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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common shares, par value $0.0125 per share
AXS
New York Stock Exchange
5.50% Series D preferred shares
AXS PRD
New York Stock Exchange
Depositary Shares, each representing a 1/100th interest in a 5.50% Series E preferred share
AXS PRE
New York Stock Exchange
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  ☒    No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes  ☒  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
☒
 
    Accelerated filer
☐
Non-accelerated filer
☐
 
 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  ☒
At July 31 2019, there were 83,946,833 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
 
 
3
Item 1.
5
Item 2.
49
Item 3.
91
Item 4.
91
 
PART II
 
 
93
Item 1.
93
Item 1A.
93
Item 2.
93
Item 5.
94
Item 6.
95
 
96


2
Table of Contents


PART I
FINANCIAL INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts included in this report, including statements regarding our estimates, beliefs, expectations, intentions, strategies or projections are forward-looking statements. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the United States federal securities laws. In some cases, these statements can be identified by the use of forward-looking words such as "may", "should", "could", "anticipate", "estimate", "expect", "plan", "believe", "predict", "potential" and "intend" or similar expressions. These forward-looking statements are not historical facts, and are based upon current expectations, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond management's control.
Forward-looking statements contained in this report may include, but are not limited to, information regarding our estimates of losses related to catastrophes and other large losses, measurements of potential losses in the fair market value of our investment portfolio and derivative contracts, our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, the outcome of our strategic initiatives, our expectations regarding estimated synergies and the success of the integration of acquired entities, our expectations regarding the estimated benefits and synergies related to our transformation program, our expectations regarding pricing and other market conditions, our growth prospects, and valuations of the potential impact of movements in interest rates, equity securities' prices, credit spreads and foreign currency rates.
Forward-looking statements only reflect our expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. We believe that these factors include, but are not limited to, the following: 
•
the cyclical nature of the insurance and reinsurance business leading to periods with excess underwriting capacity and unfavorable premium rates;
•
the occurrence and magnitude of natural and man-made disasters;
•
the impact of global climate change on our business, including the possibility that we do not adequately assess or reserve for the increased frequency and severity of natural catastrophes;
•
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;


3
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•
changes in the political environment of certain countries in which we operate or underwrite business including the United Kingdom's expected withdrawal from the European Union;
•
fluctuations in interest rates, credit spreads, equity securities' prices and/or currency values;
•
the failure to successfully integrate acquired businesses or realize the expected synergies resulting from such acquisitions;
•
the failure to realize the expected benefits or synergies relating to our transformation initiative;
•
changes in tax laws; and
•
the other factors including but not limited to those described under Item 1A, 'Risk Factors' and Item 7, 'Management’s Discussion and Analysis of Financial Condition and Results of Operations' included in our most recent Annual Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC"), as those factors may be updated from time to time in our periodic and other filings with the SEC, which are accessible on the SEC's website at www.sec.gov.

We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Website and Social Media Disclosure

We use our website (www.axiscapital.com) and our corporate Twitter (@AXIS_Capital) and LinkedIn (AXIS Capital) accounts as channels of distribution of Company information. The information we post through these channels may be deemed material.  Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, e-mail alerts and other information about AXIS Capital may be received when enrolled in our "E-mail Alerts" program in the Investor Information section of our website (www.axiscapital.com). The contents of our website and social media channels are not, however, a part of this Quarterly Report on Form 10-Q.



4
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ITEM 1.     CONSOLIDATED FINANCIAL STATEMENTS
 
 
Page  
 
 
Consolidated Balance Sheets at June 30, 2019 (Unaudited) and December 31, 2018
6
Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 (Unaudited)
7
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018 (Unaudited)
8
Consolidated Statements of Changes in Shareholders' Equity for the three and six months ended June 30, 2019 and 2018 (Unaudited)
9
Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (Unaudited)
10
Notes to Consolidated Financial Statements (Unaudited)
11
Note 1 - Basis of Presentation and Significant Accounting Policies
11
Note 2 - Segment Information
13
Note 3 - Investments
15
Note 4 - Fair Value Measurements
24
Note 5 - Derivative Instruments
34
Note 6 - Reserve for Losses and Loss Expenses
36
Note 7 - Earnings Per Common Share
40
Note 8 - Share-Based Compensation
41
Note 9 - Shareholders' Equity
42
Note 10 - Debt and Financing Arrangements
44
Note 11 - Commitments and Contingencies
45
Note 12 - Leases
45
Note 13 - Transaction and Reorganization Expenses
47
Note 14 - Other Comprehensive Income (Loss)
48





5
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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2019 (UNAUDITED) AND DECEMBER 31, 2018
 
 
2019
 
2018
 
(in thousands)
Assets
 
 
 
Investments:
 
 
 
Fixed maturities, available for sale, at fair value
(Amortized cost 2019: $12,343,774; 2018: $11,616,312)
$
12,522,955

 
$
11,435,347

Equity securities, at fair value
(Cost 2019: $377,895; 2018: $365,905)
433,407

 
381,633

Mortgage loans, held for investment, at fair value
394,179

 
298,650

Other investments, at fair value
802,064

 
787,787

Equity method investments
112,956

 
108,103

Short-term investments, at fair value
32,421

 
144,040

Total investments
14,297,982

 
13,155,560

Cash and cash equivalents
712,463

 
1,232,814

Restricted cash and cash equivalents
382,251

 
597,206

Accrued interest receivable
82,567

 
80,335

Insurance and reinsurance premium balances receivable
3,732,529

 
3,007,296

Reinsurance recoverable on unpaid losses and loss expenses
3,564,812

 
3,501,669

Reinsurance recoverable on paid losses and loss expenses
364,536

 
280,233

Deferred acquisition costs
657,275

 
566,622

Prepaid reinsurance premiums
1,291,979

 
1,013,573

Receivable for investments sold
25,850

 
32,627

Goodwill
102,003

 
102,003

Intangible assets
236,009

 
241,568

Value of business acquired
15,416

 
35,714

Operating lease right-of-use assets
132,940

 
—

Other assets
271,562

 
285,346

Total assets
$
25,870,174

 
$
24,132,566

Liabilities
 
 
 
Reserve for losses and loss expenses
$
12,254,711

 
$
12,280,769

Unearned premiums
4,503,132

 
3,635,758

Insurance and reinsurance balances payable
1,484,285

 
1,338,991

Senior notes
1,387,748

 
1,341,961

Payable for investments purchased
181,274

 
111,838

Operating lease liabilities
133,257

 
—

Other liabilities
359,290

 
393,178

Total liabilities
20,303,697

 
19,102,495

Shareholders’ equity
 
 
 
Preferred shares
775,000

 
775,000

Common shares (shares issued 2019: 176,580; 2018: 176,580
shares outstanding 2019: 83,947; 2018: 83,586)
2,206

 
2,206

Additional paid-in capital
2,303,592

 
2,308,583

Accumulated other comprehensive income (loss)
156,145

 
(177,110
)
Retained earnings
6,108,577

 
5,912,812

Treasury shares, at cost (2019: 92,633; 2018: 92,994 shares)
(3,779,043
)
 
(3,791,420
)
Total shareholders’ equity
5,566,477

 
5,030,071

Total liabilities and shareholders’ equity
$
25,870,174

 
$
24,132,566


See accompanying notes to Consolidated Financial Statements.

6
Table of Contents


AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018

 
Three months ended
 
Six months ended
 
2019
 
2018
 
2019
 
2018
 
(in thousands, except for per share amounts)
Revenues
 
 
 
 
 
 
 
Net premiums earned
$
1,123,607

 
$
1,185,548

 
$
2,257,819

 
$
2,352,950

Net investment income
137,949

 
109,960

 
245,254

 
210,961

Other insurance related income
2,925

 
3,730

 
9,852

 
10,335

Net investment gains (losses):
 
 
 
 
 
 
 
Other-than-temporary impairment ("OTTI") losses
(834
)
 
(1,674
)
 
(4,870
)
 
(2,088
)
Other realized and unrealized investment gains (losses)
22,059

 
(43,419
)
 
38,866

 
(57,835
)
Total net investment gains (losses)
21,225

 
(45,093
)
 
33,996

 
(59,923
)
Total revenues
1,285,706

 
1,254,145

 
2,546,921

 
2,514,323

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Net losses and loss expenses
672,463

 
706,641

 
1,336,491

 
1,367,986

Acquisition costs
242,363

 
231,952

 
502,781

 
461,212

General and administrative expenses
165,395

 
165,213

 
340,486

 
335,049

Foreign exchange gains
(12,381
)
 
(44,099
)
 
(5,325
)
 
(6,239
)
Interest expense and financing costs
15,607

 
17,098

 
31,502

 
33,861

Transaction and reorganization expenses
3,276

 
18,772

 
18,096

 
31,825

    Amortization of value of business acquired
7,194

 
53,407

 
20,298

 
110,517

    Amortization of intangible assets
2,912

 
4,029

 
5,914

 
6,811

Total expenses
1,096,829

 
1,153,013

 
2,250,243

 
2,341,022

 
 
 
 
 
 
 
 
Income before income taxes and interest in income of equity method investments
188,877

 
101,132

 
296,678

 
173,301

Income tax (expense) benefit
(14,469
)
 
(996
)
 
(15,703
)
 
40

Interest in income of equity method investments
2,635

 
3,378

 
4,853

 
3,378

Net income
177,043

 
103,514

 
285,828

 
176,719

Preferred share dividends
10,656

 
10,656

 
21,313

 
21,313

Net income available to common shareholders
$
166,387

 
$
92,858

 
$
264,515

 
$
155,406

 
 
 
 
 
 
 
 
Per share data
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Earnings per common share
$
1.98

 
$
1.11

 
$
3.16

 
$
1.86

Earnings per diluted common share
$
1.97

 
$
1.11

 
$
3.14

 
$
1.85

Weighted average common shares outstanding
83,941

 
83,539

 
83,834

 
83,431

Weighted average diluted common shares outstanding
84,401

 
83,984

 
84,338

 
83,853

 
 
 
 
 
 
 
 



See accompanying notes to Consolidated Financial Statements.

7
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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018
 
 
Three months ended
 
Six months ended
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Net income
$
177,043

 
$
103,514

 
$
285,828

 
$
176,719

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Available for sale investments:
 
 
 
 
 
 
 
Unrealized investment gains (losses) arising during the period
131,442

 
(105,280
)
 
321,651

 
(217,434
)
Adjustment for reclassification of net realized investment (gains) losses and OTTI losses recognized in net income
(6,949
)
 
36,456

 
6,385

 
37,240

Unrealized investment gains (losses) arising during the period, net of reclassification adjustment
124,493

 
(68,824
)
 
328,036

 
(180,194
)
Foreign currency translation adjustment
2,556

 
(9,129
)
 
5,219

 
(7,858
)
Total other comprehensive income (loss), net of tax
127,049

 
(77,953
)
 
333,255

 
(188,052
)
Comprehensive income (loss)
$
304,092

 
$
25,561

 
$
619,083

 
$
(11,333
)



See accompanying notes to Consolidated Financial Statements.

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Table of Contents


AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2019 AND 2018
 
Three months ended
 
Six months ended
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
Preferred shares
 
 
 
 
 
 
 
Balance at beginning and end of period
775,000

 
775,000

 
$
775,000

 
$
775,000

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

 
2,206

 
2,206

 
2,206

 
 
 
 
 
 
 
 
Additional paid-in capital
 
 
 
 
 
 
 
Balance at beginning of period
2,296,639

 
2,289,497

 
2,308,583

 
2,299,166

Treasury shares reissued
(756
)
 
(2,607
)
 
(20,058
)
 
(21,879
)
Share-based compensation expense
7,709

 
8,743

 
15,067

 
18,346

Balance at end of period
2,303,592

 
2,295,633

 
2,303,592

 
2,295,633

 
 
 
 
 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
 
 
 
 
Balance at beginning of period
29,096

 
(85,216
)
 
(177,110
)
 
92,382

Unrealized gains (losses) on available for sale investments, net of tax:
 
 
 
 
 
 
 
Balance at beginning of period
35,178

 
(88,906
)
 
(168,365
)
 
89,962

Cumulative effect of adoption of ASU No. 2018-02

—

 
(36
)
 
—

 
2,106

Cumulative effect of adoption of ASU No. 2016-01, net of taxes
—

 
—

 
—

 
(69,604
)
Unrealized gains (losses) arising during the period, net of reclassification adjustment
124,493

 
(68,788
)
 
328,036

 
(180,194
)
Balance at end of period
159,671

 
(157,730
)
 
159,671

 
(157,730
)
Cumulative foreign currency translation adjustments, net of tax:
 
 
 
 
 
 
 
Balance at beginning of period
(6,082
)
 
3,690

 
(8,745
)
 
2,420

Foreign currency translation adjustment
2,556

 
(9,128
)
 
5,219

 
(7,858
)
Balance at end of period
(3,526
)
 
(5,438
)
 
(3,526
)
 
(5,438
)
Balance at end of period
156,145

 
(163,168
)
 
156,145

 
(163,168
)
 
 
 
 
 
 
 
 
Retained earnings
 
 
 
 
 
 
 
Balance at beginning of period
5,976,603

 
6,076,294

 
5,912,812

 
5,979,666

Cumulative effect of adoption of ASU No. 2018-02
—

 
36

 
—

 
(2,106
)
Cumulative effect of adoption of ASU No. 2016-01, net of taxes
—

 
—

 
—

 
69,604

Net income
177,043

 
103,514

 
285,828

 
176,719

Preferred share dividends
(10,656
)
 
(10,656
)
 
(21,313
)
 
(21,313
)
Common share dividends
(34,413
)
 
(33,563
)
 
(68,750
)
 
(66,945
)
Balance at end of period
6,108,577

 
6,135,625

 
6,108,577

 
6,135,625

 
 
 
 
 
 
 
 
Treasury shares, at cost
 
 
 
 
 
 
 
Balance at beginning of period
(3,779,388
)
 
(3,793,386
)
 
(3,791,420
)
 
(3,807,156
)
Shares repurchased
(411
)
 
(1,512
)
 
(9,414
)
 
(8,676
)
Shares reissued
756

 
2,607

 
21,791

 
23,541

Balance at end of period
(3,779,043
)
 
(3,792,291
)
 
(3,779,043
)
 
(3,792,291
)
 
 
 
 
 
 
 
 
Total shareholders’ equity
$
5,566,477

 
$
5,253,005

 
$
5,566,477

 
$
5,253,005

 
 
 
 
 
 
 
 


    


See accompanying notes to Consolidated Financial Statements.

9
Table of Contents


AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2019 AND 2018
 
Six months ended
 
2019
 
2018
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
285,828

 
$
176,719

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Net investment (gains) losses
(33,996
)
 
54,002

Net realized and unrealized gains on other investments
(38,128
)
 
(26,876
)
Amortization of fixed maturities
8,592

 
15,642

Interest in income of equity method investments
(4,853
)
 
(1,891
)
Amortization of value of business acquired
20,298

 
110,517

Other amortization and depreciation
41,444

 
22,680

Share-based compensation expense, net of cash payments
9,100

 
11,707

Changes in:
 
 
 
Accrued interest receivable
(2,244
)
 
(1,839
)
Reinsurance recoverable balances on unpaid and paid losses
(146,353
)
 
(283,733
)
Deferred acquisition costs
(91,193
)
 
(240,320
)
Prepaid reinsurance premiums
(279,659
)
 
(361,482
)
Reserve for losses and loss expenses
(21,446
)
 
118,803

Unearned premiums
869,640

 
991,992

Insurance and reinsurance balances, net
(580,450
)
 
(654,090
)
Other items
(53,163
)
 
25,718

Net cash used in operating activities
(16,583
)
 
(42,451
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of:
 
 
 
Fixed maturities
(5,014,725
)
 
(4,910,021
)
Equity securities
(26,971
)
 
(49,498
)
Mortgage loans
(95,906
)
 
(60,195
)
Other investments
(141,525
)
 
(57,477
)
Short-term investments
(100,936
)
 
(239,313
)
Proceeds from the sale of:
 
 
 
Fixed maturities
3,796,747

 
4,452,631

Equity securities
2,456

 
219,916

Other investments
163,773

 
91,946

Short-term investments
205,607

 
101,510

Proceeds from redemption of fixed maturities
569,922

 
706,487

Proceeds from redemption of short-term investments
7,571

 
30,572

Proceeds from the repayment of mortgage loans

486

 
40,741

Purchase of other assets
(32,747
)
 
(13,043
)
Net cash provided by (used in) investing activities
(666,248
)
 
314,256

 
 
 
 
Cash flows from financing activities:
 
 
 
Taxes paid on withholding shares
(9,414
)
 
(8,676
)
Dividends paid - common shares
(69,948
)
 
(68,172
)
Dividends paid - preferred shares
(21,313
)
 
(21,313
)
Net proceeds from issuance of senior notes
296,334

 
—

Redemption of senior notes
(250,000
)
 
—

Net cash used in financing activities
(54,341
)
 
(98,161
)
 
 
 
 
Effect of exchange rate changes on foreign currency cash, cash equivalents, and restricted cash
1,866

 
(10,737
)
Increase (decrease) in cash, cash equivalents, and restricted cash
(735,306
)
 
162,907

Cash, cash equivalents, and restricted cash - beginning of period
1,830,020

 
1,363,786

Cash, cash equivalents, and restricted cash - end of period
$
1,094,714

 
$
1,526,693

 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
Income taxes paid
$
13,405

 
$
7,350

Interest paid
$
31,438

 
$
32,550

Supplemental disclosures of cash flow information: In 2018, total consideration paid for an agreement for the Reinsurance to Close ("RITC") of the 2015 and prior years of account of Syndicate 2007 was $819 million of which $600 million was settled by way of a transfer of securities and was treated as a non-cash activity in the consolidated statement of cash flows (refer to Note 6 'Reserve for Losses and Loss Expenses').

See accompanying notes to Consolidated Financial Statements.

10
Table of Contents

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


1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These unaudited Consolidated Financial Statements (the "financial statements") have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the U.S. Securities and Exchange Commission's ("SEC") instructions to Form 10-Q and Article 10 of Regulation S-X and include AXIS Capital Holdings Limited ("AXIS Capital") and its subsidiaries (the "Company"). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. This Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and related notes included in AXIS Capital's Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC.

In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the Company's financial position and results of operations for the periods presented.
The results of operations for any interim period are not necessarily indicative of the results for a full year. All inter-company accounts and transactions have been eliminated.

To facilitate comparison of information across periods, certain reclassifications have been made to prior year amounts to conform to the current year's presentation. These reclassifications did not impact results of operations, financial condition or liquidity.

Tabular dollar and share amounts are in thousands, except per share amounts. All amounts are reported in U.S. dollars.

Significant Accounting Policies

There was no notable change to the Company's significant accounting policies subsequent to its Annual Report on Form 10-K for the year ended December 31, 2018.

New Accounting Standards Adopted in 2019

Leases

Effective January 1, 2019, the Company adopted ASU 2016-02, "Leases (Topic 842)", which provides a new comprehensive model for lease accounting. Topic 842 requires a lessee to recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. The adoption of this standard resulted in the recognition of lease liabilities and right-of-use assets of $144 million in the Company's consolidated balance sheet at March 31, 2019, related to office property and equipment leases.

In addition, the Company adopted ASU 2018-11, "Leases (Topic 842) - Targeted Improvements", which provides an additional (and optional) transition method to adopt the new lease guidance. Under the alternative transition method, the Company's reporting for the comparative periods presented in its financial statements will be in accordance with the pre-effective date lease accounting requirements (Topic 840).

The Company also elected the package of practical expedients permitted under the transition guidance of Topic 842, which were elected as a package and applied consistently to all leases. At the adoption date, the package of practical expedients permitted the Company not to reassess the following:

1.
whether any expired or existing contracts are or contain leases;
2.
the lease classification for any expired or existing leases; and
3.
initial direct costs for any existing leases.

In addition to electing the package of practical expedients, the Company made an accounting policy election to account for non-lease components separately from lease components. As a result, the non-lease components associated with the Company's leases are not included in the lease liabilities and right-of-use assets in the Company's consolidated balance at June 30, 2019.
 


11
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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Further, the Company made an accounting policy election not to record office property and equipment leases with an initial term of 12 months or less (short-term) in the Company's consolidated balance sheets. For the six months ended June 30, 2019, the Company recognized expense for short-term leases of $0.8 million in the Company's consolidated statements of operations. The adoption of this guidance did not impact the Company's retained earnings or liquidity and did not have a material impact on its results of operations.

Premium Amortization on Purchased Callable Debt Securities

Effective January 1, 2019, the Company adopted ASU 2017-08 "Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20) - Premium Amortization on Purchased Callable Debt Securities" which shortens the amortization period for certain purchased callable debt securities held at a premium. The adoption of this guidance did not impact the Company's results of operations, financial condition or liquidity.

Changes to Disclosures on Fair Value Measurement

Effective January 1, 2019, the Company adopted ASU 2018-13 "Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement" which aims to improve the effectiveness of fair value measurement disclosures. The adoption of this guidance did not impact the Company's results of operations, financial condition or liquidity.

Recently Issued Accounting Standards Not Yet Adopted

Measurement of Credit Losses on Financial Instrument

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments" which replaces the "incurred loss" impairment methodology with an approach based on "expected losses" to estimate credit losses on certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company's insurance and reinsurance premium balances receivable and its reinsurance recoverable on unpaid and paid losses and loss expenses are its most significant financial assets within the scope of ASU 2016-13. The guidance requires financial assets to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the cost of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. The Company will also be impacted by the targeted changes to the impairment model for available for sale securities introduced in ASU 2016-13. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses. This guidance is effective for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the impact of this guidance on its results of operations, financial condition and liquidity.




12
Table of Contents

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

2.
SEGMENT INFORMATION

AXIS Capital's underwriting operations are organized around its global underwriting platforms, AXIS Insurance and AXIS Re. The Company has determined that it has two reportable segments, insurance and reinsurance. The Company does not allocate its assets by segment, with the exception of goodwill and intangible assets, as it evaluates the underwriting results of each segment separately from the results of its investment portfolio.

Insurance
The Company's insurance segment offers specialty insurance products to a variety of niche markets on a worldwide basis. The product lines in this segment are property, marine, terrorism, aviation, credit and political risk, professional lines, liability, accident and health, and discontinued lines - Novae.
 
Reinsurance
The Company's reinsurance segment provides treaty reinsurance to insurance companies on a worldwide basis. The product lines in this segment are catastrophe, property, professional lines, credit and surety, motor, liability, agriculture, engineering, marine and other accident and health, and discontinued lines - Novae.

