
0.5
%
 
4.6
%
 
10.5
%
 
 
Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement(1)
$
(1,643
)
 
$
(251
)
 
$
(1,693
)
 
$
7,366

 
$
25,859

 
$
2,915

 
$
24,964

 
$
57,517

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Assumes 10% change in underlying currencies relative to the U.S. dollar.

Total Net Foreign Currency Exposure

At September 30, 2017, our total net foreign currency exposure was $575 million net long, driven by increases in our exposures to the euro, pound sterling, Japanese yen and other non-core currencies primarily due to new business written during the nine months ended September 30, 2017. In addition, our pound sterling exposure was increased to fund the acquisition of Novae. Managed exposure in Other is primarily Indian rupee, UAE Dirham (pegged to USD) and Israeli shekel. Other net exposure of $83 million is driven by our emerging markets debt fixed income portfolio.


ITEM 4.     CONTROLS AND PROCEDURES


The Company’s management has performed an evaluation, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)) as of September 30, 2017. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2017, our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

The Company’s management has performed an evaluation, with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of changes in the Company’s internal control over financial reporting that occurred during the three months ended September 30, 2017. Based upon that evaluation, there were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II     OTHER INFORMATION

 


ITEM 1.     LEGAL PROCEEDINGS


From time to time, we are subject to routine legal proceedings, including arbitrations, arising in the ordinary course of business. These legal proceedings generally relate to claims asserted by or against us in the ordinary course of insurance or reinsurance operations; estimated amounts payable under such proceedings are included in the reserve for losses and loss expenses in the Consolidated Balance Sheets.

We are not a party to any material legal proceedings arising outside the ordinary course of business.


ITEM 1A.     RISK FACTORS

Other than the additional risk factor disclosed in our Quarterly Report on Form 10-Q for the period ended June 30, 2017, there have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.


 





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ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


The following table presents information regarding the number of shares we repurchased during the three months ended September 30, 2017:

ISSUER PURCHASES OF EQUITY SECURITIES

Common Shares
Period
Total Number
of Shares
Repurchased
Average
Price Paid
Per Share
Total Number of Shares
Repurchased as Part of
Publicly Announced
Plans or Programs(1)
Maximum Number (or Approximate
Dollar Value) of Shares That May Yet Be
Repurchased Under the Announced Plans
or Programs(2)
 
 
 
 
 
 
 
July 1-31, 2017
51


$65.74

49

$739.0 million
 
August 1-31, 2017


$—


$739.0 million
 
September 1-30, 2017


$—


$739.0 million
 
Total  
51

 
49

$739.0 million
 
 
 
 
 
 
 
(1)
From time to time, we purchase shares in connection with the vesting of restricted stock awards granted to our employees under our 2007 Long-Term Equity Compensation Plan. The purchase of these shares is separately authorized and is not part of our Board-authorized share repurchase program, described below.
(2)
On December 9, 2016, our Board of Directors authorized a share repurchase plan to repurchase up to $1 billion of our common shares through to December 31, 2017. The share repurchase authorization which became effective on January 1, 2017, replaced the previous plan which had $253 million available through the end of 2016. Share repurchases may be effected from time to time in the open market or privately negotiated transactions, depending on market conditions.




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ITEM 5.     OTHER INFORMATION


Disclosure of Certain Activities Under Section 13(r) of the Securities Exchange Act of 1934

Section 13(r) of the Securities Exchange Act of 1934, as amended, requires issuers to disclose in their annual and quarterly reports whether they or any of their affiliates knowingly engaged in certain activities with Iran or with individuals or entities that are subject to certain sanctions under U.S. law. Issuers are required to provide this disclosure even where the activities, transactions or dealings are conducted outside of the U.S. in compliance with applicable law.

As and when allowed by the applicable law and regulations, certain of our non-U.S. subsidiaries provide treaty reinsurance coverage to non-U.S. insurers on a worldwide basis, including insurers of liability, marine, aviation and energy risks, and as a result, these underlying reinsurance portfolios may have some exposure to Iran. In addition, we underwrite insurance and facultative reinsurance on a global basis to non-U.S. insureds and insurers, including for liability, marine, aviation and energy risks. Coverage provided to non-Iranian business may indirectly cover an exposure in Iran. For example, certain of our operations underwrite global marine hull and cargo policies that provide coverage for vessels navigating into and out of ports worldwide, including Iran. For the quarter ended September 30, 2017, there has been no material amount of premium allocated or apportioned to activities relating to Iran. As we believe these activities are permitted under applicable laws and regulations, we intend for our non-U.S. subsidiaries to continue to provide such coverage to the extent permitted by applicable law.




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ITEM 6.     EXHIBITS

Rule 2.7 Announcement, dated July 5, 2017 (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on July 6, 2017).
Rule 2.7 Announcement, dated August 24, 2017 (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on August 25, 2017).
Certificate of Incorporation and Memorandum of Association (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1(Amendment No. 1) (No. 333-103620) filed on April 16, 2003).
Amended and Restated Bye-Laws (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 filed on May 15, 2009).
Specimen Common Share Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (Amendment No. 3) (No. 333-103620) filed on June 10, 2003).
Certificate of Designations establishing the specific rights, preferences, limitations and other terms of the Series D Preferred Shares (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on May 20, 2013).
Certificate of Designations establishing the specific rights, preferences, limitations and other terms of the Series E Preferred Shares (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on November 7, 2016).
†*10.1
2018 Directors Annual Compensation Program.
31.1
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
†101
The following financial information from AXIS Capital Holdings Limited’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 formatted in XBRL: (i) Consolidated Balance Sheets at September 30, 2017 and December 31, 2016; (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016; (iv) Consolidated Statements of Changes in Shareholders' Equity for the nine months ended September 30, 2017 and 2016; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.

*
Exhibit 10.1 represents a management contract, compensatory plan or arrangement in which directors and/or executive officers are eligible to participate.
Filed herewith.

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: November 8, 2017
 
AXIS CAPITAL HOLDINGS LIMITED
By:
 
/S/ ALBERT BENCHIMOL
 
Albert Benchimol
 
President and Chief Executive Officer
 
 
 
/S/ JOSEPH HENRY
 
Joseph Henry
 
Executive Vice President and Chief Financial Officer
 
(Principal Financial Officer)




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