The following tables present the underwriting results of the Company's reportable segments, as well as the carrying values of allocated goodwill and intangible assets:
 
  
2019
 
2018
 
 
Three months ended and at June 30,
Insurance
 
Reinsurance
 
Total
 
Insurance
 
Reinsurance
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
968,325

 
$
679,435

 
$
1,647,760

 
$
1,026,644

 
$
624,181

 
$
1,650,825

 
 
Net premiums written
591,909

 
478,412

 
1,070,321

 
598,179

 
402,276

 
1,000,455

 
 
Net premiums earned
537,260

 
586,347

 
1,123,607

 
577,271

 
608,277

 
1,185,548

 
 
Other insurance related income (losses)
(695
)
 
3,620

 
2,925

 
1,214

 
2,516

 
3,730

 
 
Net losses and loss expenses
(308,703
)
 
(363,760
)
 
(672,463
)
 
(328,773
)
 
(377,868
)
 
(706,641
)
 
 
Acquisition costs
(111,655
)
 
(130,708
)
 
(242,363
)
 
(90,864
)
 
(141,088
)
 
(231,952
)
 
 
General and administrative expenses
(104,898
)
 
(28,149
)
 
(133,047
)
 
(102,369
)
 
(32,590
)
 
(134,959
)
 
 
Underwriting income
$
11,309

 
$
67,350

 
78,659

 
$
56,479

 
$
59,247

 
115,726

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
137,949

 
 
 
 
 
109,960

 
 
Net investment gains (losses)
 
 
 
 
21,225

 
 
 
 
 
(45,093
)
 
 
Corporate expenses
 
 
 
 
(32,348
)
 
 
 
 
 
(30,254
)
 
 
Foreign exchange gains
 
 
 
 
12,381

 
 
 
 
 
44,099

 
 
Interest expense and financing costs
 
 
 
 
(15,607
)
 
 
 
 
 
(17,098
)
 
 
Transaction and reorganization expenses
 
 
 
 
(3,276
)
 
 
 
 
 
(18,772
)
 
 
Amortization of value of business acquired
 
 
 
 
(7,194
)
 
 
 
 
 
(53,407
)
 
 
Amortization of intangible assets
 
 
 
 
(2,912
)
 
 
 
 
 
(4,029
)
 
 
Income before income taxes and interest in income of equity method investments
 
 
 
 
$
188,877

 
 
 
 
 
$
101,132

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses and loss expenses ratio
57.5
%
 
62.0
%
 
59.8
%
 
57.0
%
 
62.1
%
 
59.6
%
 
 
Acquisition cost ratio
20.8
%
 
22.3
%
 
21.6
%
 
15.7
%
 
23.2
%
 
19.6
%
 
 
General and administrative expense ratio
19.5
%
 
4.8
%
 
14.7
%
 
17.7
%
 
5.4
%
 
13.9
%
 
 
Combined ratio
97.8
%
 
89.1
%
 
96.1
%
 
90.4
%
 
90.7
%
 
93.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total intangible assets
$
353,428

 
$
—

 
$
353,428

 
$
450,073

 
$
—

 
$
450,073

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  


13
Table of Contents

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

2.
SEGMENT INFORMATION (CONTINUED)

 
  
2019
 
2018
 
 
Six months ended and at June 30,
Insurance
 
Reinsurance
 
Total
 
Insurance
 
Reinsurance
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
1,819,421

 
$
2,411,565

 
$
4,230,986

 
$
1,907,492

 
$
2,406,128

 
$
4,313,620

 
 
Net premiums written
1,121,149

 
1,726,232

 
2,847,381

 
1,146,071

 
1,840,255

 
2,986,326

 
 
Net premiums earned
1,094,022

 
1,163,797

 
2,257,819

 
1,157,330

 
1,195,620

 
2,352,950

 
 
Other insurance related income
1,046

 
8,806

 
9,852

 
1,833

 
8,502

 
10,335

 
 
Net losses and loss expenses
(622,479
)
 
(714,012
)
 
(1,336,491
)
 
(650,312
)
 
(717,674
)
 
(1,367,986
)
 
 
Acquisition costs
(229,430
)
 
(273,351
)
 
(502,781
)
 
(178,193
)
 
(283,019
)
 
(461,212
)
 
 
General and administrative expenses
(210,932
)
 
(60,988
)
 
(271,920
)
 
(204,738
)
 
(69,886
)
 
(274,624
)
 
 
Underwriting income
$
32,227

 
$
124,252

 
156,479

 
$
125,920

 
$
133,543

 
259,463

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
 
 
 
 
245,254

 
 
 
 
 
210,961

 
 
Net investment gains (losses)
 
 
 
 
33,996

 
 
 
 
 
(59,923
)
 
 
Corporate expenses
 
 
 
 
(68,566
)
 
 
 
 
 
(60,425
)
 
 
Foreign exchange gains
 
 
 
 
5,325

 
 
 
 
 
6,239

 
 
Interest expense and financing costs
 
 
 
 
(31,502
)
 
 
 
 
 
(33,861
)
 
 
Transaction and reorganization expenses
 
 
 
 
(18,096
)
 
 
 
 
 
(31,825
)
 
 
Amortization of value of business acquired
 
 
 
 
(20,298
)
 
 
 
 
 
(110,517
)
 
 
Amortization of intangible assets
 
 
 
 
(5,914
)
 
 
 
 
 
(6,811
)
 
 
Income before income taxes and interest in income of equity method investments
 
 
 
 
$
296,678

 
 
 
 
 
$
173,301

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses and loss expenses ratio
56.9
%
 
61.4
%
 
59.2
%
 
56.2
%
 
60.0
%
 
58.1
%
 
 
Acquisition cost ratio
21.0
%
 
23.5
%
 
22.3
%
 
15.4
%
 
23.7
%
 
19.6
%
 
 
General and administrative expense ratio
19.2
%
 
5.2
%
 
15.0
%
 
17.7
%
 
5.8
%
 
14.3
%
 
 
Combined ratio
97.1
%
 
90.1
%
 
96.5
%
 
89.3
%
 
89.5
%
 
92.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total intangible assets
$
353,428

 
$
—

 
$
353,428

 
$
450,073

 
$
—

 
$
450,073

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




14
Table of Contents

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

3.
INVESTMENTS

a)     Fixed Maturities and Equity securities

Fixed maturities

The amortized cost and fair values of the Company's fixed maturities classified as available for sale were as follows:
 
 
Amortized
cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
Non-credit
OTTI
in AOCI(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
2,288,204

 
$
30,488

 
$
(1,265
)
 
$
2,317,427

 
$
—

 
 
Non-U.S. government
539,588

 
6,959

 
(8,723
)
 
537,824

 
—

 
 
Corporate debt
4,850,141

 
114,591

 
(19,147
)
 
4,945,585

 
—

 
 
Agency RMBS(1)
1,669,160

 
24,127

 
(6,375
)
 
1,686,912

 
—

 
 
CMBS(2)
1,150,370

 
34,613

 
(715
)
 
1,184,268

 
—

 
 
Non-Agency RMBS
55,985

 
1,308

 
(1,313
)
 
55,980

 
(740
)
 
 
ABS(3)
1,600,846

 
5,871

 
(5,946
)
 
1,600,771

 
—

 
 
Municipals(4)
189,480

 
4,828

 
(120
)
 
194,188

 
—

 
 
Total fixed maturities
$
12,343,774

 
$
222,785

 
$
(43,604
)
 
$
12,522,955

 
$
(740
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
1,520,142

 
$
4,232

 
$
(8,677
)
 
$
1,515,697

 
$
—

 
 
Non-U.S. government
507,550

 
1,586

 
(16,120
)
 
493,016

 
—

 
 
Corporate debt
4,990,279

 
15,086

 
(128,444
)
 
4,876,921

 
—

 
 
Agency RMBS(1)
1,666,684

 
6,508

 
(29,884
)
 
1,643,308

 
—

 
 
CMBS(2)
1,103,507

 
2,818

 
(13,795
)
 
1,092,530

 
—

 
 
Non-Agency RMBS
40,732

 
1,237

 
(1,282
)
 
40,687

 
(857
)
 
 
ABS(3)
1,651,350

 
1,493

 
(15,240
)
 
1,637,603

 
—

 
 
Municipals(4)
136,068

 
914

 
(1,397
)
 
135,585

 
—

 
 
Total fixed maturities
$
11,616,312

 
$
33,874

 
$
(214,839
)
 
$
11,435,347

 
$
(857
)
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Residential mortgage-backed securities ("RMBS") originated by U.S. government-sponsored agencies.
(2)
Commercial mortgage-backed securities ("CMBS").
(3)
Asset-backed securities ("ABS") include debt tranched securities collateralized primarily by auto loans, student loans, credit card receivables, collateralized debt obligations ("CDOs") and collateralized loan obligations ("CLOs").
(4)
Municipals include bonds issued by states, municipalities and political subdivisions.
(5)
Represents the non-credit component of the other-than-temporary impairment ("OTTI") losses, adjusted for subsequent sales, maturities and redemptions. It does not include the change in fair value subsequent to the impairment measurement date.






15
Table of Contents

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

3.
INVESTMENTS (CONTINUED)

Equity Securities

The cost and fair values of the Company's equity securities were as follows:
 
 
Cost
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
 
 
At June 30, 2019
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
Common stocks
$
695

 
$
21

 
$
(459
)
 
$
257

 
 
Exchange-traded funds
213,909

 
61,531

 
(2,171
)
 
273,269

 
 
Bond mutual funds
163,291

 
—

 
(3,410
)
 
159,881

 
 
Total equity securities
$
377,895

 
$
61,552

 
$
(6,040
)
 
$
433,407

 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2018
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
Common stocks
$
790

 
$
112

 
$
(375
)
 
$
527

 
 
Exchange-traded funds
213,420

 
33,498

 
(10,079
)
 
236,839

 
 
Bond mutual funds
151,695

 
—

 
(7,428
)
 
144,267

 
 
Total equity securities
$
365,905

 
$
33,610

 
$
(17,882
)
 
$
381,633

 
 
 
 
 
 
 
 
 
 
 


In the normal course of investing activities, the Company actively manages allocations to non-controlling tranches of structured securities which are variable interests issued by Variable Interest Entities ("VIEs"). These structured securities include RMBS, CMBS and ABS. The Company also invests in limited partnerships including hedge funds, direct lending funds, private equity funds and real estate funds as well as CLO equity tranched securities, which are all variable interests issued by VIEs (refer to Note 3(c) 'Other Investments'). The Company does not have the power to direct the activities that are most significant to the economic performance of the VIEs therefore the Company is not the primary beneficiary of any of these VIEs. The maximum exposure to loss on these interests is limited to the amount of investment made by the Company. The Company has not provided financial or other support to these structured securities other than the original investment.



16
Table of Contents

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

3.
INVESTMENTS (CONTINUED)

Contractual Maturities

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The contractual maturities of fixed maturities are shown below:
 
 
Amortized
cost
 
Fair
value
 
% of Total
fair value
 
 
 
 
 
 
 
 
 
 
At June 30, 2019
 
 
 
 
 
 
 
Maturity
 
 
 
 
 
 
 
Due in one year or less
$
388,837

 
$
388,997

 
3.1
%
 
 
Due after one year through five years
5,169,170

 
5,237,935

 
41.8
%
 
 
Due after five years through ten years
1,921,131

 
1,967,360

 
15.7
%
 
 
Due after ten years
388,275

 
400,732

 
3.2
%
 
 
 
7,867,413

 
7,995,024

 
63.8
%
 
 
Agency RMBS
1,669,160

 
1,686,912

 
13.5
%
 
 
CMBS
1,150,370

 
1,184,268

 
9.5
%
 
 
Non-Agency RMBS
55,985

 
55,980

 
0.4
%
 
 
ABS
1,600,846

 
1,600,771

 
12.8
%
 
 
Total
$
12,343,774

 
$
12,522,955

 
100.0
%
 
 
 
 
 
 
 
 
 
 
At December 31, 2018
 
 
 
 
 
 
 
Maturity
 
 
 
 
 
 
 
Due in one year or less
$
430,390

 
$
426,142

 
3.7
%
 
 
Due after one year through five years
4,751,064

 
4,691,263

 
41.0
%
 
 
Due after five years through ten years
1,762,452

 
1,697,737

 
14.8
%
 
 
Due after ten years
210,133

 
206,077

 
1.8
%
 
 
 
7,154,039

 
7,021,219

 
61.3
%
 
 
Agency RMBS
1,666,684

 
1,643,308

 
14.4
%
 
 
CMBS
1,103,507

 
1,092,530

 
9.6
%
 
 
Non-Agency RMBS
40,732

 
40,687

 
0.4
%
 
 
ABS
1,651,350

 
1,637,603

 
14.3
%
 
 
Total
$
11,616,312

 
$
11,435,347

 
100.0
%
 
 
 
 
 
 
 
 
 




17
Table of Contents

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

3.
INVESTMENTS (CONTINUED)

 Gross Unrealized Losses

The following table summarizes fixed maturities and equity securities in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
 
  
12 months or greater
 
Less than 12 months
 
Total
 
 
  
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
111,237

 
$
(1,085
)
 
$
174,271

 
$
(180
)
 
$
285,508

 
$
(1,265
)
 
 
Non-U.S. government
130,187

 
(6,343
)
 
111,035

 
(2,380
)
 
241,222

 
(8,723
)
 
 
Corporate debt
479,376

 
(10,405
)
 
484,354

 
(8,742
)
 
963,730

 
(19,147
)
 
 
Agency RMBS
557,096

 
(6,256
)
 
66,210

 
(119
)
 
623,306

 
(6,375
)
 
 
CMBS
18,034

 
(27
)
 
136,832

 
(688
)
 
154,866

 
(715
)
 
 
Non-Agency RMBS
5,845

 
(973
)
 
15,760

 
(340
)
 
21,605

 
(1,313
)
 
 
ABS
400,246

 
(3,609
)
 
487,791

 
(2,337
)
 
888,037

 
(5,946
)
 
 
Municipals
9,980

 
(120
)
 
—

 
—

 
9,980

 
(120
)
 
 
Total fixed maturities
$
1,712,001

 
$
(28,818
)
 
$
1,476,253

 
$
(14,786
)
 
$
3,188,254

 
$
(43,604
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
374,030

 
$
(7,659
)
 
$
424,439

 
$
(1,018
)
 
$
798,469

 
$
(8,677
)
 
 
Non-U.S. government
44,339

 
(2,004
)
 
303,376

 
(14,116
)
 
347,715

 
(16,120
)
 
 
Corporate debt
1,439,378

 
(58,915
)
 
2,547,135

 
(69,529
)
 
3,986,513

 
(128,444
)
 
 
Agency RMBS
940,645

 
(29,255
)
 
117,181

 
(629
)
 
1,057,826

 
(29,884
)
 
 
CMBS
455,582

 
(11,430
)
 
353,802

 
(2,365
)
 
809,384

 
(13,795
)
 
 
Non-Agency RMBS
9,494

 
(1,170
)
 
11,432

 
(112
)
 
20,926

 
(1,282
)
 
 
ABS
237,237

 
(2,755
)
 
1,150,692

 
(12,485
)
 
1,387,929

 
(15,240
)
 
 
Municipals
68,814

 
(1,373
)
 
9,894

 
(24
)
 
78,708

 
(1,397
)
 
 
Total fixed maturities
$
3,569,519

 
$
(114,561
)
 
$
4,917,951

 
$
(100,278
)
 
$
8,487,470

 
$
(214,839
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Fixed Maturities

At June 30, 2019, 1,614 fixed maturities (2018: 3,599) were in an unrealized loss position of $44 million (2018: $215 million), of which $12 million (2018: $49 million) was related to securities below investment grade or not rated.

At June 30, 2019, 958 fixed maturities (2018: 1,656) had been in a continuous unrealized loss position for twelve months or greater and had a fair value of $1,712 million (2018: $3,570 million). Following a credit impairment review, it was concluded that these securities as well as the remaining securities in an unrealized loss position were temporarily impaired at June 30, 2019, and were expected to recover in value as the securities approach maturity. At June 30, 2019, the Company did not intend to sell the securities in an unrealized loss position and it is more likely than not that the Company will not be required to sell these securities before the anticipated recovery of their amortized costs.



18
Table of Contents

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

3.
INVESTMENTS (CONTINUED)

b) Mortgage Loans

The following table provides details of the Company's mortgage loans held-for-investment:
 
  
June 30, 2019
 
December 31, 2018
 
 
  
Carrying value
 
% of Total
 
Carrying value
 
% of Total
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage Loans held-for-investment:
 
 
 
 
 
 
 
 
 
Commercial
$
394,179

 
100
%
 
$
298,650

 
100
%
 
 
Total Mortgage Loans held-for-investment
$
394,179

 
100
%
 
$
298,650

 
100
%
 
 
 
 
 
 
 
 
 
 
 


The primary credit quality indicator for commercial mortgage loans 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 which compares 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.

The Company has a high quality mortgage loan portfolio with weighted average debt service coverage ratios in excess of 2.1x and weighted average loan-to-value ratios of less than 57%. At June 30, 2019, there are no credit losses or past due amounts associated with the commercial mortgage loans held by the Company.



19
Table of Contents

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

3.
INVESTMENTS (CONTINUED)

c) Other Investments

The following tables provide a summary of the Company's other investments, together with additional information relating to the liquidity of each category:
 
 
Fair value
 
Redemption frequency
(if currently eligible)
 
  Redemption  
  notice period  
 
 
 
 
 
 
 
 
 
 
 
 
At June 30, 2019
 

 
 

 
 
 
 
 
 
Long/short equity funds
$
30,526

 
4
%
 
Annually
 
60 days
 
 
Multi-strategy funds
165,123

 
21
%
 
Quarterly, Semi-annually
 
60-90 days
 
 
Direct lending funds
273,864

 
34
%
 
n/a
 
n/a
 
 
Private equity funds
60,285

 
8
%
 
n/a
 
n/a
 
 
Real estate funds
134,763

 
17
%
 
n/a
 
n/a
 
 
CLO-Equities
17,798

 
1
%
 
n/a
 
n/a
 
 
Other privately held investments
28,452

 
4
%
 
n/a
 
n/a
 
 
Overseas deposits
91,253

 
11
%
 
n/a
 
n/a
 
 
Total other investments
$
802,064

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2018
 

 
 

 
 
 
 
 
 
Long/short equity funds
$
26,779

 
3
%
 
Annually
 
60 days
 
 
Multi-strategy funds
167,819

 
22
%
 
Quarterly, Semi-annually, Annually
 
45-95 days
 
 
Direct lending funds
274,478

 
35
%
 
n/a
 
n/a
 
 
Private equity funds
64,566

 
8
%
 
n/a
 
n/a
 
 
Real estate funds
84,202

 
11
%
 
n/a
 
n/a
 
 
CLO-Equities
21,271

 
2
%
 
n/a
 
n/a
 
 
Other privately held investments
44,518

 
6
%
 
n/a
 
n/a
 
 
Overseas deposits
104,154

 
13
%
 
n/a
 
n/a
 
 
Total other investments
$
787,787

 
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 long and short investments in publicly-traded equity securities.

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

•
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.

•
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 the Company's ability to redeem 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


20
Table of Contents

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

3.
INVESTMENTS (CONTINUED)

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 the six months ended June 30, 2019 and 2018, neither of these restrictions impacted the Company's redemption requests. At June 30, 2019, $63 million (2018: $27 million), representing 32% (2018: 14%) of total hedge funds, relate to holdings where the Company is still within the lockup period. The expiration of these lockup periods range from October 2020 to March 2022. 

At June 30, 2019, the Company had $193 million (2018: $210 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 five to ten years and the General Partners of certain funds have the option to extend the term by up to three years.
At June 30, 2019, the Company had $39 million (2018: $84 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 after the completion of the funds' investment term. These funds have investment terms ranging from two years to the dissolution of the underlying fund.
At June 30, 2019, the Company had $100 million (2018: $147 million) of unfunded commitments as a limited partner in funds which invest in real estate and real estate securities and businesses. These funds include an open-ended fund and funds with investment terms ranging from seven years to the dissolution of the underlying fund.
 
At June 30, 2019, the Company had $15 million (2018: $16 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. The Company expects the overall holding period to be over ten years.

During 2015, the Company made a $50 million commitment as a limited partner of a bank revolver opportunity fund. The fund has an investment term of seven years and the General Partners have the option to extend the term by up to two years. At June 30, 2019, this commitment remains unfunded. It is not anticipated that the full amount of this fund will be drawn.

Syndicate 2007 holds overseas deposits which include investments in private funds where the underlying investments are primarily U.S. government, non-U.S. government and corporate debt securities. The funds do not trade on an exchange and therefore are not included within available for sale investments.


21
Table of Contents

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

3.
INVESTMENTS (CONTINUED)

d) Equity Method Investments

During 2016, the Company 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, the Company expects 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, the Company has entered into an arrangement with Blackstone under which underwriting and investment related fees will be shared equally. Harrington is not a VIE that is required to be included in the Company's consolidated financial statements. The Company accounts for its ownership interest 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.

e) Net Investment Income

Net investment income was derived from the following sources:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
$
97,370

 
$
88,320

 
$
188,752

 
$
172,279

 
 
Other investments
31,232

 
14,541

 
38,128

 
28,246

 
 
Equity securities
3,197

 
3,158

 
5,525

 
4,916

 
 
Mortgage loans
3,689

 
3,357

 
6,752

 
6,483

 
 
Cash and cash equivalents
8,138

 
5,627

 
13,940

 
9,779

 
 
Short-term investments
1,108

 
1,645

 
5,002

 
2,520

 
 
Gross investment income
144,734

 
116,648

 
258,099

 
224,223

 
 
Investment expenses
(6,785
)
 
(6,688
)
 
(12,845
)
 
(13,262
)
 
 
Net investment income
$
137,949

 
$
109,960

 
$
245,254

 
$
210,961

 
 
 
 
 
 
 
 
 
 
 


f) Net Investment Gains (Losses)

The following table provides an analysis of net investment gains (losses):
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Gross realized investment gains
 
 
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
18,971

 
$
5,761

 
$
29,409

 
$
37,389

 
 
Equity securities
154

 
1,147

 
1,598

 
18,662

 
 
Gross realized investment gains
19,125

 
6,908

 
31,007

 
56,051

 
 
Gross realized investment losses
 
 
 
 
 
 
 
 
 
Fixed maturities and short-term investments
(9,978
)
 
(44,442
)
 
(30,257
)
 
(87,977
)
 
 
Equity securities
(29
)
 
—

 
(122
)
 
(1,234
)
 
 
Gross realized investment losses
(10,007
)
 
(44,442
)
 
(30,379
)
 
(89,211
)
 
 
Net OTTI recognized in net income
(834
)
 
(1,674
)
 
(4,870
)
 
(2,088
)
 
 
Change in fair value of investment derivatives(1)
(204
)
 
5,134

 
(2,305
)
 
7,157

 
 
Net unrealized gains (losses) on equity securities
13,145

 
(11,019
)
 
40,543

 
(31,832
)
 
 
Net investment gains (losses)
$
21,225

 
$
(45,093
)
 
$
33,996

 
$
(59,923
)
 
 
 
 
 
 
 
 
 
 
 
(1) Refer to Note 5 'Derivative Instruments'.


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

3.
INVESTMENTS (CONTINUED)


The following table summarizes the OTTI recognized in net income by asset class:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
Non-U.S. government
$
—

 
$
22

 
$
60

 
$
22

 
 
Corporate debt
834

 
1,652

 
4,810

 
2,066

 
 
Total OTTI recognized in net income
$
834

 
$
1,674

 
$
4,870

 
$
2,088

 
 
 
 
 
 
 
 
 
 
 


The following table provides a roll forward of the credit losses ("credit loss table") before income taxes, for which a component of the OTTI charge was recognized in AOCI:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
472

 
$
1,484

 
$
510

 
$
1,494

 
 
Credit impairments recognized on securities not previously impaired
—

 
—

 
—

 
—

 
 
Additional credit impairments recognized on securities previously impaired
—

 
—

 
—

 
—

 
 
Change in timing of future cash flows on securities previously impaired
—

 
—

 
—

 
—

 
 
Intent to sell of securities previously impaired
—

 
—

 
—

 
—

 
 
Securities sold/redeemed/matured
(79
)
 
(12
)
 
(117
)
 
(22
)
 
 
Balance at end of period
$
393

 
$
1,472

 
$
393

 
$
1,472

 
 
 
 
 
 
 
 
 
 
 


g) Reverse Repurchase Agreements

At June 30, 2019, the Company held no (2018: $189 million) 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 Company's consolidated balance sheets. 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, the Company receives principal and interest income. The Company monitors 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)

4.
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 the Company has 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 the Company's 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 financial instruments categorized as Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many financial instruments. This may lead the Company to change the selection of valuation technique (from market to cash flow approach) or may cause the Company 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 the Company's financial instruments as well as the classification of the fair values of its financial instruments in the fair value hierarchy are described in detail below.

Fixed Maturities

At each valuation date, the Company uses the market approach valuation technique to estimate the fair value of its fixed maturities portfolio, when possible. The 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 the Company maintains a vendor hierarchy by asset type based on historical pricing experience and vendor expertise. When prices are unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers who are active in the corresponding markets. The valuation techniques including significant inputs and assumptions generally used to determine the fair values of the Company's 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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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.
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, the fair values of 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 generally classified as Level 2. Where pricing is unavailable from pricing services, the Company obtains 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 generally classified as Level 2. Where pricing is unavailable from pricing services, the Company obtains 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 generally classified as Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-


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

4.
FAIR VALUE MEASUREMENTS (CONTINUED)

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.

ABS

ABS include mostly investment-grade bonds backed by pools of loans with a variety of underlying collateral, including auto loans, student loans, credit card receivables, CDOs and CLOs, 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 generally classified as Level 2. Where pricing is unavailable from pricing services, the Company obtains 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, the fair value of these securities are classified as Level 1. As bond mutual funds have daily liquidity, 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 income approach valuation technique, specifically an internally developed discounted cash flow model. As the significant inputs used to price these securities are unobservable, the fair values of other investments are classified as Level 3.

The fair value of the indirect investment in CLO-Equities is estimated using an income approach valuation technique, specifically an externally developed discounted cash flow model due to the lack of observable and relevant trades in secondary markets. As the significant inputs used to price this security are unobservable, the fair value of the indirect investment in CLO-Equities is classified as Level 3.

Overseas deposits include investments in private funds held by Syndicate 2007 where the underlying investments are primarily U.S. government, Non-U.S. government and corporate debt securities. The funds do not trade on an exchange therefore are not included within available for sale investments. As the significant inputs used to price the underlying investments are observable market inputs, the fair values of overseas deposits are classified as Level 2.

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. The fair values of 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.



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

4.
FAIR VALUE MEASUREMENTS (CONTINUED)

Derivative Instruments

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

Other underwriting-related derivatives include insurance and reinsurance contracts that are 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 an income approach valuation technique, specifically internally developed discounted cash flow models. As the significant inputs used to price these derivatives are unobservable, the fair values 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, the Company obtains non-binding quotes from broker-dealers to estimate the fair value of this security. Pricing is generally unavailable when there is a low volume of trading activity and current transactions are not orderly therefore the fair value of this security is classified as Level 3.

Cash Settled Awards

Cash settled awards comprise restricted stock units that form part of the Company's 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. As the significant inputs used to price these securities are observable market inputs, 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)

4.
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 June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
2,281,604

 
$
35,823

 
$
—

 
$
—

 
$
2,317,427

 
 
Non-U.S. government
—

 
537,824

 
—

 
—

 
537,824

 
 
Corporate debt
—

 
4,906,448

 
39,137

 
—

 
4,945,585

 
 
Agency RMBS
—

 
1,686,912

 
—

 
—

 
1,686,912

 
 
CMBS
—

 
1,174,376

 
9,892

 
—

 
1,184,268

 
 
Non-Agency RMBS
—

 
55,980

 
—

 
—

 
55,980

 
 
ABS
—

 
1,600,280

 
491

 
—

 
1,600,771

 
 
Municipals
—

 
194,188

 
—

 
—

 
194,188

 
 
 
2,281,604

 
10,191,831

 
49,520

 
—

 
12,522,955

 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
Common stocks
257

 
—

 
—

 
—

 
257

 
 
Exchange-traded funds
273,269

 
—

 
—

 
—

 
273,269

 
 
Bond mutual funds
—

 
159,881

 
—

 
—

 
159,881

 
 
 
273,526

 
159,881

 
—

 
—

 
433,407

 
 
Other investments
 
 
 
 
 
 
 
 
 
 
 
Hedge funds (1)
—

 
—

 
—

 
195,649

 
195,649

 
 
Direct lending funds
—

 
—

 
—

 
273,864

 
273,864

 
 
Private equity funds
—

 
—

 
—

 
60,285

 
60,285

 
 
Real estate funds
—

 
—

 
—

 
134,763

 
134,763

 
 
Other privately held investments
—

 
—

 
28,452

 
—

 
28,452

 
 
CLO-Equities
—

 
—

 
17,798

 
—

 
17,798

 
 
Overseas deposits
—

 
91,253

 
—

 
—

 
91,253

 
 
 
—

 
91,253

 
46,250

 
664,561

 
802,064

 
 
Short-term investments
—

 
32,421

 
—

 
—

 
32,421

 
 
Other assets
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments (refer to Note 5)
—

 
863

 
—

 
—

 
863

 
 
Total Assets
$
2,555,130

 
$
10,476,249

 
$
95,770

 
$
664,561

 
$
13,791,710

 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments (refer to Note 5)
$
—

 
$
2,686

 
$
10,262

 
$
—

 
$
12,948

 
 
Cash settled awards (refer to Note 8)
—

 
12,946

 
—

 
—

 
12,946

 
 
 Total Liabilities
$
—

 
$
15,632

 
$
10,262

 
$
—

 
$
25,894

 
 
 
 
 
 
 
 
 
 
 
 
 

(1) Includes Long/short equity and Multi-strategy funds.






28
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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.
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, 2018
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
1,480,466

 
$
35,231

 
$
—

 
$
—

 
$
1,515,697

 
 
Non-U.S. government
—

 
493,016

 
—

 
—

 
493,016

 
 
Corporate debt
—

 
4,827,909

 
49,012

 
—

 
4,876,921

 
 
Agency RMBS
—

 
1,643,308

 
—

 
—

 
1,643,308

 
 
CMBS
—

 
1,073,396

 
19,134

 
—

 
1,092,530

 
 
Non-Agency RMBS
—

 
40,687

 
—

 
—

 
40,687

 
 
ABS
—

 
1,619,070

 
18,533

 
—

 
1,637,603

 
 
Municipals
—

 
135,585

 
—

 
—

 
135,585

 
 
 
1,480,466

 
9,868,202

 
86,679

 
—

 
11,435,347

 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
Common stocks
527

 
—

 
—

 
—

 
527

 
 
Exchange-traded funds
236,839

 
—

 
—

 
—

 
236,839

 
 
Bond mutual funds
—

 
144,267

 
—

 
—

 
144,267

 
 
 
237,366

 
144,267

 
—

 
—

 
381,633

 
 
Other investments
 
 
 
 
 
 
 
 
 
 
 
Hedge funds (1)
—

 
—

 
—

 
194,598

 
194,598

 
 
Direct lending funds
—

 
—

 
—

 
274,478

 
274,478

 
 
Private equity funds
—

 
—

 
—

 
64,566

 
64,566

 
 
Real estate funds
—

 
—

 
—

 
84,202

 
84,202

 
 
Other privately held investments
—

 
—

 
44,518

 
—

 
44,518

 
 
CLO-Equities
—

 
—

 
21,271

 
—

 
21,271

 
 
Overseas deposits
—

 
104,154

 
—

 
—

 
104,154

 
 
 
—

 
104,154

 
65,789

 
617,844

 
787,787

 
 
Short-term investments
—

 
144,040

 
—

 
—

 
144,040

 
 
Other assets
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments (refer to Note 5)
—

 
8,237

 
—

 
—

 
8,237

 
 
Total Assets
$
1,717,832

 
$
10,268,900

 
$
152,468

 
$
617,844

 
$
12,757,044

 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments (refer to Note 5)
$
—

 
$
4,223

 
$
10,299

 
$
—

 
$
14,522

 
 
Cash settled awards (refer to Note 8)
—

 
20,648

 
—

 
—

 
20,648

 
 
Total Liabilities
$
—

 
$
24,871

 
$
10,299

 
$
—

 
$
35,170

 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Includes Long/short equity and Multi-strategy funds.









29
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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.
FAIR VALUE MEASUREMENTS (CONTINUED)

The following table quantifies the significant unobservable inputs used in estimating fair values at June 30, 2019 of investments classified as Level 3 in the fair value hierarchy.
 
 
Fair value
Valuation technique
Unobservable input
Range
Weighted
average
 
 
 
 
 
 
 
 
 
 
Other investments - CLO-Equities
$
17,798

Discounted cash flow
Default rates
3.0%
3.0%
 
 
 
 
 
Loss severity rate
35.0%
35.0%
 
 
 
 
 
Collateral spreads
3.0%
3.0%
 
 
 
 
 
Estimated maturity dates
7 years
7 years
 
 
 
 
 
 
 
 
 
 
Other investments - Other privately held investments
$
28,452

Discounted cash flow
Discount rate
3.0%
3.0%
 
 
 
 
 
 
 
 
 
 
Derivatives - Other underwriting-related derivatives
$
(10,262
)
Discounted cash flow
Discount rate
1.9%
1.9%
 
 
 
 
 
 
 
 
 

Note: Fixed maturities and insurance-linked securities that are classified as Level 3 are excluded from the above table as these securities are priced using broker-dealer quotes.

Other Investments - CLO-Equities

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 CLO-Equities held by the Company. Accordingly, the fair value of the Company's indirect investment in CLO-Equities is determined using a discounted cash flow model prepared by an external investment manager.

The default and loss severity rates are the most judgmental unobservable market inputs to the discounted cash flow model to which the valuation of the Company's indirect investment in CLO-Equities is most sensitive. A significant increase (decrease) in either of these significant inputs in isolation would result in a lower (higher) fair value estimate for the investment in CLO-Equities and, in general, a change in default rate assumptions would 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 a higher (lower) fair value estimate for the investment 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, the Company's valuation process for its indirect investment in CLO-Equities includes 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 the Company's CLO-Equities portfolio. In order to assess the reasonableness of the inputs the Company uses in its models, the Company maintains an understanding of current market conditions, historical results, as well as emerging trends that may impact future cash flows. In addition, the assumptions the Company uses in its models are updated through regular communication with industry participants and ongoing monitoring of the deals in which the Company participates.

Other Investments - Other Privately Held Securities

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 of these securities. A significant increase (decrease) in this input in isolation could result in significantly lower (higher) fair value measurement for other privately held securities. Where relevant, the Company also considers 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 the Company uses in the discounted cash flow models, the Company maintains an understanding of current market conditions, historical results, as well as investee specific information that may impact future cash flows.


30
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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.
FAIR VALUE MEASUREMENTS (CONTINUED)

Derivatives - Other Underwriting-related Derivatives

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

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
net income(1)
 
Included
in OCI (2)
 
Purchases
 
Sales
 
Settlements/
distributions
 
Closing
balance
 
Change in
unrealized
investment
gains/(losses) (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
$
41,125

 
$
—

 
$
—

 
$
(763
)
 
$
309

 
$
—

 
$
(31
)
 
$
(1,503
)
 
$
39,137

 
$
—

 
 
CMBS
11,145

 
—

 
—

 
—

 
21

 
—

 
—

 
(1,274
)
 
9,892

 
—

 
 
ABS
12,043

 
—

 
(11,564
)
 
—

 
12

 
—

 
—

 
—

 
491

 
—

 
 
 
64,313

 
—

 
(11,564
)
 
(763
)
 
342

 
—

 
(31
)
 
(2,777
)
 
49,520

 
—

 
 
Other investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other privately held investments
47,685

 
—

 
—

 
14,194

 
—

 
—

 
(33,427
)
 
—

 
28,452

 
767

 
 
CLO - Equities
18,022

 
—

 
—

 
833

 
—

 
—

 
—

 
(1,057
)
 
17,798

 
833

 
 
 
65,707

 
—

 
—

 
15,027

 
—

 
—

 
(33,427
)
 
(1,057
)
 
46,250

 
1,600

 
 
Total assets
$
130,020

 
$
—

 
$
(11,564
)
 
$
14,264

 
$
342

 
$
—

 
$
(33,458
)
 
$
(3,834
)
 
$
95,770

 
$
1,600

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Other liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments
$
10,233

 
$
—

 
$
—

 
$
29

 
$
—

 
$
—

 
$
—

 
$
—

 
$
10,262

 
$
29

 
 
Total liabilities
$
10,233

 
$
—

 
$
—

 
$
29

 
$
—

 
$
—

 
$
—

 
$
—

 
$
10,262

 
$
29

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Corporate debt
$
49,012

 
$
—

 
$
—

 
$
(1,459
)
 
$
933

 
$
—

 
$
(5,578
)
 
$
(3,771
)
 
$
39,137

 
$
—

 
 
CMBS
19,134

 
—

 
(4,767
)
 
—

 
164

 
—

 
—

 
(4,639
)
 
9,892

 
—

 
 
ABS
18,533

 
—

 
(27,966
)
 
—

 
174

 
9,750

 
—

 
—

 
491

 
—

 
 
 
86,679

 
—

 
(32,733
)
 
(1,459
)
 
1,271

 
9,750

 
(5,578
)
 
(8,410
)
 
49,520

 
—

 
 
Other investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other privately held investments
44,518

 
—

 
—

 
14,861

 
—

 
2,500

 
(33,427
)
 
—

 
28,452

 
1,434

 
 
CLO - Equities
21,271

 
—

 
—

 
1,248

 
—

 
—

 
—

 
(4,721
)
 
17,798

 
1,248

 
 
 
65,789

 
—

 
—

 
16,109

 
—

 
2,500

 
(33,427
)
 
(4,721
)
 
46,250

 
2,682

 
 
Total assets
$
152,468

 
$
—

 
$
(32,733
)
 
$
14,650

 
$
1,271

 
$
12,250

 
$
(39,005
)
 
$
(13,131
)
 
$
95,770

 
$
2,682

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments
$
10,299

 
$
—

 
$
—

 
$
(37
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
10,262

 
$
(37
)
 
 
Total liabilities
$
10,299

 
$
—

 
$
—

 
$
(37
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
10,262

 
$
(37
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Realized investment gains (losses) on fixed maturities, and realized and unrealized gains (losses) on other assets and other liabilities included in net income are included in net investment gains (losses). Realized and unrealized gains (losses) on other investments included in net income are included in net investment income.
(2)
Unrealized investment gains (losses) on fixed maturities are included in other comprehensive income ("OCI").
(3)
Change in unrealized investment gains (losses) relating to assets held at the reporting date.


31
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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.
FAIR VALUE MEASUREMENTS (CONTINUED)

 
 
Opening
balance
 
Transfers
into
Level 3
 
Transfers
out of
Level 3
 
Included in
net income(1)
 
Included
in OCI (2)
 
Purchases
 
Sales
 
Settlements/
distributions
 
Closing
balance
 
Change in
unrealized
investment
gains/(losses) (3)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
$
43,471

 
$
1,589

 
$
—

 
$
(1
)
 
$
(388
)
 
$
3,185

 
$
(3,218
)
 
$
(2,085
)
 
$
42,553

 
$
—

 
 
Non-Agency RMBS
—

 
—

 
—

 
—

 
3

 
900

 
—

 
—

 
903

 
—

 
 
CMBS
—

 
1,936

 
—

 
—

 
(2
)
 
16,215

 
—

 
—

 
18,149

 
—

 
 
 
43,471

 
3,525

 
—

 
(1
)
 
(387
)
 
20,300

 
(3,218
)
 
(2,085
)
 
61,605

 
—

 
 
Other investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other privately held investments
48,787

 
—

 
—

 
(1,174
)
 
—

 
—

 
—

 
—

 
47,613

 
(1,174
)
 
 
CLO - Equities
28,556

 
—

 
—

 
3,068

 
—

 
—

 
—

 
(5,471
)
 
26,153

 
3,068

 
 
 
77,343

 
—

 
—

 
1,894

 
—

 
—

 
—

 
(5,471
)
 
73,766

 
1,894

 
 
Other assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance-linked securities
25,000

 
—

 
—

 
—

 
—

 
—

 
—

 
(25,000
)
 
—

 
—

 
 
 
25,000

 
—

 
—

 
—

 
—

 
—

 
—

 
(25,000
)
 
—

 
—

 
 
Total assets
$
145,814

 
$
3,525

 
$
—

 
$
1,893

 
$
(387
)
 
$
20,300

 
$
(3,218
)
 
$
(32,556
)
 
$
135,371

 
$
1,894

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments
$
10,942

 
$
—

 
$
—

 
$
(353
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
10,589

 
$
(353
)
 
 
Total liabilities
$
10,942

 
$
—

 
$
—

 
$
(353
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
10,589

 
$
(353
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 
Corporate debt
$
52,897

 
$
1,589

 
$
(4,279
)
 
$
(119
)
 
$
1,015

 
$
3,185

 
$
(5,754
)
 
$
(5,981
)
 
$
42,553

 
$
—

 
 
Non-Agency RMBS
—

 
—

 
—

 
—

 
3

 
900

 
—

 
—

 
903

 
—

 
 
CMBS
—

 
1,936

 
—

 
—

 
(2
)
 
16,215

 
—

 
—

 
18,149

 
—

 
 
 
52,897

 
3,525

 
(4,279
)
 
(119
)
 
1,016

 
20,300

 
(5,754
)
 
(5,981
)
 
61,605

 
—

 
 
Other investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other privately held investments
46,430

 
—

 
—

 
(428
)
 
—

 
3,111

 
(1,500
)
 
—

 
47,613

 
(428
)
 
 
CLO - Equities
31,413

 
—

 
—

 
4,684

 
—

 
—

 
—

 
(9,944
)
 
26,153

 
4,684

 
 
 
77,843

 
—

 
—

 
4,256

 
—

 
3,111

 
(1,500
)
 
(9,944
)
 
73,766

 
4,256

 
 
Other assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance-linked securities
25,090

 
—

 
—

 
(90
)
 
—

 
—

 
—

 
(25,000
)
 
—

 
—

 
 
 
25,090

 
—

 
—

 
(90
)
 
—

 
—

 
—

 
(25,000
)
 
—

 
—

 
 
Total assets
$
155,830

 
$
3,525

 
$
(4,279
)
 
$
4,047

 
$
1,016

 
$
23,411

 
$
(7,254
)
 
$
(40,925
)
 
$
135,371

 
$
4,256

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments
$
11,510

 
$
—

 
$
—

 
$
(921
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
10,589

 
$
(921
)
 
 
Total liabilities
$
11,510

 
$
—

 
$
—

 
$
(921
)
 
$
—

 
$
—

 
$
—

 
$
—

 
$
10,589

 
$
(921
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 














32
Table of Contents

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

4.
FAIR VALUE MEASUREMENTS (CONTINUED)

Transfers into Level 3 from Level 2

There were no transfers into Level 3 from Level 2 made during the three and six months ended June 30, 2019. The transfers into Level 3 from Level 2 made during the three and six months ended June 30, 2018 were primarily due to the lack of observable market inputs and multiple quotes from pricing vendors and broker-dealers for certain fixed maturities.

Transfers out of Level 3 into Level 2

The transfers out of Level 3 into Level 2 made during the three and six months ended June 30, 2019 and 2018 were primarily due to the availability of observable market inputs and multiple quotes from pricing vendors for certain fixed maturities.

Measuring the Fair Value of Other Investments Using Net Asset Valuations ("NAVs")

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, the Company estimates 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 therefore the Company does not typically have a reporting lag in fair value measurements of these funds. Historically, the Company's 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 the Company's hedge funds, valuation statements are typically released on a reporting lag therefore the Company estimates the fair value of these funds by starting with the most recent fund valuations and adjusting for capital calls, redemptions, drawdowns and distributions. Return estimates are not available from the relevant fund managers for these funds therefore the Company typically has a reporting lag in its fair value measurements of these funds. For the six months ended June 30, 2019, funds reported on a lag represented 64% (2018: 61%) of the Company's total other investments balance.

The Company often does 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, the Company performs a number of monitoring procedures on a quarterly basis, to assess the quality of the information provided by fund managers and fund 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 the Company's fair value estimates against subsequently received NAVs. Backtesting involves comparing the Company's 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.



33
Table of Contents

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

4.
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.
 
At June 30, 2019, 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 due to their respective short maturities. As these financial instruments are not actively traded, their fair values are classified as Level 2.

At June 30, 2019, the carrying value of mortgage loans held-for-investment approximated their fair value. 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 June 30, 2019, senior notes are recorded at amortized cost with a carrying value of $1,388 million (2018: $1,342 million) and a fair value of $1,443 million (2018: $1,334 million). The fair values of these senior 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 the yields for the risk-free yield curve and the spreads are observable market inputs, the fair values of senior notes are classified as Level 2.

5.
DERIVATIVE INSTRUMENTS

The balance sheet classifications of derivatives recorded at fair value are shown in the following table:
 
  
June 30, 2019
 
December 31, 2018
 
 
  
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
$
189,811

 
$
147

 
$
1,074

 
$
79,336

 
$
262

 
$
531

 
 
Interest rate swaps
—

 
—

 
—

 
150,000

 
—

 
1,116

 
 
Relating to underwriting portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
534,811

 
716

 
1,612

 
737,419

 
7,975

 
2,576

 
 
Other underwriting-related contracts
85,000

 
—

 
10,262

 
85,000

 
—

 
10,299

 
 
Total derivatives
 
 
$
863

 
$
12,948

 
 
 
$
8,237

 
$
14,522

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Asset and liability derivatives are classified within other assets and other liabilities in the consolidated balance sheets.

The notional amounts of derivative contracts which represent the basis upon which amounts paid or received are calculated and are presented in the above table to quantify the volume of the Company's derivative activities. Notional amounts are not reflective of credit risk.

None of the Company's derivative instruments are designated as hedges under current accounting guidance.



34
Table of Contents

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

5.
DERIVATIVE INSTRUMENTS (CONTINUED)

Offsetting Assets and Liabilities

The Company's 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.

A reconciliation of 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, is shown in the following table:
 
 
June 30, 2019
 
December 31, 2018
 
 
 
Gross amounts
Gross amounts offset
Net
amounts(1)
 
Gross amounts
Gross amounts offset
Net
amounts(1)
 
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
$
2,577

$
(1,714
)
$
863

 
$
11,967

$
(3,730
)
$
8,237

 
 
Derivative liabilities
$
14,662

$
(1,714
)
$
12,948

 
$
18,252

$
(3,730
)
$
14,522

 
 
 
 
 
 
 
 
 
 
 
(1)
Net asset and liability derivatives are classified within other assets and other liabilities in the consolidated balance sheets.

Refer to Note 3 'Investments' for information on reverse repurchase agreements.

a) Relating to Investment Portfolio

Foreign Currency Risk

The Company's investment portfolio is exposed to foreign currency risk therefore the fair values of its investments are partially influenced by the change in foreign exchange rates. The Company may enter into foreign 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

The Company's investment portfolio contains a large percentage of fixed maturities which exposes it to significant interest rate risk. As part of overall management of this risk, the Company may use interest rate swaps.

b) Relating to Underwriting Portfolio

Foreign Currency Risk

The Company's insurance and reinsurance subsidiaries and branches operate in various countries. Some of its business is written in currencies other than the U.S. dollar, therefore the underwriting portfolio is exposed to significant foreign currency risk. The Company manages foreign currency risk by seeking to match its foreign-denominated net liabilities under insurance and reinsurance contracts with cash and investments that are denominated in the same currencies. The Company uses derivative instruments, specifically, forward contracts to economically hedge foreign currency exposures.

Other Underwriting-related Risks

The Company enters into insurance and reinsurance contracts that are accounted for as derivatives. These insurance or reinsurance contracts provide indemnification to an insured or cedant as a result of a change in a variable as opposed to an identifiable insurable event. The Company considers these contracts to be part of its underwriting operations.



35
Table of Contents

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

5.
DERIVATIVE INSTRUMENTS (CONTINUED)

The total unrealized and realized gains (losses) recognized in net income for derivatives not designated as hedges are shown in the following table:  
 
  
Location of gain (loss) recognized in net income
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Relating to investment portfolio:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
Net investment gains (losses)
$
620

 
$
2,515

 
$
1,372

 
$
1,323

 
 
Interest rate swaps
Net investment gains (losses)
(824
)
 
2,619

 
(3,677
)
 
5,833

 
 
Relating to underwriting portfolio:
 
 
 
 
 
 
 
 
 
 
Foreign exchange forward contracts
Foreign exchange gains (losses)
802

 
(7,809
)
 
(9,715
)
 
(138
)
 
 
Other underwriting-related contracts
Other insurance related income (losses)
271

 
647

 
618

 
1,548

 
 
Total
 
$
869

 
$
(2,028
)
 
$
(11,402
)
 
$
8,566

 
 
 
 
 
 
 
 
 
 
 
 


6.    RESERVE FOR LOSSES AND LOSS EXPENSES

Reserve Roll-Forward

The following table presents a reconciliation of the Company's beginning and ending net reserve for unpaid losses and loss expenses:
 
 
Six months ended June 30,
 
 
 
2019
 
2018
 
 
 
 
 
 
 
 
Gross reserve for losses and loss expenses, beginning of period
$
12,280,769

 
$
12,997,553

 
 
Less reinsurance recoverable on unpaid losses, beginning of period
(3,501,669
)
 
(3,159,514
)
 
 
Net reserve for unpaid losses and loss expenses, beginning of period
8,779,100

 
9,838,039

 
 
 
 
 
 
 
 
Net incurred losses and loss expenses related to:
 
 
 
 
 
Current year
1,374,784

 
1,482,409

 
 
Prior years
(38,293
)
 
(114,423
)
 
 
 
1,336,491

 
1,367,986

 
 
Net paid losses and loss expenses related to:
 
 
 
 
 
Current year
(132,111
)
 
(186,576
)
 
 
Prior years
(1,304,413
)
 
(1,233,793
)
 
 
 
(1,436,524
)
 
(1,420,369
)
 
 
 
 
 
 
 
 
Foreign exchange and other
10,832

 
(985,628
)
 
 
 
 
 
 
 
 
Net reserve for unpaid losses and loss expenses, end of period
8,689,899

 
8,800,028

 
 
Reinsurance recoverable on unpaid losses, end of period
3,564,812

 
3,152,706

 
 
Gross reserve for losses and loss expenses, end of period
$
12,254,711

 
$
11,952,734

 
 
 
 
 
 
 


The Company writes business with loss experience generally characterized as low frequency and high severity in nature, which can result in volatility in its financial results. During the six months ended June 30, 2019, the Company recognized net losses and loss expenses of $36 million (2018: $73 million) attributable to catastrophe and weather-related events.
 
On April 16, 2018, the Company entered into a quota share retrocessional agreement with Harrington Re, a related party, which was deemed to have met the established criteria for retroactive reinsurance accounting. The Company recognized reinsurance recoverable


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

6.
RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED)

on unpaid losses of $108 million related to this reinsurance agreement. This transaction was conducted at market rates consistent with negotiated arms-length contracts.

On January 1, 2018, AXIS Managing Agency Limited, the managing agent of Syndicate 2007 entered into an agreement for the RITC of the 2015 and prior years of account of Syndicate 2007. This agreement was accounted for as a novation reinsurance contract. At June 30, 2018, foreign exchange and other included a reduction in reserves for losses and loss expenses of $819 million related to this transaction.

Prior Year Development

The Company's net favorable prior year reserve development arises from changes to loss and loss expense estimates related to loss events that occurred in previous calendar years. The following table presents net prior year reserve development by segment:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
$
21,326

 
$
24,294

 
$
28,240

 
$
47,068

 
 
Reinsurance
2,295

 
35,822

 
10,053

 
67,355

 
 
Total
$
23,621

 
$
60,116

 
$
38,293

 
$
114,423

 
 
 
 
 
 
 
 
 
 
 


The following tables map the Company's lines of business to reserve classes and the expected claim tails:
Insurance segment
 
 
 
 
 
 
Reserve class and tail
 
 
 
 
 
 
 
 
Property and other
Marine
Aviation
Credit and political risk
Professional lines
Liability
 
 
 
 
 
 
 
 
Short
Short
Short/Medium
Medium
Medium
Long
 
 
 
 
 
 
 
Reported lines of business
 
 
 
 
 
 
Property
X
 
 
 
 
 
Marine
 
X
 
 
 
 
Terrorism
X
 
 
 
 
 
Aviation
 
 
X
 
 
 
Credit and political risk
 
 
 
X
 
 
Professional lines
 
 
 
 
X
 
Liability
 
 
 
 
 
X
Accident and health
X
 
 
 
 
 
Discontinued lines - Novae
X
 
 
 
X
X



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

6.
RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED)

Reinsurance segment
 
 
 
 
 
Reserve class and tail
 
 
 
 
 
 
 
Property and other
Credit and surety
Professional lines
Motor
Liability
 
 
 
 
 
 
 
Short
Medium
Medium
Long
Long
 
 
 
 
 
 
Reported lines of business
 
 
 
 
 
Catastrophe
X
 
 
 
 
Property
X
 
 
 
 
Credit and surety
 
X
 
 
 
Professional lines
 
 
X
 
 
Motor
 
 
 
X
 
Liability
 
 
 
 
X
Engineering
X
 
 
 
 
Agriculture
X
 
 
 
 
Marine and other
X
 
 
 
 
Accident and health
X
 
 
 
 
Discontinued lines - Novae
X
 
 
X
X


Short-tail business

Short-tail business includes the underlying exposures in property and other, marine and aviation reserve classes in the insurance segment, and the property and other reserve class in the reinsurance segment.

For the three months ended June 30, 2019, these reserve classes recognized net adverse prior year reserve development of $19 million including $30 million of net adverse prior year reserve development recognized by the reinsurance property and other reserve class, partially offset by net favorable prior year reserve development of $6 million contributed by the insurance property and other reserve class and net favorable prior year reserve development of $5 million contributed by the insurance marine reserve class.

For the six months ended June 30, 2019, these reserve classes recognized net adverse prior year reserve development of $52 million including $59 million of net adverse prior year reserve development recognized by the reinsurance property and other reserve class and $16 million of net adverse prior year reserve development recognized by the insurance property and other reserve class, partially offset by net favorable prior year reserve development of $22 million contributed by the insurance marine reserve class.

For the three and six months ended June 30, 2018, these reserve classes contributed net favorable prior year reserve development of $43 million and $81 million, respectively, reflecting the recognition of better than expected loss emergence.

Medium-tail business

Medium-tail business consists primarily of insurance and reinsurance professional lines reserve classes, insurance credit and political risk reserve class and reinsurance credit and surety reserve class.

For the three and six months ended June 30, 2019, the reinsurance credit and surety reserve class recorded net favorable prior year reserve development of $17 million (2018: $9 million) and $27 million (2018: $14 million), respectively, reflecting the recognition of better than expected loss emergence.

For the three and six months ended June 30, 2019, insurance credit and political risk reserve class recorded net favorable prior year reserve development of $7 million and $9 million, respectively, reflecting the recognition of better than expected loss emergence.


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

6.
RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED)

For the three and six months ended June 30, 2019, the insurance professional lines reserve class recorded net favorable prior year reserve development of $4 million and $10 million, respectively. For the three and six months ended June 30, 2019, the reinsurance professional lines reserve class recorded net favorable prior year reserve development of $6 million and $8 million (2018: $8 million). The net favorable prior year reserve development on these reserve classes continued to reflect generally favorable experience on older accident years as the Company continued to transition to more experience based actuarial methods.

Long-tail business

Long-tail business consists primarily of insurance and reinsurance liability reserve classes and reinsurance motor reserve classes.

For the three and six months ended June 30, 2019, the reinsurance liability reserve class contributed net favorable prior year reserve development of $11 million (2018: $6 million) and $23 million (2018: $8 million), respectively. The net favorable prior year reserve development was due to increased weight given by management to experience based indications on older accident years.

For the six months ended June 30, 2018, the insurance liability reserve class recorded net adverse prior year reserve development of $7 million primarily related to reserve strengthening in the Company's U.S. excess casualty book of business.

For the six months ended June 30, 2019, the reinsurance motor reserve class contributed net favorable prior year reserve development of $11 million (2018: $9 million). For the three months ended June 30, 2018, the reinsurance motor reserve class contributed net favorable prior year reserve development of $5 million. The net favorable prior year reserve development was primarily attributable to non proportional treaty business on older accident years.

At June 30, 2019, net reserves for losses and loss expenses included estimated amounts for numerous catastrophe events. The magnitude and/or complexity of losses arising from certain of these events, in particular California Wildfires, Hurricanes Michael and Florence, and Typhoons Jebi and Trami which occurred in 2018 as well as Hurricanes Harvey, Irma and Maria and the California Wildfires which occurred in 2017 inherently increase the level of uncertainty and, therefore, the level of management judgment involved in arriving at the estimated net reserves for losses and loss expenses. As a result, actual losses for these events may ultimately differ materially from the Company's current estimates.


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

7.
EARNINGS PER COMMON SHARE

The following table presents earnings per common share and earnings per diluted common share:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share
 
 
 
 
 
 
 
 
 
Net income
$
177,043

 
$
103,514

 
$
285,828

 
$
176,719

 
 
Less: Preferred share dividends
10,656

 
10,656

 
21,313

 
21,313

 
 
Net income available to common shareholders
166,387

 
92,858

 
264,515

 
155,406

 
 
Weighted average common shares outstanding
83,941

 
83,539

 
83,834

 
83,431

 
 
Earnings per common share
$
1.98

 
$
1.11

 
$
3.16

 
$
1.86

 
 
 
 
 
 
 
 
 
 
 
 
Earnings per diluted common share
 
 
 
 
 
 
 
 
 
Net income available to common shareholders
$
166,387

 
$
92,858

 
$
264,515

 
$
155,406

 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
83,941

 
83,539

 
83,834

 
83,431

 
 
Share-based compensation plans
460

 
445

 
504

 
422

 
 
Weighted average diluted common shares outstanding
84,401

 
83,984

 
84,338

 
83,853

 
 
 
 
 
 
 
 
 
 
 
 
Earnings per diluted common share
$
1.97

 
$
1.11

 
$
3.14

 
$
1.85

 
 
 
 
 
 
 
 
 
 
 
 
Weighted average anti-dilutive shares excluded from the dilutive computation
3

 
158

 
302

 
484

 
 
 
 
 
 
 
 
 
 
 





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

8.
SHARE-BASED COMPENSATION

For the three months ended June 30, 2019, the Company incurred share-based compensation costs of $13 million (2018: $14 million) related to share-settled restricted stock units and cash-settled restricted stock units. In addition, the Company recorded associated tax benefits of $2 million (2018: $3 million).

For the six months ended June 30, 2019, the Company incurred share-based compensation costs of $29 million (2018: $29 million) and recorded associated tax benefits of $4 million (2018: $4 million).

During the six months ended June 30, 2019, the fair value of share-settled restricted stock units and cash-settled restricted stock units that vested was $49 million (2018: $47 million). At June 30, 2019, there was $105 million of unrecognized share-based compensation costs (2018: $121 million) which are expected to be recognized over the weighted average period of 2.7 years (2018: 2.8 years).

Share-Settled Awards

The following table provides an activity summary of the Company's share-settled restricted stock units for the six months ended June 30, 2019:
 
 
Share-Settled Performance Vesting Restricted Stock Units
 
Share-Settled Service Based Restricted Stock Units
 
 
 
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 units - beginning of period
232

 
$
54.54

 
1,411

 
$
54.12

 
 
     Granted
127

 
54.70

 
512

 
54.70

 
 
     Vested
(61
)
 
53.82

 
(463
)
 
54.20

 
 
     Forfeited
—

 
—

 
(126
)
 
54.57

 
 
Nonvested restricted stock units - end of period
298

 
$
54.76

 
1,334

 
$
54.27

 
 
 
 
 
 
 
 
 
 
 

(1) Fair value is based on the closing price of the Company's common shares on the grant date.

Cash-Settled awards

The following table provides an activity summary of the Company's cash-settled restricted stock units for the six months ended June 30, 2019:
 
 
Cash-Settled Performance Vesting Restricted Stock Units
 
Cash-Settled Service Based Restricted Stock Units
 
 
 
Number of
restricted
stock units
 
Number of
restricted
stock units
 
 
 
 
 
 
 
 
Nonvested restricted stock units - beginning of period
27

 
932

 
 
     Granted
—

 
354

 
 
     Vested
(12
)
 
(327
)
 
 
     Forfeited
—

 
(62
)
 
 
Nonvested restricted stock units - end of period
15

 
897

 
 
 
 
 
 
 


At June 30, 2019, the liability for cash-settled restricted stock units, included in other liabilities in the consolidated balance sheets, was $13 million (2018: $13 million).




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

9.    SHAREHOLDERS' EQUITY

The following table presents changes in common shares issued and outstanding:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Shares issued, balance at beginning of period
176,580

 
176,580

 
176,580

 
176,580

 
 
Shares issued
—

 
—

 
—

 
—

 
 
Total shares issued at end of period
176,580

 
176,580

 
176,580

 
176,580

 
 
 
 
 
 
 
 
 
 
 
 
Treasury shares, balance at beginning of period
(92,646
)
 
(93,062
)
 
(92,994
)
 
(93,419
)
 
 
Shares repurchased
(7
)
 
(26
)
 
(164
)
 
(175
)
 
 
Shares reissued
20

 
64

 
525

 
570

 
 
Total treasury shares at end of period
(92,633
)
 
(93,024
)
 
(92,633
)
 
(93,024
)
 
 
 
 
 
 
 
 
 
 
 
 
Total shares outstanding
83,947

 
83,556

 
83,947

 
83,556

 
 
 
 
 
 
 
 
 
 
 


Dividends

In the three months ended June 30, 2019, the total dividends declared per common share were $0.40, paid in July 2019 (2018: $0.39, paid in July 2018). In the six months ended June 30, 2019, the total cash dividends declared per common share were $0.80 per share, paid in April 2019 and July 2019 (2018: $0.78 paid in April 2018 and July 2018).

In the three months ended June 30, 2019, the total dividends declared on Series D preferred shares were $0.34375 per share, payable in September 2019 (2018: $0.34375, paid in September 2018). In the six months ended June 30, 2019, the total dividends declared on Series D preferred shares were $0.68750 per share, paid in June 2019 and payable in September 2019 (2018: $0.68750, paid in June 2018 and September 2018).

In the three months ended June 30, 2019, the total dividends declared on Series E preferred shares were $34.375 per share, paid in July 2019 (2018: $34.375, paid in July 2018). In the six months ended June 30, 2019, the total dividends declared on Series E preferred shares were $68.75 per share, paid in April 2019 and July 2019 (2018: $68.75, paid in April 2018 and July 2018).

























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

9.
SHAREHOLDERS' EQUITY (CONTINUED)

Treasury Shares

The following table presents common share repurchased from shares held in Treasury:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
In the open market:
 
 
 
 
 
 
 
 
 
Total shares
—

 
—

 
—

 
—

 
 
Total cost
$
—

 
$
—

 
$
—

 
$
—

 
 
Average price per share(1)
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
From employees:(2)
 
 
 
 
 
 
 
 
 
Total shares
7

 
26

 
164

 
175

 
 
Total cost
$
411

 
$
1,512

 
$
9,414

 
$
8,676

 
 
Average price per share(1)
$
58.34

 
$
57.97

 
$
57.22

 
$
49.56

 
 
 
 
 
 
 
 
 
 
 
 
Total shares repurchased:
 
 
 
 
 
 
 
 
 
Total shares
7

 
26

 
164

 
175

 
 
Total cost
$
411

 
$
1,512

 
$
9,414

 
$
8,676

 
 
Average price per share(1)
$
58.34

 
$
57.97

 
$
57.22

 
$
49.56

 
 
 
 
 
 
 
 
 
 
 
(1) Calculated using whole numbers.
(2)
Shares are repurchased from employees to satisfy withholding tax liabilities related to the vesting of share-settled restricted stock units.



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

10.
DEBT AND FINANCING ARRANGEMENTS

a)
Senior Notes

On April 1, 2019, AXIS Specialty Finance PLC, a 100% owned finance subsidiary, repaid $250 million aggregate principal amount of 2.65% Senior Notes at their stated maturity.

On April 3, 2019, AXIS Capital and AXIS Specialty Finance PLC ("AXIS Finance") entered into a first supplemental indenture (the "First Supplemental Indenture") among AXIS Finance, as issuer, AXIS Capital, as guarantor, and The Bank of New York Mellon Trust Company, N.A., as trustee (the "Trustee"), to the senior indenture dated March 13, 2014 (the "Indenture") relating to $250 million aggregate principal amount of 5.15% Senior Notes due 2045 (the "5.15% Senior Notes") issued by AXIS Finance and fully and unconditionally guaranteed by AXIS Capital.

The changes described below were made to permit the 5.15% Senior Notes to qualify as Tier 3 ancillary capital under eligible capital requirements of the Bermuda Monetary Authority. Because this amendment does not materially adversely affect the interests of the holders of the 5.15% Senior Notes, the First Supplemental Indenture was entered into without consent of any holders of the 5.15% Senior Notes. The First Supplemental Indenture relates to the 5.15% Senior Notes only and does not affect any other series of securities issued under the Indenture.

Under the terms of the senior indenture, the 5.15% Senior Notes are redeemable at any time at the option of AXIS Finance at a redemption price equal to a make-whole premium or, in the event that, as a result of certain tax law changes, AXIS Finance or AXIS Capital becomes obligated to pay additional amounts with respect to the 5.15% Senior Notes, at par, plus in each case, accrued and unpaid interest. The First Supplemental Indenture limits this optional redemption right to provide that the 5.15% Senior Notes are not redeemable at the option of AXIS Finance on or before March 13, 2017, except in the limited circumstances set forth in the First Supplemental Indenture and prior to maturity unless certain conditions are satisfied.

The First Supplemental Indenture also clarifies, for the avoidance of doubt, that the 5.15% Senior Notes are free of encumbrances and that neither the Indenture nor the 5.15% Senior Notes contain any terms or conditions designed to accelerate or induce AXIS Capital or any of its subsidiary’s insolvency or effect similar proceedings.
 
The holders of the 5.15% Senior Notes should note that the 5.15% Senior Notes do not in any way give rise to any rights of set-off against any claims and obligations of AXIS Capital, AXIS Finance or any of AXIS Capital’s regulated operating subsidiaries to any holder or creditor.

On June 19, 2019 AXIS Specialty Finance LLC, a 100% owned finance subsidiary, issued $300 million aggregate principal amount of 3.90% senior unsecured notes (the "3.90% Senior Notes") at an issue price of 99.36%. The net proceeds of the issuance, after consideration of the offering discount and underwriting expenses and commissions, totaled approximately $296 million. Interest on the 3.90% Senior Notes is payable semi-annually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. Unless previously redeemed, the 3.90% Senior Notes will mature on July 15, 2029. The 3.90% Senior Notes are ranked as unsecured senior obligations of AXIS Specialty Finance LLC. AXIS Capital has fully and unconditionally guaranteed all obligations of AXIS Specialty Finance LLC under the 3.90% Senior Notes. AXIS Capital's obligations under this guarantee are unsecured senior obligations and rank equally with all other senior obligations of AXIS Capital.

b)
Credit Facilities

On March 28, 2019, certain of AXIS Capital’s operating subsidiaries (the "Participating Subsidiaries") amended their existing $250 million secured letter of credit facility with Citibank Europe plc (the "$250 Million Facility") under their aggregate $750 million secured letter of credit facility with Citibank Europe plc (the "$750 Million Facility") to extend the expiration date to March 31, 2020.The terms and conditions of the additional $500 million secured letter of credit facility under the $750 Million Facility remain unchanged. The $500 million secured letter of credit facility expires December 31, 2019.



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

10.    DEBT AND FINANCING ARRANGEMENTS (CONTINUED)

Letters of credit issued under the $750 Million Facility will principally be used to support the reinsurance obligations of the Participating Subsidiaries. The Participating Subsidiaries are subject to certain covenants, including the requirement to maintain sufficient collateral to cover obligations outstanding under the $750 Million Facility. In the event of default, Citibank Europe plc may exercise certain remedies, including the exercise of control over pledged collateral and the termination of the availability of the $750 Million Facility to any or all of the Participating Subsidiaries.

11.
COMMITMENTS AND CONTINGENCIES

Legal Proceedings

From time to time, the Company is subject to routine legal proceedings, including arbitrations, arising in the ordinary course of business. These legal proceedings generally relate to claims asserted by or against the Company 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.

The Company is not party to any material legal proceedings arising outside the ordinary course of business.

Investments

Refer to Note 3 - 'Investments' for information on the Company's unfunded investment commitments related to the Company's other investment portfolio.

12.
LEASES

In the ordinary course of business, the Company renews and enters into new leases for office property and equipment, which expire at various dates.

At the lease inception date, the Company assesses whether a contract is or contains a lease. At the commencement date, the Company determines the classification of each separate lease component as either a finance lease or an operating lease. The Company's leases are all currently classified as operating leases. For operating leases that have a lease term of more than 12 months, the Company recognizes a lease liability and a right-of-use asset in the Company's consolidated balance sheets at the present value of the lease payments at the lease commencement date.

At the commencement date, the Company determines lease terms by assuming the exercise of those renewal options that are deemed to be reasonably certain. The exercise of lease renewal options is at the sole discretion of the Company.

As the lease contracts generally do not provide an implicit discount rate, the Company uses its incremental borrowing rate based on the information available at commencement date to determine the present value of lease payments. The incremental borrowing rate is based on a borrowing with a term that is similar to the term of the associated lease. The Company has made an accounting policy election not to include renewal, termination, or purchase options that are not reasonably certain of exercise when determining the term of the borrowing.

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Operating lease rentals are expensed on a straight-line basis over the life of the lease beginning on the commencement date. For the three and six months ended June 30, 2019, the total lease expense was $4 million and $11 million, respectively.



45
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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

12.
LEASES (CONTINUED)


The following table summarizes the amounts related to the Company’s total lease expense and the cash flows arising from lease transactions.
 
 
Three months ended
 
Six months ended
 
 
 
June 30, 2019
 
June 30, 2019
 
 
 
 
 
 
 
 
Lease cost:
 
 
 
 
 
Operating lease expense
$
4,134

 
$
11,064

 
 
Short-term lease expense(1)
119

 
765

 
 
Sublease income(2)
(192
)
 
(734
)
 
 
Total lease expense
$
4,061

 
$
11,095

 
 
 
 
 
 
 
 
Other information:
 
 
 
 
 
Operating cash outflows from operating leases
$
6,384

 
$
12,920

 
 
Right-of-use assets obtained in exchange for new operating lease liabilities
$
—

 
$
—

 
 
Weighted-average remaining lease term - operating leases(3)
8.7 years

 
8.7 years

 
 
Weighted-average discount rate - operating lease(4)
4.7
%
 
4.7
%
 
(1) Short-term lease expense is recognized on a straight-line basis over the lease term.
(2) Sublease income largely relates to office property in London, England.
(3) Weighted-average remaining lease term was calculated on the basis of the remaining lease term and the lease liability balance for each lease at the reporting date.
(4) Weighted-average discount was calculated on the basis of the discount rate for the lease that was used to calculate the lease liability balance for each lease at the reporting date and the remaining balance of the lease payments for each lease at the reporting date.

At June 30, 2019, the scheduled maturity of the Company's operating lease liabilities are expected to be as follows:
 
 
Expected
 
 
 
Cash Flows
 
 
 
 
 
 
Remainder of 2019
$
12,709

 
 
2020
21,558

 
 
2021
21,366

 
 
2022
21,989

 
 
2023
17,877

 
 
Later years
70,056

 
 
Discount
(32,298
)
 
 
Total discounted operating lease liabilities
$
133,257

 
 
 
 
 


The Company's lease for its current office property in Alpharetta, Georgia, expires on December 31, 2019. As a result, the Company executed a 15 year lease for a new office property in Alpharetta, Georgia. The Company is not involved in the construction or design of this office property and will not move into this property until January 1, 2020, the commencement date of the lease. Given that the commencement date is after the balance sheet date, the Company has not reflected this lease in the maturity table above or in the Company's consolidated balance sheets at June 30, 2019. The total contractual lease costs over the 15 year lease is $40 million.


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

12.
LEASES (CONTINUED)


At December 31, 2018, the Company's future minimum lease payments were expected to be as follows:
 
 
 
 
 
Year ended December 31,
 
 
 
 
 
 
 
2019
$
28,240

 
 
2020
25,331

 
 
2021
27,025

 
 
2022
28,012

 
 
2023
23,801

 
 
Later years
118,497

 
 
Total future minimum lease payments
$
250,906

 
 
 
 
 


For the three and six months ended June 30, 2018, the total lease expense was $8 million and $14 million, respectively.

13.
TRANSACTION AND REORGANIZATION EXPENSES

For the three and six months ended months ended June 30, 2019, transaction and reorganization expenses were $3 million (2018: $19 million) and $18 million (2018: $32 million), respectively, related to the Company's transformation program which was launched in 2017. This program encompasses the integration of Novae which commenced in the fourth quarter of 2017, the realignment of the Company's accident and health business, together with other initiatives designed to increase efficiency and enhance profitability while delivering a customer-centric operating model.



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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
14.    OTHER COMPREHENSIVE INCOME (LOSS)


The following table presents the tax effects allocated to each component of other comprehensive income (loss):
 
 
2019
 
2018
 
 
 
Before tax amount
 
Tax (expense) benefit
 
Net of tax amount
 
Before tax amount
 
Tax (expense) benefit
 
Net of Tax Amount
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized investment gains (losses) arising during the period
$
146,907

 
$
(15,465
)
 
$
131,442

 
$
(114,842
)
 
$
9,562

 
$
(105,280
)
 
 
Adjustment for reclassification of net realized investment (gains) losses and OTTI losses recognized in net income
(8,141
)
 
1,192

 
(6,949
)
 
39,100

 
(2,644
)
 
36,456

 
 
Unrealized investment gains (losses) arising during the period, net of reclassification adjustment
138,766

 
(14,273
)
 
124,493

 
(75,742
)
 
6,918

 
(68,824
)
 
 
Non-credit portion of OTTI losses
—

 
—

 
—

 
—

 
—

 
—

 
 
Foreign currency translation adjustment
2,556

 
—

 
2,556

 
(9,129
)
 
—

 
(9,129
)
 
 
Total other comprehensive income (loss), net of tax
$
141,322

 
$
(14,273
)
 
$
127,049

 
$
(84,871
)
 
$
6,918

 
$
(77,953
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30,
 
 
 
 
 
 
 
 
 
 
 
 
 
Available for sale investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized investment gains (losses) arising during the period
$
353,712

 
$
(32,061
)
 
$
321,651

 
$
(220,480
)
 
$
3,046

 
$
(217,434
)
 
 
Adjustment for reclassification of net realized investment losses and OTTI losses recognized in net income
5,733

 
652

 
6,385

 
34,987

 
2,253

 
37,240

 
 
Unrealized investment gains (losses) arising during the period, net of reclassification adjustment
359,445

 
(31,409
)
 
328,036

 
(185,493
)
 
5,299

 
(180,194
)
 
 
Non-credit portion of OTTI losses
—

 
—

 
—

 
—

 
—

 
—

 
 
Foreign currency translation adjustment
5,219

 
—

 
5,219

 
(7,858
)
 
—

 
(7,858
)
 
 
Total other comprehensive income (loss), net of tax
$
364,664

 
$
(31,409
)
 
$
333,255

 
$
(193,351
)
 
$
5,299

 
$
(188,052
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

    
The following table presents reclassifications from accumulated other comprehensive income ("AOCI") to net income (loss):
 
 
 
Amount reclassified from AOCI(1)
 
 
Details about AOCI Components
Consolidated statement of operations line item that includes reclassification
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized investment gains (losses) on available for sale investments
 
 
 
 
 
 
 
 
 
 
 
Other realized investment gains (losses)
$
8,975

 
$
(37,426
)
 
$
(863
)
 
$
(32,899
)
 
 
 
OTTI losses
(834
)
 
(1,674
)
 
(4,870
)
 
(2,088
)
 
 
 
Total before tax
8,141

 
(39,100
)
 
(5,733
)
 
(34,987
)
 
 
 
Income tax (expense) benefit
(1,192
)
 
2,644

 
(652
)
 
(2,253
)
 
 
 
Net of tax
$
6,949

 
$
(36,456
)
 
$
(6,385
)
 
$
(37,240
)
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Amounts in parentheses are decreases to net income (loss).




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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 results of operations for the three and six months ended June 30, 2019 and 2018 and our financial condition at June 30, 2019 and December 31, 2018. This should be read in conjunction with Item 1 'Consolidated Financial Statements and the accompanying notes' of this report and our 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, 2018. Tabular dollars are in thousands, except per share amounts. Amounts in tables may not reconcile due to rounding differences.
 
 
Page  
 
 
Second Quarter 2019 Financial Highlights
50
Executive Summary
51
Underwriting Results – Consolidated
63
Results by Segment: For the three and six months ended June 30, 2019 and 2018
73
i) Insurance Segment
73
ii) Reinsurance Segment
77
Other Expenses (Revenues), Net
81
Net Investment Income and Net Investment Gains (Losses)
83
Cash and Investments
85
Liquidity and Capital Resources
88
Critical Accounting Estimates
90
Recent Accounting Pronouncements
90
Off-Balance Sheet and Special Purpose Entity Arrangements
90



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SECOND QUARTER 2019 FINANCIAL HIGHLIGHTS
Second Quarter 2019 Consolidated Results of Operations
 
•
Net income available to common shareholders of $166 million, or $1.98 per common share and $1.97 per diluted common share
•
Operating income(1) of $137 million, or $1.62 per diluted common share(1)
•
Gross premiums written of $1.6 billion
•
Net premiums written of $1.1 billion
•
Net premiums earned of $1.1 billion
•
Estimated pre-tax catastrophe and weather-related losses of $26 million (insurance: $14 million and reinsurance: $11 million), or 2.3 points on current accident year loss ratio related to weather-related events
•
Net favorable prior year reserve development of $24 million
•
Underwriting income(2) of $79 million and combined ratio of 96.1%

•
Net investment income of $138 million

•
Net investment gains of $21 million

•
Amortization of value of business acquired ("VOBA") of $7 million

•
Transaction and reorganization expenses of $3 million

•
Foreign exchange gains of $12 million

Second Quarter 2019 Consolidated Financial Condition 
•
Total cash and investments of $15.4 billion; fixed maturities, cash and short-term securities comprise 89% of total cash and investments and have an average credit rating of AA-
•
Total assets of $25.9 billion
•
Reserve for losses and loss expenses of $12.3 billion and reinsurance recoverable on unpaid and paid losses and loss expenses of $3.9 billion
•
Total debt of $1.4 billion and debt to total capital ratio of 20.0%
•
Common shareholders’ equity of $4.8 billion; book value per diluted common share of $55.99






(1)
Operating income (loss) and operating income (loss) per diluted common share are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. The reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures, net income (loss) available (attributable) to common shareholders and earnings (loss) per diluted common share, respectively, are provided in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations'.
(2)
Consolidated underwriting income (loss) is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to income (loss) before income taxes and interest in income (loss) of equity method investments, the most comparable GAAP measure, is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations'.


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EXECUTIVE SUMMARY

Business Overview
AXIS Capital Holdings Limited ("AXIS Capital"), through its operating subsidiaries, is a global provider of specialty lines insurance and reinsurance products with operations in Bermuda, the U.S., Europe, Singapore, Canada and the Middle East. Our underwriting operations are organized around our global underwriting platforms, AXIS Insurance and AXIS Re.
We provide our clients and distribution partners with a broad range of risk transfer products and services and meaningful capacity, backed by significant financial strength. We manage our portfolio holistically, aiming to construct the optimum consolidated portfolio of 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 six months of 2019 included the following:

•
increasing our relevance in a select number of attractive specialty insurance and global reinsurance markets and continuing the implementation of a more focused distribution strategy;

•
continuing to grow a leadership position in business lines with strong growth potential including U.S. excess and surplus lines, and North America professional lines;

•
increasing our presence at Lloyd's of London ("Lloyd's") achieved through our acquisition of Novae Group plc ("Novae") in 2017 which provides us with access to Lloyd's worldwide licenses and an extensive distribution network;

•
continuing to re-balance our portfolio towards less volatile lines of business that carry attractive rates;

•
launching a new phase of our transformation efforts, an enterprise-wide program to enhance all of our functions and position us to lead in a transforming industry;

•
continuing to improve in the effectiveness and efficiency of our operating platforms and processes;

•
increasing investment in data and analytics; and

•
broadening risk-funding sources and the development of vehicles that utilize third-party capital.

Reinsurance Agreement with Alturas Re Ltd ("Alturas")

In July 2019, we obtained protection for our reinsurance segment through a reinsurance agreement with Alturas. In connection with the reinsurance agreement, Alturas issued notes on June 28, 2019 to unrelated investors in an amount equal to the full $39 million of coverage provided under the reinsurance agreement covering a one year period. At the time of the agreement, we concluded that we do not have a variable interest in Alturas as the variability in results is expected to be absorbed entirely by the investors in Alturas. Accordingly, the results of Alturas are not included in our consolidated financial statements.













51
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Outlook

We are committed to leadership in specialty insurance risk and global reinsurance, areas where we have depth of talent and expertise. As a mid-sized player that is both sophisticated and agile, we believe we are well-positioned to succeed in the rapidly evolving insurance and reinsurance marketplace. Through our hybrid strategy, we have developed substantial platforms in insurance and reinsurance, providing us with both balance and diversification. We believe our market positioning, underwriting expertise, best-in-class claims management capabilities, and strong relationships with our distributors and clients will provide opportunities for increased profitability in 2019 and beyond, with variances among our lines driven by our tactical response to market conditions.
 
Rates across most insurance lines generally continued to improve into 2019, with U.S. excess and primary casualty, catastrophe exposed property insurance lines, and U.K. directors & officers liability and professional liability experiencing the most upward rate momentum. While the insurance market remains competitive with capacity and capital willing to support business with a broad range of return hurdles in certain pockets, there has been more consistent signs of hardening rates. We expect many specialty segments will experience further pricing improvements as carriers assess pricing, portfolio construction and account preferences through the course of the year. In this competitive market environment with mixed market conditions, we are focusing on lines of business and market segments that are adequately priced, and we are trading off growth for profitability in other areas. In addition, our acquisition of Novae increases our leadership 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.
 
The reinsurance market is also experiencing increased momentum in rates, and improved terms and conditions, due to adjustments to both supply and demand given the significant losses across many lines of business over the last couple of years. We continue to emphasize underwriting discipline to actively manage our portfolio profitability. In parallel, we are capitalizing on opportunities to support clients in a world of changing exposures, regulation and reinsurance panels. We believe that there is a real opportunity to achieve more relevance and to produce new streams of income in the future while still defending the quality of our existing portfolio. We are also focused on managing the volatility and capital efficiency of our portfolio by further expanding our already strong group of strategic capital partners. Taken together, we balance short term needs and long term priorities, with the ultimate goal of adding value to our clients, communities and shareholders.

Non-GAAP Financial Measures

We present our results of operations in the way we believe will be most meaningful and useful to investors, analysts, rating agencies and others who use our financial information to evaluate our performance. Some of the measurements we use are considered non-GAAP financial measures under SEC rules and regulations. In this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we present underwriting-related general and administrative expenses, consolidated underwriting income (loss), operating income (loss) (in total and on a per share basis), annualized operating return on average common equity ("operating ROACE"), amounts presented on a constant currency basis, pre-tax total return on cash and investments excluding foreign exchange movements, ex-PGAAP operating income (loss) (in total and on a per share basis) and annualized ex-PGAAP operating ROACE which are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. We believe that these non-GAAP financial measures, which may be defined and calculated differently by other companies, 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 accounting principles generally accepted in the United States of America ("U.S. GAAP").

Underwriting-Related General and Administrative Expenses

Underwriting-related general and administrative expenses include those general and administrative expenses that are incremental and/or directly attributable to our individual underwriting operations. While this measure is presented in Item 1, Note 2 to the Consolidated Financial Statements 'Segment Information', it is considered a non-GAAP financial measure when presented elsewhere on a consolidated basis.

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


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The reconciliation of underwriting-related general and administrative expenses to general and administrative expenses, the most comparable GAAP financial measure, is presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations'.

Consolidated Underwriting Income (Loss)

Consolidated underwriting income (loss) is a pre-tax measure of underwriting profitability that takes into account net premiums earned and other insurance related income (losses) as revenues and net losses and loss expenses, acquisition costs and underwriting-related general and administrative expenses as expenses. While this measure is presented in Item 1, Note 2 to the Consolidated Financial Statements 'Segment Information', it is considered a non-GAAP financial measure when presented elsewhere on a consolidated basis.

We evaluate our underwriting results separately from the performance of our investment portfolio. As a result, we believe it is appropriate to exclude net investment income and net investment gains (losses) from our underwriting profitability measure.

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

Interest expense and financing costs primarily relate to interest payable on our senior notes. As these expenses are not incremental and/or directly attributable to our individual underwriting operations, these expenses are excluded from underwriting-related general and administrative expenses, and therefore, consolidated underwriting income (loss).

Transaction and reorganization expenses are primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from consolidated underwriting income (loss).

Amortization of intangible assets including VOBA arose from business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from consolidated underwriting income (loss).

We believe that the presentation of underwriting-related general and administrative expenses and consolidated underwriting income (loss) provides investors with an enhanced understanding of our results of operations, by highlighting the underlying pre-tax profitability of our underwriting activities. The reconciliation of consolidated underwriting income (loss) to income (loss) before income taxes and interest in income (loss) of equity method investments, the most comparable GAAP financial measure, is presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations'.

Operating Income (Loss)

Operating income (loss) represents after-tax operational results exclusive of net investment gains (losses), foreign exchange losses (gains), transaction and reorganization expenses, and interest in income (loss) of equity method investments.

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

Foreign exchange losses (gains) in our consolidated statements of operations primarily relate to the impact of foreign exchange rate movements on net insurance related-liabilities. In addition, we recognize unrealized foreign exchange losses (gains) on our equity securities and foreign exchange losses (gains) realized upon the sale of our available-for-sale investments and equity securities in net investment gains (losses). However, these movements are only one element of the overall impact of foreign exchange rate fluctuations on our financial position. We also recognize unrealized foreign exchange losses (gains) on our available-for-sale investments in other comprehensive income (loss). These unrealized and realized foreign exchange losses (gains) generally offset a large portion of the foreign exchange losses (gains) reported in net income (loss) available (attributable) to common shareholders, thereby minimizing the


53
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impact of foreign exchange rate movements on total shareholders' equity. As such, foreign exchange losses (gains) in our consolidated statements of operations in isolation are not a fair representation of the performance of our business.

Transaction and reorganization expenses are primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from operating income (loss).

Interest in income (loss) of equity method investments is primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, this income (loss) is excluded from operating income (loss).

Certain users of our financial statements evaluate performance exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), transaction and reorganization expenses, and interest in income (loss) of equity method investments to understand the profitability of recurring sources of income.

We believe that showing net income (loss) available (attributable) to common shareholders exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), transaction and reorganization expenses, and interest in income (loss) of equity method investments reflects the underlying fundamentals of our business. In addition, we believe that this presentation enables investors and other users of our financial information to analyze performance in a manner similar to how our management analyzes the underlying business performance. We also believe this measure follows industry practice and, therefore, facilitates comparison of our performance with our peer group. We believe that equity analysts and certain rating agencies that follow us, and the insurance industry as a whole, generally exclude these items from their analyses for the same reasons. The reconciliation of operating income (loss) to net income (loss) available (attributable) to common shareholders, the most comparable GAAP financial measure, is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations'.

We also present operating income (loss) per diluted common share and annualized operating ROACE, which are derived from the operating income (loss) measure and are reconciled to the most comparable GAAP financial measures, earnings per diluted common share and annualized return on average common equity ("ROACE"), respectively, in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations'.

Constant Currency Basis

We present gross premiums written, net premiums written and net premiums earned on a constant currency basis in this MD&A. The amounts presented on a constant currency basis are calculated by applying the average foreign exchange rate from the current year to the prior year amounts. We believe this presentation enables investors and other users of our financial information to analyze growth in gross premiums written, net premiums written and net premiums earned on a constant basis. The reconciliation to gross premiums written, net premiums written and net premiums earned on a GAAP basis is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Underwriting Results – Consolidated'.

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 investments gains (losses), interest in income (loss) of equity method investments, and change in unrealized gains (losses) generated by our average cash and investment balances. The reconciliation of pre-tax total return on cash and investments excluding foreign exchange movements to pre-tax total return on cash and investments, the most comparable GAAP financial measure, is presented in the 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Net Investment Income and Net Investment Gains (Losses)'. We believe this presentation enables investors and other users of our financial information to better analyze the performance of our investment portfolio.



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Ex-PGAAP Operating Income (Loss)

Ex-PGAAP operating income (loss) represents operating income (loss) exclusive of amortization of VOBA and intangible assets, net of tax and amortization of acquisition costs, net of tax associated with Novae's balance sheet at October 2, 2017 (the "closing date" or "acquisition date"). The reconciliation of ex-PGAAP operating income (loss) to net income (loss) available (attributable) to common shareholders, the most comparable GAAP financial measure, is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations'.

We also present ex-PGAAP operating income (loss) per diluted common share and annualized ex-PGAAP operating ROACE, which are derived from the ex-PGAAP operating income (loss) measure and are reconciled to the most comparable GAAP financial measures, earnings per diluted common share and annualized ROACE, respectively, are also presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations'.

We believe the presentation of ex-PGAAP operating income (loss), ex-PGAAP operating income (loss) per diluted common share and annualized ex-PGAAP operating ROACE enables investors and other users of our financial information to better analyze the performance of our business.

Acquisition of Novae

On October 2, 2017, we acquired Novae. We identified VOBA which represents the present value of the expected underwriting profit within policies that were in-force at the closing date of the transaction. In addition, the allocation of the acquisition price to the assets acquired and liabilities assumed based on estimated fair values at the acquisition date, resulted in the write-off of the deferred acquisition cost asset on Novae's balance sheet at the acquisition date as the value of policies in-force on that date are considered within VOBA. Consequently, underwriting income (loss) in the three and six months ended June 30, 2019 and 2018 included the recognition of premium attributable to Novae's balance sheet at the acquisition date without the recognition of the associated acquisition costs.




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Results of Operations
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
% Change
 
2018
 
2019
 
% Change
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums earned
$
1,123,607

 
(5%)
 
$
1,185,548

 
$
2,257,819

 
(4%)
 
$
2,352,950

 
 
Other insurance related income
2,925

 
(22%)
 
3,730

 
9,852

 
(5%)
 
10,335

 
 
Underwriting expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net losses and loss expenses
(672,463
)
 
(5%)
 
(706,641
)
 
(1,336,491
)
 
(2%)
 
(1,367,986
)
 
 
Acquisition costs
(242,363
)
 
4%
 
(231,952
)
 
(502,781
)
 
9%
 
(461,212
)
 
 
Underwriting-related general and administrative expenses(1)
(133,047
)
 
(1%)
 
(134,959
)
 
(271,920
)
 
(1%)
 
(274,624
)
 
 
Underwriting Income
$
78,659

 
 
 
$
115,726

 
$
156,479

 
 
 
$
259,463

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
137,949

 
25%
 
109,960

 
245,254

 
16%
 
210,961

 
 
Net investment gains (losses)
21,225

 
nm
 
(45,093
)
 
33,996

 
nm
 
(59,923
)
 
 
Corporate expenses(1)
(32,348
)
 
7%
 
(30,254
)
 
(68,566
)
 
13%
 
(60,425
)
 
 
Other (expenses) revenues, net
(3,226
)
 
nm
 
27,001

 
(26,177
)
 
(5%)
 
(27,622
)
 
 
Transaction and reorganization expenses
(3,276
)
 
(83%)
 
(18,772
)
 
(18,096
)
 
(43%)
 
(31,825
)
 
 
Amortization of value of business acquired
(7,194
)
 
(87%)
 
(53,407
)
 
(20,298
)
 
(82%)
 
(110,517
)
 
 
Amortization of intangible assets
(2,912
)
—

(28%)
 
(4,029
)
 
(5,914
)
 
(13%)
 
(6,811
)
 
 
Income before income taxes and interest in income of equity method investments
188,877

 
 
 
101,132

 
296,678

 

 
173,301

 
 
Income tax (expense) benefit
(14,469
)
 
nm
 
(996
)
 
(15,703
)
 
nm
 
40

 
 
Interest in income of equity method investments
2,635

 
(22%)
 
3,378

 
4,853

 
44%
 
3,378

 
 
Net income
$
177,043

 
 
 
$
103,514

 
$
285,828

 
 
 
$
176,719

 
 
Preferred share dividends
(10,656
)
 
—%
 
(10,656
)
 
(21,313
)
 
—%
 
(21,313
)
 
 
Net income available to common shareholders
$
166,387

 
79%
 
$
92,858

 
$
264,515

 
70%
 
$
155,406

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net investment (gains) losses(2)
$
(21,225
)
 
nm
 
$
45,093

 
$
(33,996
)
 
nm
 
$
59,923

 
 
Foreign exchange (gains)(3)
(12,381
)
 
(72%)
 
(44,099
)
 
(5,325
)
 
(15%)
 
(6,239
)
 
 
Transaction and reorganization expenses(4)
3,276

 
(83%)
 
18,772

 
18,096

 
(43%)
 
31,825

 
 
Interest in (income) of equity method investments(5)
(2,635
)
 
(22%)
 
(3,378
)
 
(4,853
)
 
44%
 
(3,378
)
 
 
Income tax expense (benefit)
3,569

 
nm
 
(5,996
)
 
3,164

 
nm
 
(11,658
)
 
 
Operating income (6)
$
136,991

 
33%
 
$
103,250

 
$
241,601

 
7%
 
$
225,879

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
nm – not meaningful
(1)
Underwriting-related general and administrative expenses is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to total general and administrative expenses, the most comparable GAAP financial measure, also included corporate expenses of $32,348 and $30,254 for the three months ended June 30, 2019 and 2018, respectively, and $68,566 and $60,425 for the six months ended June 30, 2019 and 2018, respectively. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Expenses (Revenues), Net' for additional information related to the corporate expenses. Refer also to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures' for additional information.
(2)
Tax cost (benefit) of $2,936 and ($4,531) for the three months ended June 30, 2019 and 2018, respectively, and $5,771 and $(3,388) for the six months ended June 30, 2019 and 2018, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize capital losses.
(3)
Tax cost (benefit) of $1,170 and $779 for the three months ended June 30, 2019 and 2018, respectively, and $588 and $(3,555) for the six months ended June 30, 2019 and 2018, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the tax status of specific foreign exchange transactions.
(4)
Tax cost (benefit) of ($537) and ($2,556) for the three months ended June 30, 2019 and 2018, respectively, and ($3,195) and ($5,027) for the six months ended June 30, 2019 and 2018, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
(5)
Tax cost (benefit) of $nil and $312 for the three months ended June 30, 2019 and 2018, respectively, and $nil and $312 for the six months ended June 30, 2019 and 2018, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
(6)
Operating income (loss) is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliations to the most comparable GAAP financial measure, net income (loss) available (attributable) to common shareholders, is presented in the table above, and a discussion of the rationale for its presentation is included in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures'.


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Non-GAAP Financial Measures

We also present operating income (loss) per diluted common share and annualized operating ROACE, which are derived from the operating income (loss) measure and can be reconciled to the most comparable GAAP financial measures as follows:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to common shareholders
$
166,387

 
$
92,858

 
$
264,515

 
$
155,406

 
 
Operating income
136,991

 
103,250

 
241,601

 
225,879

 
 
Weighted average diluted common shares outstanding(1)
84,401

 
83,984

 
84,338

 
83,853

 
 
 
 
 
 
 
 
 
 
 
 
Earnings per diluted common share
$
1.97

 
$
1.11

 
$
3.14

 
$
1.85

 
 
Operating income per diluted common share(2)
$
1.62

 
$
1.23

 
$
2.86

 
$
2.69

 
 
 
 
 
 
 
 
 
 
 
 
Average common shareholders’ equity
$
4,658,317

 
$
4,483,700

 
$
4,523,274

 
$
4,522,135

 
 
 
 
 
 
 
 
 
 
 
 
Annualized return on average common equity(3)
14.3
%
 
8.3
%
 
11.7
%
 
6.9
%
 
 
Annualized operating return on average common equity(4)
11.8
%
 
9.2
%
 
10.7
%
 
10.0
%
 
 
 
 
 
 
 
 
 
 
 
(1)
Refer to Item 1, Note 7 to our Consolidated Financial Statements 'Earnings per Common Share' for additional information on the dilution calculation.
(2)
Operating income (loss) per diluted common share is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to the most comparable GAAP financial measure, earnings (loss) per diluted common share, is presented in the table above, and a discussion of the rationale for its presentation is included in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures'.
(3)
Annualized ROACE is calculated by dividing annualized net income (loss) available (attributable) to common shareholders 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.
(4)
Annualized operating ROACE, a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K, is calculated by dividing annualized operating income (loss) for the period by the average common shareholders' equity balances at the beginning and end of the period. The reconciliation to the most comparable GAAP financial measure, ROACE, is presented in the table above and a discussion of the rationale for its presentation is included in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures'.

























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Ex-PGAAP Operating Income

We also present ex-PGAAP operating income (loss), ex-PGAAP operating income (loss) per diluted common share and ex-PGAAP operating ROACE which are derived from the operating income (loss) measure and can be reconciled to the most comparable GAAP financial measures as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income available to common shareholders
$
166,387

 
$
92,858

 
$
264,515

 
$
155,406

Net investment (gains) losses
(21,225
)
 
45,093

 
(33,996
)
 
59,923

Foreign exchange (gains)
(12,381
)
 
(44,099
)
 
(5,325
)
 
(6,239
)
Transaction and reorganization expenses
3,276

 
18,772

 
18,096

 
31,825

Interest in (income) of equity method investments
(2,635
)
 
(3,378
)
 
(4,853
)
 
(3,378
)
Income tax expense (benefit)
3,569

 
(5,996
)
 
3,164

 
(11,658
)
Operating income
$
136,991

 
$
103,250

 
$
241,601

 
$
225,879

Amortization of VOBA and intangible assets(2)
10,093

 
56,328

 
26,095

 
113,438

Amortization of acquisition costs(3)
(2,854
)
 
(39,641
)
 
(9,121
)
 
(80,090
)
Income tax expense (benefit)
(1,376
)
 
(3,170
)
 
(3,225
)
 
(6,336
)
Ex-PGAAP operating income(1)
$
142,854

 
$
116,767

 
$
255,350

 
$
252,891

 
 
 
 
 
 
 
 
Earnings per diluted common share
$
1.97

 
$
1.11

 
$
3.14

 
$
1.85

Net investment (gains) losses
(0.25
)
 
0.54

 
(0.40
)
 
0.71

Foreign exchange (gains)
(0.15
)
 
(0.53
)
 
(0.06
)
 
(0.07
)
Transaction and reorganization expenses
0.04

 
0.22

 
0.21

 
0.38

Interest in (income) of equity method investments
(0.03
)
 
(0.04
)
 
(0.06
)
 
(0.04
)
Income tax expense (benefit)
0.04

 
(0.07
)
 
0.03

 
(0.14
)
Operating income per diluted common share
$
1.62

 
$
1.23

 
$
2.86

 
$
2.69

Amortization of VOBA and intangible assets(2)
0.12

 
0.67

 
0.31

 
1.35

Amortization of acquisition cost(3)
(0.03
)
 
(0.47
)
 
(0.11
)
 
(0.94
)
Income tax expense (benefit)
(0.02
)
 
(0.04
)
 
(0.03
)
 
(0.08
)
Ex-PGAAP operating income per diluted common share(1)
$
1.69

 
$
1.39

 
$
3.03

 
$
3.02

 
 
 
 
 
 
 
 
Weighted average diluted common shares outstanding
84,401

 
83,984

 
84,338

 
83,853

 
 
 
 
 
 
 
 
Average common shareholders' equity
$
4,658,317

 
$
4,483,700

 
$
4,523,274

 
$
4,522,135

 
 
 
 
 
 
 
 
Annualized return on average common equity
14.3
%
 
8.3
%
 
11.7
%
 
6.9
%
Annualized operating return on average common equity
11.8
%
 
9.2
%
 
10.7
%
 
10.0
%
Annualized ex-PGAAP operating return on average common equity(1)
12.3
%
 
10.4
%
 
11.3
%
 
11.2
%
 
 
 
 
 
 
 
 
(1)
Ex-PGAAP operating income (loss), ex-PGAAP operating income (loss) per diluted common share and annualized ex-PGAAP operating ROACE are non-GAAP financial measures as defined in SEC Regulation S-K. The reconciliation to the most comparable GAAP financial measures, net income (loss) available (attributable) to common shareholders, earnings (loss) per diluted common share, and annualized ROACE, respectively, are provided in the table above, and a discussion of the rationale for the presentation of these items is included in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures'.
(2)
Tax cost (benefit) of $(1,918) and $(10,702) for the three months ended June 30, 2019 and 2018, respectively, and $(4,958) and $(21,553) for the six months ended June 30, 2019 and 2018, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
(3)
Tax cost (benefit) of $542 and $7,532 for the three months ended June 30, 2019 and 2018, respectively, and $1,733 and $15,217 for the six months ended June 30, 2019 and 2018, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions.



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Underwriting Results

Total underwriting income for the three months ended June 30, 2019 was $79 million, a decrease of $37 million compared to the underwriting income of $116 million for the three months ended June 30, 2018. The decrease in underwriting income was primarily driven by a decrease in net premiums earned, a decrease in prior year reserve development, an increase in the acquisition cost ratio, and an increase in the underwriting-related general and administrative expense ratio, partially offset by a decrease in the current accident year loss ratio excluding catastrophe and weather-related losses and a decrease in catastrophe and weather-related losses.

The reinsurance segment underwriting income increased by $8 million for the three months ended June 30, 2019, compared to the three months ended June 30, 2018. The increase in underwriting income was primarily driven by a decrease in the current accident year loss ratio excluding catastrophe and weather-related losses, a decrease in the acquisition cost ratio, a decrease in catastrophe and weather-related losses, and a decrease in the underwriting-related general and administrative expense ratio, partially offset by a decrease in net premiums earned and a decrease in net favorable prior year reserve development.

The insurance segment underwriting income decreased by $45 million for the three months ended June 30, 2019, compared to the three months ended June 30, 2018. The decrease in underwriting income was primarily driven by a decrease in net premiums earned, an increase in the acquisition cost ratio, an increase in the underwriting-related general and administrative expense, and an increase in the current accident year loss ratio excluding catastrophe and weather-related losses, partially offset by a decrease in catastrophe and weather-related losses.

Total underwriting income for the six months ended June 30, 2019 was $156 million, a decrease of $103 million compared to underwriting income of $259 million for the six months ended June 30, 2018. The decrease in underwriting income was primarily driven by a decrease in net premiums earned, a decrease in prior year reserve development, an increase in the acquisition cost ratio, and an increase in the underwriting-related general and administrative expense ratio, partially offset by a decrease in catastrophe and weather-related losses and a decrease in the current accident year loss ratio excluding catastrophe and weather-related losses.
The reinsurance segment underwriting income decreased by $9 million for the six months ended June 30, 2019, compared to the six months ended June 30, 2018. The decrease in underwriting income was primarily driven by a decrease in net premiums earned and a decrease in net favorable prior year reserve development, partially offset by a decrease in the current accident year loss ratio excluding catastrophe and weather-related losses, a decrease in catastrophe and weather-related losses, and a decrease in the underwriting-related general and administrative expense ratio.
The insurance segment underwriting income decreased by $94 million for the six months ended June 30, 2019, compared to the six months ended June 30, 2018. The decrease in underwriting income was primarily driven by a decrease in net premiums earned, an increase in the acquisition cost ratio, an increase in the current accident year loss ratio excluding catastrophe and weather-related losses, a decrease in prior year reserve development, and an increase in the underwriting-related general and administrative expense ratio, partially offset by a decrease in catastrophe and weather-related losses.
Net Investment Income

Net investment income was $138 million and $245 million for the three and six months ended June 30, 2019, respectively, compared to $110 million and $211 million for the three and six months ended June 30, 2018, respectively, an increase of $28 million and $34 million, respectively, mainly attributable to an increase in income from fixed maturities due to the increase in yields and a larger allocation of the portfolio to fixed maturities together with improved returns on a privately held investment.
Net Investment Gains (Losses)

Net investment gains were $21 million for the three months ended June 30, 2019, compared to net investment losses of $45 million for the same period of 2018.

Net investment gains for the three months ended June 30, 2019 were primarily due to net unrealized investment gains on equity securities and net realized investment gains on the sale of U.S. government and agency securities.

Net investment losses for the three months ended June 30, 2018 were primarily due to the sale of U.S. government and Agency RMBS and net unrealized investment losses on equity securities.



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Net investment gains were $34 million for the six months ended June 30, 2019, compared to net investment losses of $60 million for the same period of 2018.

Net investment gains for six months ended June 30, 2019 were primarily due to net unrealized investment gains on equity securities.

Net investment losses for the six months ended June 30, 2018 were primarily due to the sale of U.S. government and Agency RMBS and net unrealized investment losses on equity securities.

Other Expenses (Revenues), Net

Corporate expenses were $32 million for the three months ended June 30, 2019 compared to $30 million for the three months ended June 30, 2018. The increase was primarily attributable to increases in information technology costs, professional fees, and office costs, partially offset by an increase in allocations of corporate costs to the insurance and reinsurance segments.

Corporate expenses were $69 million for the six months ended June 30, 2019, compared to $60 million for the six months ended June 30, 2018. The increase was primarily attributable to increases in information technology costs, performance-related compensation costs, professional fees, and office costs, partially offset by an increase in allocations of corporate costs to the insurance and reinsurance segments.

Foreign exchange gains were $12 million and $5 million for the three and six months ended June 30, 2019, respectively, compared to foreign exchange gains of $44 million and $6 million for the three and six months ended June 30, 2018, respectively.

Foreign exchange gains for the three months ended June 30, 2019, were primarily attributable to the impact of the strengthening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling, partially offset by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in euro.

Foreign exchange gains for the six months ended June 30, 2019, were primarily attributable to the impact of the strengthening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling and euro.

Foreign exchange gains for the three and six months ended June 30, 2018, were primarily attributable to the impact of the strengthening of the U.S. dollar on the remeasurement of net insurance-related liabilities mainly denominated in pound sterling and euro.

Interest expenses and financing costs were $16 million and $32 million for the three and six months ended June 30, 2019, respectively, compared to $17 million and $34 million for the three and six months ended June 30, 2018, respectively. The decrease was primarily attributable to the repayment of the 2.65% Senior Notes and the repayment of the Dekania Notes. In addition, the decrease in interest expenses and financing costs for the three months ended was partially offset by an increase in letter of credit fees.

The financial results for the three and six months ended June 30, 2019 resulted in tax expense of $14 million and $16 million, respectively, compared to tax expense of $1 million and $nil for the three and six months ended June 30, 2018, respectively.

The tax expense of $14 million recognized in the three months ended June 30, 2019, was attributable to the generation of pre-tax income in our U.S., European, and U.K. operations. The tax expense of $16 million recognized in the six months ended June 30, 2019, was attributable to the generation of pre-tax income in our U.S. and European operations, partially offset by pre-tax losses in our U.K. operations.

The tax expense of $1 million and $nil recognized in the three and six months ended June 30, 2018, respectively, was attributable to the generation of pre-tax income in our U.S. operations, offset by the generation of pre-tax losses in our U.K. and European operations.

Transaction and Reorganization Expenses

Transaction and reorganization expenses were $3 million and $18 million for the three and six months ended June 30, 2019, respectively, compared to $19 million and $32 million for the three and six months ended June 30, 2018, respectively, related to the transformation program launched in 2017. This program encompasses the integration of Novae which commenced in the fourth quarter of 2017, the realignment of our accident and health business, together with other initiatives designed to increase our efficiency


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and enhance our profitability while delivering a customer-centric operating model. These expenses are not included in operating income.

At June 30, 2019, we achieved an annual run-rate pre-tax cost savings of $60 million, compared to the 2017 run-rate, against a target of $100 million, which we intend to deliver by the end of 2020. These expense savings will be achieved through the elimination of redundant roles, efficiencies introduced through organizational redesign, operating efficiency improvements, integration of systems, and the rationalization of third party contracts and professional fees.

Amortization of Value of Business Acquired

On October 2, 2017, we acquired Novae. The acquisition of Novae was undertaken to accelerate the growth strategy of our international insurance business, and to significantly scale up its capabilities to enable us to even better serve our clients and brokers. At the acquisition date, we identified VOBA, which represents the present value of the expected underwriting profit within policies that were in-force at the closing date of the transaction, of $257 million.

VOBA is amortized over its economic useful life and this expense is included in amortization of value of business acquired in the consolidated statement of operations.

Interest in Income of Equity Method Investments

Interest income (loss) of equity method investments represents our share of income (loss) related to investments where we have significant influence over the operating and financial policies of the investee.

Interest in income of equity method investments was $3 million and $5 million for the three and six months ended June 30, 2019, respectively.

Interest in income of equity method investments was $3 million for both the three and six months ended June 30, 2018.

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 June 30,
 
Six months ended June 30,
 
 
  
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Annualized ROACE
14.3
%
 
8.3
%
 
11.7
%
 
6.9
%
 
 
Annualized operating ROACE
11.8
%
 
9.2
%
 
10.7
%
 
10.0
%
 
 
Annualized ex-PGAAP operating ROACE
12.3
%
 
10.4
%
 
11.3
%
 
11.2
%
 
 
Book value per diluted common share(1)
$
55.99

 
$
52.47

 
$
55.99

 
$
52.47

 
 
Cash dividends declared per common share
0.40

 
0.39

 
0.80

 
0.78

 
 
Increase (decrease) in book value per diluted common share adjusted for dividends
$
3.55

 
$
0.29

 
$
5.11

 
$
(6.43
)
 
 
 
 
 
 
 
 
 
 
 
(1)
Book value per diluted common share represents total common shareholders’ equity divided by the number of diluted common shares outstanding, determined using the treasury stock method. Cash settled awards are excluded.
Return on Equity
Our objective is to generate superior returns on capital that appropriately reward our common shareholders for the risks we assume and to grow revenue only when we expect the returns will meet or exceed our requirements. We recognize that the nature of underwriting cycles and the frequency or severity of large loss events in any one year may challenge the ability to achieve a profitability target in any specific period.
ROACE reflects the impact of net income (loss) available (attributable) to common shareholders including net investment gains (losses), foreign exchange losses (gains), transaction and reorganization expenses, and interest in income (loss) of equity method investments.


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The increase in ROACE for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, was primarily driven by increases in net investment income and net investment gains, together with decreases in amortization of VOBA associated with the acquisition of Novae, and transaction and reorganization expenses, partially offset by decreases in underwriting income and foreign exchange gains. In addition, ROACE was impacted by an increase in average common equity.
The increase in ROACE for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, was primarily driven by increases in net investment income and net investment gains, together with decreases in amortization of VOBA associated with the acquisition of Novae, and transaction and reorganization expenses, partially offset by a decrease in underwriting income and an increase in corporate expenses. In addition, ROACE was impacted by an increase in average common equity.
Operating ROACE excludes the impact of net investment gains (losses), foreign exchange losses (gains), transaction and reorganization expenses, and interest in income (loss) of equity method investments.
The increase in operating ROACE for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, was primarily driven by a decrease in amortization of VOBA associated with the acquisition of Novae, together with an increase in net investment income, partially offset by a decrease in underwriting income.
The increase in operating ROACE for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, was primarily driven by a decrease in amortization of VOBA associated with the acquisition of Novae, together with an increase in net investment income, partially offset by a decrease in underwriting income and an increase in corporate expenses.
Ex-PGAAP operating ROACE excludes the impact of amortization of VOBA and intangible assets, net of tax, and amortization of acquisition costs, net of tax, associated with Novae's balance sheet at October 2, 2017. Ex-PGAAP operating ROACE for the three and six months ended June 30, 2019 was 12.3% and 11.3%, respectively, compared to 10.4% and 11.2% for the three and six months ended June 30, 2018, respectively.
Book Value per Diluted Common Share
We consider book value per diluted common share to be an appropriate measure of our returns to common shareholders, as we believe growth in our book value on a diluted basis will ultimately translate into appreciation of our stock price.
Book value per diluted common share increased to $55.99 at June 30, 2019, from $52.47 at June 30, 2018, an increase of 7%, due to net income generated during the period and net unrealized investment gains reported in other comprehensive income, partially offset by common share dividends declared.
Cash Dividends Declared per Common Share
We believe in returning excess capital to our shareholders by way of dividends and share repurchases. Accordingly, our dividend policy is an integral part of the value we create for our shareholders. Our cumulative strong earnings have permitted our Board of Directors to approve fifteen successive increases in quarterly common share dividends.
Book Value per Diluted Common Share Adjusted for Dividends
Book value per diluted common share adjusted for dividends increased by $3.55, or 7% per common share for the three months ended June 30, 2019, and increased $5.11 or 10% over the past twelve months.
Taken together, we believe that growth in book value per diluted 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 book value per diluted common share adjusted for dividends metric to measure comparable performance across the industry.


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During the three months ended June 30, 2019, total value created was driven by the net income generated in the quarter and unrealized investment gains reported in accumulated other comprehensive income.

During the six months ended June 30, 2019, total value created was driven by the net income generated in the period and unrealized gains investment reported in accumulated other comprehensive income.

During the three months ended June 30, 2018, total value created was primarily driven by the net income generated in the quarter, partially offset by an increase in unrealized investment losses reported in accumulated other comprehensive income.

During the six months ended June 30, 2018, the reduction in total value was primarily driven by the unrealized investment losses reported in accumulated other comprehensive income, partially offset by net income generated in the period.

UNDERWRITING RESULTS – CONSOLIDATED

The following table provides our 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 (loss) as revenues and net losses and loss expenses, acquisition costs and underwriting-related general and administrative costs as expenses.
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
% Change
 
2018
 
2019
 
% Change
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
1,647,760

 
—%
 
$
1,650,825

 
$
4,230,986

 
(2%)
 
$
4,313,620

 
 
Net premiums written
1,070,321

 
7%
 
1,000,455

 
2,847,381

 
(5%)
 
2,986,326

 
 
Net premiums earned
1,123,607

 
(5%)
 
1,185,548

 
2,257,819

 
(4%)
 
2,352,950

 
 
Other insurance related income
2,925

 
(22%)
 
3,730

 
9,852

 
(5%)
 
10,335

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Current year net losses and loss expenses
(696,084
)
 

 
(766,757
)
 
(1,374,784
)
 

 
(1,482,409
)
 
 
Prior year reserve development
23,621

 

 
60,116

 
38,293

 

 
114,423

 
 
Acquisition costs
(242,363
)
 

 
(231,952
)
 
(502,781
)
 

 
(461,212
)
 
 
Underwriting-related general and administrative expenses(1)
(133,047
)
 

 
(134,959
)
 
(271,920
)
 
 
 
(274,624
)
 
 
Underwriting income (2)
$
78,659

 
(32%)
 
$
115,726

 
$
156,479

 
(40%)
 
$
259,463

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
General and administrative expenses(1)
$
165,395

 

 
$
165,213

 
$
340,486

 

 
$
335,049

 
 
Income before income taxes and interest in income of equity method investments(2)
$
188,877

 

 
$
101,132

 
$
296,678

 

 
$
173,301

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
Underwriting-related general and administrative expenses is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to total general and administrative expenses, the most comparable GAAP financial measure, is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations'.
(2)
Consolidated underwriting income (loss) is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to income (loss) before income taxes and interest in income (loss) of equity investments, the most comparable GAAP financial measure, is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Results of Operations'.



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Underwriting Revenues

Gross and net premiums written by segment were as follows:
 
  
Gross premiums written
 
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
% Change
 
2018
 
2019
 
% Change
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
$
968,325

 
(6%)
 
$
1,026,644

 
$
1,819,421

 
(5%)
 
$
1,907,492

 
 
Reinsurance
679,435

 
9%
 
624,181

 
2,411,565

 
—%
 
2,406,128

 
 
Total
$
1,647,760

 
—%
 
$
1,650,825

 
$
4,230,986

 
(2%)
 
$
4,313,620

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
% ceded
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
39%
 
(3) pts
 
42%
 
38%
 
(2) pts
 
40%
 
 
Reinsurance
30%
 
(6) pts
 
36%
 
28%
 
4 pts
 
24%
 
 
Total
35%
 
(4) pts
 
39%
 
33%
 
2 pts
 
31%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net premiums written
 
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
% Change
 
2018
 
2019
 
% Change
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
$
591,909

 
(1%)
 
$
598,179

 
$
1,121,149

 
(2%)
 
$
1,146,071

 
 
Reinsurance
478,412

 
19%
 
402,276

 
1,726,232

 
(6%)
 
1,840,255

 
 
Total
$
1,070,321

 
7%
 
$
1,000,455

 
$
2,847,381

 
(5%)
 
$
2,986,326

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Gross Premiums Written:

Gross premiums written for the three and six months ended June 30, 2019 decreased by $3 million (increased by $21 million or 1% on a constant currency basis1) and $83 million or 2% ($7 million or 0% on a constant currency basis), respectively, compared to the three and six months ended June 30, 2018.

The decrease for the three months ended June 30, 2019, compared to the same period in 2018, was due to a decrease in the insurance segment, primarily offset by an increase in the reinsurance segment. The decrease for the six months ended June 30, 2019, compared to the same period in 2018, was primarily due to a decrease in the insurance segment.

The insurance segment's gross premiums written decreased by $58 million or 6% ($43 million or 4% on a constant currency basis) and $88 million or 5% ($62 million or 3% on a constant currency basis) for the three and six months ended June 30, 2019, respectively, compared to the same period in 2018.

The decrease for the three months ended June 30, 2019 was attributable to property, and accident and health lines, partially offset by increases in liability and professional lines. The decrease for the six months ended June 30, 2019 was attributable to property and accident and health lines, partially offset by increases in liability, professional lines and marine lines.

The reinsurance segment's gross premiums written increased by $55 million or 9% ($64 million or 10% on a constant currency basis) and $5 million ($55 million or 2% on a constant currency basis) for the three and six months ended June 30, 2019, respectively, compared to the same period in 2018.

The increase for the three months ended June 30, 2019 was attributable to catastrophe, liability and agriculture lines, partially offset by decreases in motor, professional lines, property, and credit and surety lines. The increase for the six months ended June 30, 2019 was attributable to catastrophe, liability and accident and health lines, partially offset by decreases in motor, credit and surety, and property lines.

(1) Amounts presented on a constant currency basis are non-GAAP financial measures as defined in Item10 (e) of SEC Regulation S-K. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to the prior year balance.


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Ceded Premiums Written:

Ceded premiums written for the three and six months ended June 30, 2019 were $577 million or 35% of gross premiums written and $1.4 billion or 33% of gross premiums written, respectively, compared to ceded premiums of $650 million or 39% of gross premiums written and $1.3 billion or 31% of gross premiums written for the three and six months ended June 30, 2018, respectively.

The decrease in ceded premiums written for the three months ended June 30, 2019, compared to the same period in 2018, was due to decreases in both segments. The increase in ceded premiums written for the six months ended June 30, 2019, compared to the same period in 2018, was attributable to an increase in ceded premiums written in the reinsurance segment, partially offset by a decrease in ceded premiums written in the insurance segment.

The decrease in the reinsurance segment ceded premiums written of $21 million or 9% for the three months ended June 30, 2019, compared to the same period in 2018, was attributable to agriculture and accident and health lines, partially offset by increases in catastrophe and liability lines.

The increase in the reinsurance segment ceded premiums written of $119 million or 21% for the six months ended June 30, 2019, compared to the same period in 2018, was attributable to catastrophe, liability, credit and surety, and accident and health lines, partially offset by decreases in agriculture and property lines.

The decrease in the insurance segment ceded premiums written of $52 million or 12% and $63 million or 8% for the three and six months ended June 30, 2019, compared to the same periods in 2018, was primarily driven by property and professional lines, partially offset by an increase in liability lines.

Reinsurance Agreement with Northshore Re II Limited ("Northshore")

In June 2019, we obtained catastrophe protection for our insurance and reinsurance segments through a reinsurance agreement with Northshore. In connection with the reinsurance agreement, Northshore issued notes to unrelated investors in an amount equal to the full $165 million of coverage provided under the reinsurance agreement covering a four year period. At the time of the agreement, we performed an evaluation of Northshore to determine if it meets the definition of a variable interest entity ("VIE"). We concluded that Northshore is a VIE. In addition, we concluded that we do not have a variable interest in the entity, as the variability in results is expected to be absorbed entirely by the investors in Northshore. Accordingly, the results of Northshore are not included in our consolidated financial statements.

Net Premiums Earned:

Net premiums earned by segment were as follows:
 
  
Three months ended June 30,
 
 
 
Six months ended June 30,
 
 
 
 
  
2019
 
 
 
2018
 
 
 
%
Change
 
2019
 
 
 
2018
 
 
 
%
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
$
537,260

 
48
%
 
$
577,271

 
49
%
 
(7%)
 
$
1,094,022

 
48
%
 
$
1,157,330

 
49
%
 
(5%)
 
 
Reinsurance
586,347

 
52
%
 
608,277

 
51
%
 
(4%)
 
1,163,797

 
52
%
 
1,195,620

 
51
%
 
(3%)
 
 
Total
$
1,123,607

 
100
%
 
$
1,185,548

 
100
%
 
(5%)
 
$
2,257,819

 
100
%
 
$
2,352,950

 
100
%
 
(4%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Net premiums earned for the three and six months ended June 30, 2019 decreased by $62 million or 5% ($51 million or 4% on a constant currency basis) and $95 million or 4% ($75 million or 3% on a constant currency basis), respectively, compared to the three and six months ended June 30, 2018. The decrease for the three and six months ended June 30, 2019, compared to the same period in 2018, was driven by decreases in both segments.

Net premiums earned decreased by $40 million or 7% ($31 million or 5% on a constant currency basis) in the insurance segment for the three months ended June 30, 2019, compared to the same period in 2018. The decrease was driven by property, and accident and health lines, partially offset by increases in professional lines.



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Net premiums earned decreased by $63 million or 5% ($49 million or 4% on a constant currency basis) in our insurance segment for the six months ended June 30, 2019, compared to the same period in 2018. The decrease was driven by property, and accident and health lines, partially offset by increases in professional lines and liability lines.

Net premiums earned decreased by $22 million or 4% ($20 million or 3% on a constant currency basis) in the reinsurance segment for the three months ended June 30, 2019, compared to the same period in 2018. The decrease was driven by motor, and credit and surety lines, partially offset by increases in agriculture and catastrophe lines.

Net premiums earned decreased by $32 million or 3% ($27 million or 2% on a constant currency basis) in our reinsurance segment for the six months ended June 30, 2019, compared to the same period in 2018. The decrease was driven by motor, and credit and surety lines, partially offset by increases in catastrophe and agriculture lines.

Other Insurance Related Income (Loss):

Other insurance related income was $3 million for the three months ended June 30, 2019, compared to $4 million for the same period in 2018.

Other insurance related income was $10 million for the six months ended June 30, 2019 and 2018.

Underwriting Expenses

The following table provides a breakdown of our combined ratio:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
% Point
Change
 
2018
 
2019
 
% Point
Change
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year loss ratio excluding catastrophe and weather-related losses
59.7
%
 
(1.8)
 
61.5
%
 
59.3
%
 
(0.6)
 
59.9
%
 
 
Catastrophe and weather-related losses ratio
2.3
%
 
(0.9)
 
3.2
%
 
1.6
%
 
(1.5)
 
3.1
%
 
 
Current accident year loss ratio
62.0
%
 
(2.7)
 
64.7
%
 
60.9
%
 
(2.1)
 
63.0
%
 
 
Prior year reserve development ratio
(2.2
%)
 
2.9
 
(5.1
%)
 
(1.7
%)
 
3.2
 
(4.9
%)
 
 
Net losses and loss expenses ratio
59.8
%
 
0.2
 
59.6
%
 
59.2
%
 
1.1
 
58.1
%
 
 
Acquisition cost ratio
21.6
%
 
2.0
 
19.6
%
 
22.3
%
 
2.7
 
19.6
%
 
 
General and administrative expense ratio(1)
14.7
%
 
0.8
 
13.9
%
 
15.0
%
 
0.7
 
14.3
%
 
 
Combined ratio
96.1
%
 
3.0
 
93.1
%
 
96.5
%
 
4.5
 
92.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1)
The general and administrative expense ratio includes corporate expenses not allocated to reportable segments of 2.9% and 2.6% for the three months ended June 30, 2019 and 2018, respectively and 3.0% and 2.6% for the six months ended June 30, 2019 and 2018, respectively. These costs are further discussed in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Expenses (Revenues), Net'.

Current Accident Year Loss Ratio:

The current accident year loss ratio decreased to 62.0% and 60.9% for the three and six months ended June 30, 2019, respectively, from 64.7% and 63.0% for the three and six months ended June 30, 2018, respectively.

The decrease in the current accident year loss ratio for the three and six months ended June 30, 2019, compared to the same periods in 2018, was impacted by a lower level of catastrophe and weather-related losses. During the three and six months ended June 30, 2019, we incurred $26 million or 2.3 points and $36 million or 1.6 points, respectively, in pre-tax catastrophe and weather-related losses primarily attributable to weather-related events. Comparatively, during the three and six months ended June 30, 2018, we incurred pre-tax catastrophe and weather-related losses, of $38 million or 3.2 points and $73 million or 3.1 points, respectively.

After adjusting for the impact of catastrophe and weather-related losses, our current accident year loss ratio for the three and six months ended June 30, 2019 was 59.7% and 59.3%, respectively, compared to 61.5% and 59.9% for the three and six months ended June 30, 2018, respectively.



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The decrease in the current accident year loss ratio after adjusting for the impact of catastrophe and weather-related losses for the three months ended June 30, 2019, compared to the same periods in 2018, was principally due to a decrease in mid-size loss experience in property and engineering lines in the reinsurance segment, a decrease in attritional loss experience in property lines in the insurance segment, a decrease in attritional loss experience in credit and surety lines in the reinsurance segment, and the impact of improved pricing over loss trend in business written in prior periods, partially offset by elevated loss experience in marine lines in the insurance segment.

The decrease in the current accident year loss ratio after adjusting for the impact of catastrophe and weather-related losses for the six months ended June 30, 2019, compared to the same periods in 2018, was principally due to the impact of improved pricing over loss trend in business written in prior periods.

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

Estimates of Significant Catastrophe Events:

Our June 30, 2019 net reserves for losses and loss expenses included estimated amounts for numerous catastrophe events. We caution that the magnitude and/or complexity of losses arising from certain of these events, in particular California Wildfires, Hurricanes Michael and Florence, and Typhoons Jebi and Trami which occurred in 2018 as well as Hurricanes Harvey, Irma and Maria and the California Wildfires which occurred in 2017 inherently increase the level of uncertainty and, therefore, the level of management judgment involved in arriving at 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.
Our estimated net reserves for losses and loss expenses 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:

Net favorable prior year reserve development arises from changes to loss and loss expense estimates related to loss events that occurred in previous calendar years. The following table presents net prior year reserve development by segment:

 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Insurance
$
21,326

 
$
24,294

 
$
28,240

 
$
47,068

 
 
Reinsurance
2,295

 
35,822

 
10,053

 
67,355

 
 
Total
$
23,621

 
$
60,116

 
$
38,293

 
$
114,423

 
 
 
 
 
 
 
 
 
 
 

Overview

Short-tail business

Short-tail business includes the underlying exposures in the property and other, marine and aviation reserve classes in the insurance segment, and the property and other reserve class in the reinsurance segment.

These reserve classes recognized net adverse prior year reserve development of $19 million for the three months ended June 30, 2019, including $30 million of net adverse prior year reserve development recognized by the reinsurance property and other reserve class, partially offset by net favorable prior year reserve development of $6 million contributed by the insurance property and other reserve class and net favorable prior year reserve development of $5 million contributed by the marine reserve class. These reserve classes


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recognized net adverse prior year reserve development of $52 million for the six months ended June 30, 2019, including $59 million of net adverse prior year reserve development recognized by the reinsurance property and other reserve class, and $16 million of net adverse prior year reserve development recognized by the insurance property and other reserve class, partially offset by net favorable prior year reserve development of $22 million contributed by the marine reserve class.

These reserve classes contributed net favorable prior year reserve development of $43 million and $81 million for the three and six months ended June 30, 2018, respectively, reflecting the recognition of better than expected loss emergence.

Medium-tail business

Medium-tail business consists primarily of insurance and reinsurance professional lines reserve classes, insurance credit and political risk reserve class and reinsurance credit and surety reserve class.

Reinsurance credit and surety reserve class recorded net favorable prior year reserve development of $17 million and $27 million for the three and six months ended June 30, 2019, respectively, and $9 million and $14 million for the three and six months ended June 30, 2018, respectively, reflecting the recognition of better than expected loss emergence.

Insurance credit and political risk reserve class recorded net favorable prior year reserve development of $7 million and $9 million for the three and six months ended June 30, 2019, respectively, reflecting the recognition of better than expected loss emergence.

Insurance professional lines reserve class recorded net favorable prior year reserve development of $4 million and $10 million for the three and six months ended June 30, 2019, respectively. Reinsurance professional lines reserve class recorded net favorable prior year reserve development of $6 million and $8 million for the three and six months ended June 30, 2019, respectively, and net favorable prior year reserve development of $8 million for the six months ended June 30, 2018. The net favorable prior year reserve development on these reserve classes continued to reflect generally favorable experience on older accident years as we continued to transition to more experienced based actuarial methods.

Long-tail business

Long-tail business consists primarily of insurance and reinsurance liability reserve classes and reinsurance motor reserve class.

Reinsurance liability reserve class contributed net favorable prior year reserve development of $11 million and $23 million for the three and six months ended June 30, 2019, respectively, compared to $6 million and $8 million for the three and six months ended June 30, 2018, respectively. The net favorable prior year reserve development was due to increased weight given by management to experience based indications on older accident years.

Insurance liability reserve class recorded net adverse prior year reserve development of $7 million for the six months ended June 30, 2018 primarily related to reserve strengthening in our U.S. excess casualty book of business.

Reinsurance motor reserve class contributed net favorable prior year reserve development of $$11 million for the six months ended June 30, 2019 primarily attributable to non proportional treaty business on older accident years. Reinsurance motor reserve class contributed net favorable prior year reserve development of $5 million and $9 million for the three and six months ended June 30, 2018, respectively, primarily attributable to non proportional treaty business on older 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.












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The following tables map our lines of business to reserve classes and the expected claim tails:
Insurance segment
 
 
 
 
 
 
Reserve class and tail
 
 
 
 
 
 
 
 
Property and other
Marine
Aviation
Credit and political risk
Professional lines
Liability
 
 
 
 
 
 
 
 
Short
Short
Short/Medium
Medium
Medium
Long
 
 
 
 
 
 
 
Reported lines of business
 
 
 
 
 
 
Property
X
 
 
 
 
 
Marine
 
X
 
 
 
 
Terrorism
X
 
 
 
 
 
Aviation
 
 
X
 
 
 
Credit and political risk
 
 
 
X
 
 
Professional lines
 
 
 
 
X
 
Liability
 
 
 
 
 
X
Accident and health
X
 
 
 
 
 
Discontinued lines - Novae
X
 
 
 
X
X

Reinsurance segment
 
 
 
 
 
Reserve class and tail
 
 
 
 
 
 
 
Property and other
Credit and surety
Professional lines
Motor
Liability
 
 
 
 
 
 
 
Short
Medium
Medium
Long
Long
 
 
 
 
 
 
Reported lines of business
 
 
 
 
 
Catastrophe
X
 
 
 
 
Property
X
 
 
 
 
Credit and surety
 
X
 
 
 
Professional lines
 
 
X
 
 
Motor
 
 
 
X
 
Liability
 
 
 
 
X
Engineering
X
 
 
 
 
Agriculture
X
 
 
 
 
Marine and other
X
 
 
 
 
Accident and health
X
 
 
 
 
Discontinued lines - Novae
X
 
 
X
X

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



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Insurance Segment:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Property and other
$
5,868

 
$
22,318

 
$
(15,851
)
 
$
39,508

 
 
Marine
5,156

 
3,363

 
21,634

 
14,635

 
 
Aviation
12

 
1,239

 
1,200

 
(2,453
)
 
 
Credit and political risk
6,561

 
(687
)
 
9,062

 
78

 
 
Professional lines
4,278

 
(1,673
)
 
10,243

 
2,234

 
 
Liability
(549
)
 
(266
)
 
1,952

 
(6,934
)
 
 
Total
$
21,326

 
$
24,294

 
$
28,240

 
$
47,068

 
 
 
 
 
 
 
 
 
 
 

For the three months ended June 30, 2019, we recognized $21 million of net favorable prior year reserve development, the principal components of which were: 

•
$7 million of net favorable prior year reserve development on credit and political risk business primarily due to the recognition of better than expected loss emergence on the 2018 accident year.

•
$6 million of net favorable prior year reserve development on property and other business primarily due to the recognition of better than expected loss emergence attributable to SuperStorm Sandy.

•
$5 million of net favorable prior year reserve development on marine business primarily due to the recognition of better than expected loss emergence on more recent accident years, partially offset by reserve strengthening attributable to a specific 2018 accident year claim.

•
$4 million of net favorable prior year reserve development on professional lines business due to the recognition of better than expected loss emergence particularly on the 2013 to 2015 accident years.

For the three months ended June 30, 2018, we recognized $24 million of net favorable prior year reserve development, the principal components of which were: 

•
$22 million of net favorable prior year reserve development on property and other business primarily due to generally better than expected loss emergence related to the 2017 catastrophe events.

For the six months ended June 30, 2019, we recognized $28 million of net favorable prior year reserve development, the principal components of which were: 

•
$22 million of net favorable prior year reserve development on marine business primarily due to the recognition of better than expected loss emergence on more recent accident years.

•
$10 million of net favorable prior year reserve development on professional lines business due to the recognition of better than expected loss emergence particularly on the 2011 to 2015 accident years.

•
$9 million of net favorable prior year reserve development on credit and political risk business primarily due to the recognition of better than expected loss emergence on the 2018 accident year.

•
$16 million of net adverse prior year reserve development on property and other business primarily due to reserve strengthening in our international book of business mainly related to accident year 2018, partially offset by the recognition of better than expected loss emergence attributable to SuperStorm Sandy.

For the six months ended June 30, 2018, we recognized $47 million of net favorable prior year reserve development, the principal components of which were: 



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•
$40 million of net favorable prior year reserve development on property and other business primarily due to generally better than expected loss emergence related to the 2017 catastrophe events.

•
$15 million of net favorable prior year reserve development on marine business due to better than expected loss emergence on recent accident years.

•
$7 million of net adverse prior year reserve development on liability business due to slight reserve strengthening within our U.S. excess casualty book of business, mainly related to the 2013 to 2015 accident years.
Reinsurance Segment:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Property and other
$
(30,094
)
 
$
16,058

 
$
(58,943
)
 
$
29,120

 
 
Credit and surety
16,645

 
8,712

 
27,008

 
13,698

 
 
Professional lines
6,465

 
(467
)
 
7,944

 
8,106

 
 
Motor
(1,243
)
 
5,334

 
11,062

 
8,525

 
 
Liability
10,522

 
6,185

 
22,982

 
7,906

 
 
Total
$
2,295

 
$
35,822

 
$
10,053

 
$
67,355

 
 
 
 
 
 
 
 
 
 
 

For the three months ended June 30, 2019, we recognized $2 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 business primarily due to generally better than expected loss emergence primarily related to the 2016 accident year.

•
$11 million of net favorable prior year reserve development on liability business due to increased weight given by management to experience based indications on older accident years.

•
$6 million of net favorable prior year reserve development on professional lines business reflecting the generally favorable experience on earlier accident years as we continued to transition to more experience based actuarial methods.

•
$30 million of net adverse prior year reserve development on property and other business mainly due to an increase in loss estimates attributable to Typhoon Jebi consistent with updated industry insured loss estimates, an increase in loss estimates attributable to Hurricane Michael, and reserve strengthening attributable to late reporting of claims bordereaux associated with the 2015 through 2017 accident years, partially offset by the recognition of better than expected loss emergence attributable to the California Wildfires.

For the three months ended June 30, 2018, we recognized $36 million of net favorable prior year reserve development, the principal components of which were:

•
$16 million of net favorable prior year reserve development on property and other business due to overall better than expected loss emergence related to the 2017 catastrophe events and better than expected loss emergence on our agriculture business.

•
$9 million of net favorable prior year reserve development on credit and surety business due to generally better than expected prior year loss emergence.

•
$6 million of net favorable prior year reserve development on liability business reflecting the generally favorable experience on earlier accident years, particularly 2008, 2009 and 2013, as progressively increased weight was given by management to experience based indications on older accident years.
    
•
$5 million of net favorable prior year reserve development on motor business related to favorable experience on non proportional business on earlier accident years.


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For the six months ended June 30, 2019, we recognized $10 million of net favorable prior year reserve development, the principal components of which were:

•
$27 million of net favorable prior year reserve development on credit and surety business primarily due to generally better than expected loss emergence primarily related to 2015 and 2016 accident years, partially offset by reserve strengthening attributable to the 2018 accident year.

•
$23 million of net favorable prior year reserve development on liability business due to increased weight given by management to experience based indications on older accident years.

•
$11 million of net favorable prior year reserve development on motor business largely due to non proportional treaty business related to older accident years.

•
$8 million of net favorable prior year reserve development on professional lines business reflecting the generally favorable experience on earlier accident years as we continued to transition to more experience based actuarial methods.

•
$59 million of net adverse prior year reserve development on property and other business mainly due to an increase in loss estimates attributable Typhoons Jebi and Trami consistent with updated industry insured loss estimates, an increase in loss estimates attributable to Hurricane Michael, and reserve strengthening attributable to 2015 through 2017 accident year claims associated with late bordereau reporting, partially offset by to the recognition of better than expected loss emergence attributable to the California Wildfires.

For the six months ended June 30, 2018, we recognized $67 million of net favorable prior year reserve development, the principal components of which were:

•
$29 million of net favorable prior year reserve development on property and other business due to overall better than expected loss emergence related to the 2017 catastrophe events and better than expected loss emergence on agriculture business.

•
$14 million of net favorable prior year reserve development on credit and surety due to generally better than expected prior year loss emergence.

•
$9 million of net favorable prior year reserve development on motor business related to favorable non proportional business on earlier accident years.

•
$8 million of net favorable prior year reserve development on professional lines business reflecting the generally favorable experience on earlier accident years as we continue to transition to more experience actuarial based methods.

•
$8 million of net favorable prior year reserve development on liability business reflecting the generally favorable experience on earlier accident years as progressively increased weight was given by management to experience based indications on older accident years.

Acquisition Cost Ratio:

The acquisition cost ratio increased to 21.6% and 22.3% for the three and six months ended June 30, 2019, respectively, from 19.6% for the both three and six months ended June 30, 2018. The increase was primarily attributable to the insurance segment due to changes in business mix largely associated with the acquisition of Novae.

General and Administrative Expense Ratio:

The general and administrative expense ratio increased to 14.7% and 15.0% for the three and six months ended June 30, 2019, respectively, from 13.9% and 14.3% for the three and six months ended June 30, 2018, respectively, driven primarily by a decrease in net premiums earned.



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RESULTS BY SEGMENT

Insurance Segment

Results from the insurance segment were as follows:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
% Change
 
2018
 
2019
 
% Change
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
968,325

 
(6%)
 
$
1,026,644

 
$
1,819,421

 
(5%)
 
$
1,907,492

 
 
Net premiums written
591,909

 
(1%)
 
598,179

 
1,121,149

 
(2%)
 
1,146,071

 
 
Net premiums earned
537,260

 
(7%)
 
577,271

 
1,094,022

 
(5%)
 
1,157,330

 
 
Other insurance related income (loss)
(695
)
 
nm
 
1,214

 
1,046

 
(43%)
 
1,833

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Current year net losses and loss expenses
(330,029
)
 
 
 
(353,067
)
 
(650,719
)
 
 
 
(697,380
)
 
 
Prior year reserve development
21,326

 
 
 
24,294

 
28,240

 
 
 
47,068

 
 
Acquisition costs
(111,655
)
 
 
 
(90,864
)
 
(229,430
)
 
 
 
(178,193
)
 
 
General and administrative expenses
(104,898
)
 
 
 
(102,369
)
 
(210,932
)
 
 
 
(204,738
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income
$
11,309

 
(80%)
 
$
56,479

 
$
32,227

 
(74%)
 
$
125,920

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
% Point
Change
 
 
 
 
 
% Point
Change
 
 
 
 
Current accident year loss ratio excluding catastrophe and weather-related losses
58.7
%
 
1.5
 
57.2
%
 
57.4
%
 
1.6
 
55.8
%
 
 
Catastrophe and weather-related losses ratio
2.7
%
 
(1.3)
 
4.0
%
 
2.1
%
 
(2.4)
 
4.5
%
 
 
Current accident year loss ratio
61.4
%
 
0.2
 
61.2
%
 
59.5
%
 
(0.8)
 
60.3
%
 
 
Prior year reserve development ratio
(3.9
%)
 
0.3
 
(4.2
%)
 
(2.6
%)
 
1.5
 
(4.1
%)
 
 
Net losses and loss expenses ratio
57.5
%
 
0.5
 
57.0
%
 
56.9
%
 
0.7
 
56.2
%
 
 
Acquisition cost ratio
20.8
%
 
5.1
 
15.7
%
 
21.0
%
 
5.6
 
15.4
%
 
 
General and administrative expense ratio
19.5
%
 
1.8
 
17.7
%
 
19.2
%
 
1.5
 
17.7
%
 
 
Combined ratio
97.8
%
 
7.4
 
90.4
%
 
97.1
%
 
7.8
 
89.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
nm – not meaningful



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Table of Contents


Gross Premiums Written:

The following table provides gross premiums written by line of business:
 
  
Three months ended June 30,
 
 
 
Six months ended June 30,
 
 
 
 
  
2019
 
 
 
2018
 
 
 
%
Change
 
2019
 
 
 
2018
 
 
 
%
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property
$
259,295

 
26
%
 
$
344,737

 
33
%
 
(25%)
 
$
459,797

 
25
%
 
$
639,943

 
34
%
 
(28%)
 
 
Marine
99,389

 
10
%
 
95,690

 
9
%
 
4%
 
246,368

 
14
%
 
222,432

 
12
%
 
11%
 
 
Terrorism
15,157

 
2
%
 
15,812

 
2
%
 
(4%)
 
29,519

 
2
%
 
32,712

 
2
%
 
(10%)
 
 
Aviation
18,539

 
2
%
 
21,048

 
2
%
 
(12%)
 
36,209

 
2
%
 
42,061

 
2
%
 
(14%)
 
 
Credit and political risk
36,076

 
4
%
 
30,736

 
3
%
 
17%
 
81,983

 
5
%
 
75,466

 
4
%
 
9%
 
 
Professional lines
321,284

 
33
%
 
297,243

 
29
%
 
8%
 
548,592

 
30
%
 
505,208

 
26
%
 
9%
 
 
Liability
190,030

 
20
%
 
150,167

 
15
%
 
27%
 
332,672

 
18
%
 
255,828

 
13
%
 
30%
 
 
Accident and health
28,126

 
3
%
 
69,860

 
7
%
 
(60%)
 
79,174

 
4
%
 
130,537

 
7
%
 
(39%)
 
 
Discontinued lines - Novae
429

 
—
%
 
1,351

 
—
%
 
(68%)
 
5,107

 
—
%
 
3,305

 
—
%
 
55%
 
 
Total
$
968,325

 
100
%
 
$
1,026,644

 
100
%
 
(6%)
 
$
1,819,421

 
100
%
 
$
1,907,492

 
100
%
 
(5%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Gross premiums written for the three months ended June 30, 2019 decreased by $58 million or 6% ($43 million or 4% on a constant currency basis), compared to the three months ended June 30, 2018. The decrease was attributable to property, and accident and health lines, partially offset by increases in liability and professional lines.

The decrease in property lines was due to the non-renewals, partially offset by new business. The decrease in accident and health lines was due to the cancellation of certain program business. The increase in gross premiums written in liability lines was driven by new business and favorable rate changes. The increase in professional lines and credit and political risk lines was due to new business.

Gross premiums written for the six months ended June 30, 2019 decreased by $88 million or 5% ($62 million or 3% on a constant currency basis), compared to the six months ended June 30, 2018. The decrease was attributable to property, and accident and health lines, partially offset by increases in liability, professional lines, marine, and credit and political risk lines.

The decrease in property lines was due to the non-renewals and timing differences, partially offset by new business. The decrease in accident and health lines was due to the cancellation of certain program business. The increase in gross premiums written in liability lines was driven by new business and favorable rate changes. The increases in professional lines and credit and political risk lines were due to new business. The increase in marine lines was due to favorable rate changes and favorable premium adjustments.

Ceded Premiums Written:

Ceded premiums written for the three and six months ended June 30, 2019 were $376 million or 39% of gross premiums written and $698 million or 38%, of gross premiums written, respectively, compared to $428 million or 42% of gross premiums written and $761 million or 40% of gross premiums written, respectively, for the three and six months ended June 30, 2018.

The decrease in ceded premiums written of $52 million or 12% and $63 million or 8% for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018, was primarily driven by property and professional lines, partially offset by an increase in liability lines.











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Table of Contents


Net Premiums Earned:

The following table provides net premiums earned by line of business:
 
  
Three months ended June 30,
 
 
 
Six months ended June 30,
 
 
 
 
  
2019
 
 
 
2018
 
 
 
%
Change
 
2019
 
 
 
2018
 
 
 
%
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property
$
155,566

 
29
%
 
$
189,402

 
32
%
 
(18%)
 
$
326,699

 
30
%
 
$
386,015

 
34
%
 
(15%)
 
 
Marine
70,379

 
13
%
 
73,194

 
13
%
 
(4%)
 
144,192

 
13
%
 
149,569

 
13
%
 
(4%)
 
 
Terrorism
12,867

 
2
%
 
11,879

 
2
%
 
8%
 
24,030

 
2
%
 
26,386

 
2
%
 
(9%)
 
 
Aviation
14,737

 
3
%
 
17,702

 
3
%
 
(17%)
 
27,610

 
3
%
 
36,188

 
3
%
 
(24%)
 
 
Credit and political risk
24,175

 
4
%
 
26,281

 
5
%
 
(8%)
 
46,979

 
4
%
 
53,999

 
5
%
 
(13%)
 
 
Professional lines
161,525

 
30
%
 
136,306

 
24
%
 
19%
 
318,649

 
29
%
 
271,918

 
23
%
 
17%
 
 
Liability
62,141

 
12
%
 
58,465

 
10
%
 
6%
 
124,350

 
11
%
 
109,562

 
9
%
 
13%
 
 
Accident and health
35,610

 
7
%
 
56,103

 
10
%
 
(37%)
 
76,034

 
7
%
 
104,686

 
9
%
 
(27%)
 
 
Discontinued lines - Novae
260

 
—
%
 
7,939

 
1
%
 
(97%)
 
5,479

 
1
%
 
19,007

 
2
%
 
(71%)
 
 
Total
$
537,260

 
100
%
 
$
577,271

 
100
%
 
(7%)
 
$
1,094,022

 
100
%
 
$
1,157,330

 
100
%
 
(5%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Net premiums earned for the three months ended June 30, 2019 decreased by $40 million or 7% ($31 million or 5% on a constant currency basis), compared to the three months ended June 30, 2018. The decrease was by driven by decreases in gross premiums earned in property, and accident and health lines, partially offset by an increase in gross premiums earned in professional lines.

Net premiums earned for the six months ended June 30, 2019 decreased by $63 million or 5% ($49 million or 4% on a constant currency basis), compared to the six months ended June 30, 2018. The decrease was by driven by decreases in gross premiums earned in property, accident and health and discontinued lines - Novae, together with increases in ceded premiums earned in liability and property lines, partially offset by increases in gross premiums earned in professional lines and liability lines.

Loss Ratio:

The table below shows the components of our loss ratio:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
 
2019
 
% Point
Change
 
2018
 
2019
 
% Point
Change
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year
61.4
%
 
0.2
 
61.2
%
 
59.5
%
 
(0.8)
 
60.3
%
 
 
Prior year reserve development
(3.9
%)
 
0.3
 
(4.2
%)
 
(2.6
%)
 
1.5
 
(4.1
%)
 
 
Loss ratio
57.5
%
 
0.5
 
57.0
%
 
56.9
%
 
0.7
 
56.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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Table of Contents


Current Accident Year Loss Ratio:

The current accident year loss ratio increased to 61.4% for the three months ended June 30, 2019, from 61.2% for the three months ended June 30, 2018. For the six months ended June 30, 2019, the current accident year loss ratio decreased to 59.5% from 60.3% for the same period in 2018.

The current accident year loss ratio for the three and six months ended June 30, 2019, compared to the same periods in 2018, was impacted by a lower level of catastrophe and weather-related losses. During the three and six months ended June 30, 2019, we incurred $14 million, or 2.7 points and $22 million, or 2.1 points, respectively, in pre-tax catastrophe and weather-related losses primarily attributable to weather-related events. Comparatively, during the three and six months ended June 30, 2018, we incurred $23 million or 4.0 points and $51 million or 4.5 points, respectively, in pre-tax catastrophe and weather-related losses.

After adjusting for the impact of the catastrophe and weather-related losses, our current accident year loss ratio for the three and six months ended June 30, 2019 was 58.7% and 57.4%, respectively, compared to 57.2% and 55.8% for the three and six months ended June 30, 2018, 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 and six months ended June 30, 2019, compared to the same periods in 2018, was principally due to mid-size loss experience in marine lines, elevated loss experience in credit and political risk lines, and changes in business mix, partially offset by a decrease in attritional loss experience in property lines, and the impact of improved pricing over loss trend in business written in prior periods.

The increase in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses for the six months ended June 30, 2019, compared to the same period in 2018, was also due to mid-size loss experience in aviation lines.

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

Acquisition Cost Ratio:

The acquisition cost ratio increased to 20.8% for the three months ended June 30, 2019 from 15.7% for the three months ended June 30, 2018 primarily attributable to the acquisition of Novae. At the acquisition date, the allocation of the acquisition price to the assets acquired and liabilities assumed based on estimated fair values at that date, resulted in the write-off of the deferred acquisition cost asset on Novae's balance sheet at the acquisition date as the value of policies in-force on that date are considered within VOBA. Consequently, the absence of $3 million and $38 million of acquisition expense related to premiums earned in the three months ended June 30, 2019 and 2018, respectively, benefited the acquisition cost ratio by 0.5 points and 6.6 points, respectively. Adjusting the acquisition cost ratio for these amounts, the acquisition cost ratio decreased by 1.0 point compared to the same period in 2018 due to changes in business mix.

The acquisition cost ratio increased to 21.0% for the six months ended June 30, 2019 from 15.4% for the six months ended June 30, 2018 primarily attributable to the acquisition of Novae. The absence of $9 million and $76 million of acquisition expense related to premiums earned in the six months ended June 30, 2019 and 2018, respectively, benefited the acquisition cost ratio by 0.8 points and 6.6 points, respectively. Adjusting the acquisition cost ratio for these amounts, the acquisition cost ratio decreased 0.2 points compared to the same period in 2018.

General and Administrative Expense Ratio:

The general and administrative expense ratio increased to 19.5% for the three months ended June 30, 2019 from 17.7% for the three months ended June 30, 2018 driven by a decrease in net premiums earned, an increase in the allocation of corporate costs to the segment, partially offset by a decrease in personnel costs.

The general and administrative expense ratio increased to 19.2% for the six months ended June 30, 2019 from 17.7% for the six months ended June 30, 2018 driven by a decrease in net premiums earned, an increase in the allocation of corporate costs to the segment, an increase in professional fees and information technology costs, partially offset by a decrease in personnel costs and an increase in fees associated with arrangements with strategic capital partners.




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Table of Contents


Reinsurance Segment

Results from the reinsurance segment were as follows:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
% Change
 
2018
 
2019
 
% Change
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
679,435

 
9%
 
$
624,181

 
$
2,411,565

 
—%
 
$
2,406,128

 
 
Net premiums written
478,412

 
19%
 
402,276

 
1,726,232

 
(6%)
 
1,840,255

 
 
Net premiums earned
586,347

 
(4%)
 
608,277

 
1,163,797

 
(3%)
 
1,195,620

 
 
Other insurance related income
3,620

 
44%
 
2,516

 
8,806

 
4%
 
8,502

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Current year net losses and loss expenses
(366,055
)
 
 
 
(413,690
)
 
(724,065
)
 
 
 
(785,029
)
 
 
Prior year reserve development
2,295

 
 
 
35,822

 
10,053

 
 
 
67,355

 
 
Acquisition costs
(130,708
)
 
 
 
(141,088
)
 
(273,351
)
 
 
 
(283,019
)
 
 
General and administrative expenses
(28,149
)
 
 
 
(32,590
)
 
(60,988
)
 
 
 
(69,886
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underwriting income
$
67,350

 
14%
 
$
59,247

 
$
124,252

 
(7%)
 
$
133,543

 
 
Ratios:
 
 
% Point
Change
 
 
 
 
 
% Point
Change
 
 
 
 
Current accident year loss ratio excluding catastrophe and weather-related losses
60.5
%
 
(5.0)
 
65.5
%
 
61.0
%
 
(2.8)
 
63.8
%
 
 
Catastrophe and weather-related losses ratio
1.9
%
 
(0.6)
 
2.5
%
 
1.2
%
 
(0.7)
 
1.9
%
 
 
Current accident year loss ratio
62.4
%
 
(5.6)
 
68.0
%
 
62.2
%
 
(3.5)
 
65.7
%
 
 
Prior year reserve development ratio
(0.4
%)
 
5.5
 
(5.9
%)
 
(0.8
%)
 
4.9
 
(5.7
%)
 
 
Net losses and loss expenses ratio
62.0
%
 
(0.1)
 
62.1
%
 
61.4
%
 
1.4
 
60.0
%
 
 
Acquisition cost ratio
22.3
%
 
(0.9)
 
23.2
%
 
23.5
%
 
(0.2)
 
23.7
%
 
 
General and administrative expense ratio
4.8
%
 
(0.6)
 
5.4
%
 
5.2
%
 
(0.6)
 
5.8
%
 
 
Combined ratio
89.1
%
 
(1.6)
 
90.7
%
 
90.1
%
 
0.6
 
89.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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Table of Contents


Gross Premiums Written:

The following table provides gross premiums written by line of business:
 
  
Three months ended June 30,
 
 
 
Six months ended June 30,
 
 
 
 
  
2019
 
 
 
2018
 
 
 
% 
Change
 
2019
 
 
 
2018
 
 
 
% 
Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophe
$
245,203

 
36
%
 
$
148,304

 
23
%
 
65%
 
$
603,336

 
26
%
 
$
430,188

 
19
%
 
40%
 
 
Property
43,135

 
6
%
 
60,293

 
10
%
 
(28%)
 
215,877

 
9
%
 
261,000

 
11
%
 
(17%)
 
 
Professional lines
92,915

 
14
%
 
116,273

 
19
%
 
(20%)
 
202,743

 
8
%
 
222,452

 
9
%
 
(9%)
 
 
Credit and surety
38,465

 
6
%
 
52,685

 
8
%
 
(27%)
 
190,369

 
8
%
 
249,000

 
10
%
 
(24%)
 
 
Motor
6,846

 
1
%
 
43,279

 
7
%
 
(84%)
 
288,248

 
12
%
 
455,355

 
19
%
 
(37%)
 
 
Liability
125,990

 
19
%
 
91,343

 
15
%
 
38%
 
311,310

 
13
%
 
250,352

 
10
%
 
24%
 
 
Agriculture
70,077

 
10
%
 
53,953

 
9
%
 
30%
 
196,517

 
8
%
 
199,350

 
8
%
 
(1%)
 
 
Engineering
7,600

 
1
%
 
6,604

 
1
%
 
15%
 
30,365

 
1
%
 
33,110

 
1
%
 
(8%)
 
 
Marine and other
22,042

 
3
%
 
13,631

 
2
%
 
62%
 
58,379

 
2
%
 
40,279

 
2
%
 
45%
 
 
Accident and health
27,723

 
4
%
 
37,808

 
6
%
 
(27%)
 
315,315

 
13
%
 
265,496

 
11
%
 
19%
 
 
Discontinued lines - Novae
(561
)
 
—
%
 
8

 
—
%
 
nm
 
(894
)
 
—
%
 
(454
)
 
—
%
 
97%
 
 
Total
$
679,435

 
100
%
 
$
624,181

 
100
%
 
9%
 
$
2,411,565

 
100
%
 
$
2,406,128

 
100
%
 
—%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
nm – not meaningful

Gross premiums written for the three months ended June 30, 2019, increased by $55 million or 9% ($64 million or 10% on a constant currency basis), compared to the three months ended June 30, 2018. The increase was primarily attributable to increases in catastrophe, liability, agriculture, and marine and other lines, partially offset by decreases in motor, professional lines, property, credit and surety, and accident and health lines.

The increases in catastrophe, liability, and marine and other lines were driven by new business. Increased line sizes on a number of treaties and the restructuring of several treaties which impacted the timing of premium recognition also contributed to the increase in catastrophe lines. The increase in agriculture lines was due to increased line sizes on a number of treaties, the timing of treaty renewals, and premium adjustments.

The decrease in motor lines was due to premium adjustments and the non-renewal of a large treaty. The decrease in professional lines was due to the timing of the renewal of a large treaty, together with non-renewals, partially offset by new business and premium adjustments. The decrease in property lines was driven by non-renewals and decreased line sizes on a number of treaties, partially offset by premium adjustments. The decreases in credit and surety, and accident and health lines were driven by premium adjustments. In addition, the decrease in accident and health lines was due to non-renewals.

Gross premiums written for the six months ended June 30, 2019, increased by $5 million ($55 million or 2% on a constant currency basis), compared to the six months ended June 30, 2018. The increase was primarily attributable to increases in catastrophe, liability, and accident and health lines, largely offset by decreases in motor, credit and surety, property and professional lines.

The increases in catastrophe, liability, and accident and health lines were driven by new business. Increased line sizes on a number of treaties and the restructuring of several treaties which impacted the timing of premium recognition also contributed to the increase in catastrophe lines. In addition, liability lines increased due to premium adjustments and the restructuring of a large treaty. The decreases in motor, and credit and surety lines were due to non-renewals and premium adjustments. Decreased line sizes on a number of treaties and the impact of foreign exchange movements as the strengthening of the U.S. dollar drove comparative premium decreases in treaties denominated in foreign currencies, also contributed to the decrease in motor lines. The decrease in property lines was primarily due to non-renewals and decreased line sizes on a number of treaties, partially offset by favorable rate changes and the restructuring of several treaties. The decrease in professional lines was due to non-renewals.



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Table of Contents


Ceded Premiums Written:

Ceded premiums written for the three and six months ended June 30, 2019 were $201 million or 30% and $685 million or 28%, respectively, of gross premiums written compared to $222 million or 36% and $566 million or 24% of gross premiums written for the three and six months ended June 30, 2018, respectively.

The decrease in ceded premiums written of $21 million or 9% for the three months ended June 30, 2019, compared to the three months ended June 30, 2018, was attributable to agriculture, and accident and health lines, partially offset by increases in catastrophe and liability lines.

The decrease in agriculture lines was attributable to a non-renewal of a large fronting arrangement and the restructuring of a quota share retrocessional treaty. The decrease in accident and health lines was attributable to a decrease in premiums ceded to the retrocessional cover with Harrington Re Ltd ("Harrington Re"). The increase in catastrophe lines was attributable to an increase in premiums ceded to our strategic capital partners and to the quota share retrocessional treaty with Alturas Re Ltd. ("Alturas"), effective January 1, 2019. The increase in liability lines was primarily attributable to an increase in premiums ceded to Harrington Re.

The increase in ceded premiums written of $119 million or 21% for the six months ended June 30, 2019, compared to the six months ended June 30, 2018, was attributable to catastrophe, liability, credit and surety, and accident and health lines, partially offset by decreases in agriculture and property lines.

The increase in catastrophe lines was attributable to an increase in premiums ceded to a new aggregate excess of loss treaty and premiums ceded to the quota share retrocessional treaty with Alturas, together with increases in premium ceded to our strategic capital partners. The increases in accident and health, and liability lines were attributable to the increase in premiums ceded to the retrocessional cover with Harrington Re. The increase in credit and surety lines was attributable to an increase in premiums ceded to a new quota share retrocessional treaty. The decrease in agriculture lines was attributable to a non-renewal of a large fronting arrangement and the restructuring of a quota share retrocessional treaty.

Net Premiums Earned:

The following table provides net premiums earned by line of business:
 
  
Three months ended June 30,
 
 
 
Six months ended June 30,
 
 
 
 
  
2019
 
  
 
2018
 
  
 
% Change
 
2019
 
  
 
2018
 
  
 
% Change
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Catastrophe
$
68,506

 
11
%
 
$
59,498

 
10
%
 
15%
 
$
136,558

 
10
%
 
$
121,352

 
9
%
 
13%
 
 
Property
71,338

 
12
%
 
78,466

 
13
%
 
(9%)
 
148,243

 
13
%
 
156,923

 
13
%
 
(6%)
 
 
Professional lines
51,525

 
9
%
 
51,558

 
8
%
 
—%
 
103,424

 
9
%
 
107,749

 
9
%
 
(4%)
 
 
Credit and surety
48,930

 
8
%
 
65,746

 
11
%
 
(26%)
 
99,013

 
9
%
 
118,481

 
10
%
 
(16%)
 
 
Motor
92,458

 
16
%
 
117,975

 
19
%
 
(22%)
 
193,694

 
17
%
 
221,507

 
19
%
 
(13%)
 
 
Liability
95,145

 
16
%
 
89,511

 
15
%
 
6%
 
184,006

 
16
%
 
179,103

 
15
%
 
3%
 
 
Agriculture
47,158

 
8
%
 
35,330

 
6
%
 
33%
 
84,226

 
7
%
 
73,888

 
6
%
 
14%
 
 
Engineering
16,003

 
3
%
 
16,593

 
3
%
 
(4%)
 
30,676

 
3
%
 
34,298

 
3
%
 
(11%)
 
 
Marine and other
15,168

 
3
%
 
12,616

 
2
%
 
20%
 
26,610

 
2
%
 
19,076

 
2
%
 
39%
 
 
Accident and health
80,420

 
14
%
 
78,442

 
13
%
 
3%
 
157,888

 
14
%
 
156,999

 
13
%
 
1%
 
 
Discontinued lines - Novae
(304
)
 
—
%
 
2,542

 
—
%
 
nm
 
(541
)
 
—
%
 
6,244

 
1
%
 
nm
 
 
Total
$
586,347

 
100
%
 
$
608,277

 
100
%
 
(4%)
 
$
1,163,797

 
100
%
 
$
1,195,620

 
100
%
 
(3%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
nm – not meaningful

Net premiums earned for the three months ended June 30, 2019, decreased by $22 million or 4% ($20 million or 3% on a constant currency basis), compared to the three months ended June 30, 2018. The decrease was driven by decreases in gross premiums earned in motor and credit and surety lines, together with an increase in ceded premiums earned in catastrophe lines, partially offset by an increase in gross premiums earned in catastrophe lines, and a decrease in ceded premiums earned in agriculture lines.



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Table of Contents


Net premiums earned for the six months ended June 30, 2019, decreased by $32 million or 3% ($27 million or 2% on a constant currency basis), compared to the six months ended June 30, 2018. The decrease was driven by increases in ceded premiums earned in catastrophe, and credit and surety lines, together with decreases in gross premiums earned in motor, and credit and surety lines, partially offset by increases in gross premiums earned in catastrophe and agriculture lines, as well as a decrease in ceded premiums earned in agriculture lines.

Other Insurance Related Income (Loss):

Other insurance related income was $4 million for the three months ended June 30, 2019, compared to $3 million for the three months ended June 30, 2018. The increase of $1 million for the three months ended June 30, 2019, was due to an increase in fees associated with arrangements with strategic capital partners.

Other insurance related income of $9 million for the six months ended June 30, 2019, was comparable to the six months ended June 30, 2018.

Loss Ratio:

The table below shows the components of our loss ratio:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
% Point
Change
 
2018
 
2019
 
% Point
Change
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Current accident year
62.4
%
 
(5.6)
 
68.0
%
 
62.2
%
 
(3.5)
 
65.7
%
 
 
Prior year reserve development
(0.4
%)
 
5.5
 
(5.9
%)
 
(0.8
%)
 
4.9
 
(5.7
%)
 
 
Loss ratio
62.0
%
 
(0.1)
 
62.1
%
 
61.4
%
 
1.4
 
60.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Current Accident Year Loss Ratio:

The current accident year loss ratio decreased to 62.4% and 62.2% for the three and six months ended June 30, 2019, respectively, from 68.0% and 65.7% for the three and six months ended June 30, 2018, respectively.

The decrease in the current accident year loss ratio for three and six months ended June 30, 2019, compared to the same period in 2018, was impacted by a lower level of catastrophe and weather-related losses. During the three and six months ended June 30, 2019, we incurred $11 million or 1.9 points and $14 million or 1.2 points, respectively, in pre-tax catastrophe and weather-related losses primarily attributable to weather-related events. Comparatively, during the three and six months ended June 30, 2018, we incurred $15 million or 2.5 points and $22 million or 1.9 points, respectively, in pre-tax catastrophe and weather-related losses.

After adjusting for the impact of the catastrophe and weather-related losses, our current accident year loss ratio for the three and six months ended June 30, 2019 was 60.5% and 61.0%, respectively, compared to 65.5% and 63.8% for the three and six months ended June 30, 2018, respectively.

The decrease in the current accident year loss ratio after adjusting for the impact of catastrophe and weather-related losses for the three and six months ended June 30, 2019, compared to the same period in 2018, was principally due to a decrease in mid-size loss experience in property, engineering, and credit and surety lines, a decrease in attritional loss experience in credit and surety lines, the impact of changes in business mix, and the impact of improved pricing over loss trend in business written in prior periods.

The decrease in the current accident year loss ratio after adjusting for the impact of the catastrophe and weather-related losses for the six months ended June 30, 2019, compared to the same period in 2018, was principally due to a decrease in attritional loss experience in credit and surety lines, a decrease in mid-size loss experience in property and engineering lines, the impact of changes in business mix, and the impact of rate and trend, partially offset by a mid-size aviation loss in marine and other lines.

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



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Acquisition Cost Ratio:

The acquisition cost ratio decreased to 22.3% and 23.5% for the three and six months ended June 30, 2019, compared to 23.2% and 23.7% for the three and six months ended June 30, 2018, respectively, primarily attributable to adjustments related to loss sensitive features, together with 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 4.8% for the three months ended June 30, 2019, compared to 5.4% for the three months ended June 30, 2018. The decrease was driven by a decrease in net premiums earned and an increase in fees associated with arrangements with strategic capital partners, partially offset by an increase in the allocation of corporate costs to the segment.

The general and administrative expense ratio decreased to 5.2% for the three months ended June 30, 2019, compared to 5.8% for the three months ended June 30, 2018. The decrease was driven by a decrease in net premiums earned, an increase in fees associated with arrangements with strategic capital partners, together with a decrease in personnel costs, and information technology costs, partially offset by an increase in the allocation of corporate costs to the segment.

OTHER EXPENSES (REVENUES), NET

The following table provides a summary of other expenses (revenues), net:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
% Change
 
2018
 
2019
 
% Change
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate expenses
$
32,348

 
7%
 
$
30,254

 
$
68,566

 
13%
 
$
60,425

 
 
Foreign exchange gains
(12,381
)
 
(72%)
 
(44,099
)
 
(5,325
)
 
(15%)
 
(6,239
)
 
 
Interest expense and financing costs
15,607

 
(9%)
 
17,098

 
31,502

 
(7%)
 
33,861

 
 
Income tax expense (benefit)
14,469

 
nm
 
996

 
15,703

 
nm
 
(40
)
 
 
Total
$
50,043

 
nm
 
$
4,249

 
$
110,446

 
25%
 
$
88,007

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
nm – not meaningful

Corporate Expenses

Corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As a percentage of net premiums earned, corporate expenses were 2.9% and 3.0% for the three and six months ended June 30, 2019, respectively, compared to 2.6% and 2.6%, for the same periods in 2018, respectively.

The increase in corporate expenses for the three and six months ended June 30, 2019, was primarily attributable to increases in information technology costs, professional fees, and office costs, partially offset by an increase in the allocation of corporate costs to the insurance and reinsurance segments. In addition, the increase in corporate expenses for the six months ended June 30, 2019, was attributable to an increase in performance-related compensation cost.



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Foreign Exchange Losses (Gains)

Some of our business is written in currencies other than the U.S. dollar. Foreign exchange gains of $12 million for the three months ended June 30, 2019, were primarily attributable to the impact of the strengthening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling, partially offset by the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in euro.

Foreign exchange gains of $5 million for the six months ended June 30, 2019, were primarily attributable to the impact of the strengthening of the U.S. dollar on the remeasurement of net insurance-related liabilities mainly denominated in pound sterling and euro.

The foreign exchange gains of $44 million for the three months ended June 30, 2018, were primarily attributable to the impact of the strengthening of the U.S. dollar on the remeasurement of net insurance-related liabilities mainly denominated in pound sterling and euro.

The foreign exchange gains of $6 million for the six months ended June 30, 2018, were primarily attributable to the impact of the strengthening of the U.S. dollar on the remeasurement of net insurance-related liabilities mainly denominated in pound sterling and euro in the second quarter, largely offset by foreign exchange losses driven primarily by 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 in the first quarter.

Interest Expense and Financing Costs

Interest expense and financing costs are related to interest due on 5.875% Senior Notes issued in 2010, 5.15% Senior Notes issued in 2014, 4.0% Senior Notes issued in 2017, and 3.90% Senior Notes issued in 2019. Interest expenses and financing costs decreased by $1 million and $2 million for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018, primarily attributable to the repayments of the 2.65% Senior Notes on April 1, 2019 and the Dekania Notes on November 15, 2018. In addition, the decrease for the three months ended June 30, 2019, was partially offset by an increase in letter of credit fees.

Income Tax Expense (Benefit)

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

The tax expense of $14 million for the three months ended June 30, 2019, was attributable to the generation of pre-tax income in our U.S., European, and U.K. operations.

The tax expense of $16 million for the six months ended June 30, 2019, was attributable to the generation of pre-tax income in our U.S. and European operations, partially offset by pre-tax losses in our U.K. operations.

The tax expense of $1 million and $nil recognized for the three and six months ended June 30, 2018, respectively, was attributable to by the generation of pre-tax income in our U.S. operations, largely offset by the generation of pre-tax losses in our U.K. and European operations.




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NET INVESTMENT INCOME AND NET INVESTMENT GAINS (LOSSES)

Net Investment Income

The following table provides details of income generated by our cash and investment portfolio by major asset class:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
% Change
 
2018
 
2019
 
% Change
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
$
97,370

 
10%
 
$
88,320

 
$
188,752

 
10%
 
$
172,279

 
 
Other investments
31,232

 
115%
 
14,541

 
38,128

 
35%
 
28,246

 
 
Equity securities
3,197

 
1%
 
3,158

 
5,525

 
12%
 
4,916

 
 
Mortgage loans
3,689

 
10%
 
3,357

 
6,752

 
4%
 
6,483

 
 
Cash and cash equivalents
8,138

 
45%
 
5,627

 
13,940

 
43%
 
9,779

 
 
Short-term investments
1,108

 
(33%)
 
1,645

 
5,002

 
98%
 
2,520

 
 
Gross investment income
144,734

 
24%
 
116,648

 
258,099

 
15%
 
224,223

 
 
Investment expense
(6,785
)
 
1%
 
(6,688
)
 
(12,845
)
 
(3%)
 
(13,262
)
 
 
Net investment income
$
137,949

 
25%
 
$
109,960

 
$
245,254

 
16%
 
$
210,961

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax yield:(1)
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
3.2
%
 
 
 
3.0
%
 
3.2
%
 
 
 
2.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1) Pre-tax yield is calculated by dividing annualized net investment income by the average month-end amortized cost balances.

Fixed Maturities

Net investment income attributable to fixed maturities for the three and six months ended June 30, 2019 was $97 million and $189 million, respectively, compared to net investment income of $88 million and $172 million for the three and six months ended June 30, 2018. The increase was due to the increase in yields and a larger allocation of the portfolio to fixed maturities.

Other Investments

The following table provides details of net investment income from other investments:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Hedge, direct lending, private equity and real estate funds
$
16,807

 
$
11,867

 
$
22,253

 
$
22,457

 
 
Other privately held investments
13,592

 
(394
)
 
14,627

 
1,105

 
 
CLO-Equities
833

 
3,068

 
1,248

 
4,684

 
 
Net investment income from other investments (1)
$
31,232

 
$
14,541

 
$
38,128

 
$
28,246

 
 
 
 
 
 
 
 
 
 
 
 
Pre-tax return on other investments(2)
4.4
%
 
1.8
%
 
5.5
%
 
3.5
%
 
 
 
 
 
 
 
 
 
 
 
(1)
Excluding overseas deposits.
(2)
The pre-tax return on other investments is calculated by dividing total net investment income from other investments (non-annualized) by the average month-end fair value balances held for the periods indicated, excluding overseas deposits.

Net investment income attributable to other investments for the three and six months ended June 30, 2019 was $31 million and $38 million, respectively, compared to net investment income of $15 million and $28 million for the three and six months ended June 30, 2018, respectively. The increase was largely due to a realized gain of $13 million associated with the sale of a privately held investment. The increase for the three months ended June 30, 2019, compared to the same period in 2018, was also attributable to improved returns on credit funds which benefited from the rally in risk assets in the quarter.


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Net Investment Gains (Losses)

The following table provides details of net investment gains (losses):
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
On sale of investments:
 
 
 
 
 
 
 
 
 
Fixed maturities and short-term investments
$
8,993

 
$
(38,681
)
 
$
(848
)
 
$
(50,588
)
 
 
Equity securities
125

 
1,147

 
1,476

 
17,428

 
 
 
9,118

 
(37,534
)
 
628

 
(33,160
)
 
 
OTTI charges recognized in net income
(834
)
 
(1,674
)
 
(4,870
)
 
(2,088
)
 
 
Change in fair value of investment derivatives
(204
)
 
5,134

 
(2,305
)
 
7,157

 
 
Net unrealized gains (losses) on equity securities
13,145

 
(11,019
)
 
40,543

 
(31,832
)
 
 
Net investment gains (losses)
$
21,225

 
$
(45,093
)
 
$
33,996

 
$
(59,923
)
 
 
 
 
 
 
 
 
 
 
 

Net investment gains for the three months ended June 30, 2019 were $21 million compared to net investment losses of $45 million for the three months ended June 30, 2018, an increase of $66 million. For the three months ended June 30, 2019, the net investment gains were primarily due to net unrealized gains on equity securities and net realized gains on the sale of U.S. government and agency securities. For the three months ended June 30, 2018, net investment losses were primarily due to the sale of U.S. government and Agency RMBS and net unrealized losses on equity securities.

Net investment gains for the six months ended June 30, 2019 were $34 million compared to net investment losses of $60 million for the six months ended June 30, 2018, an increase of $94 million. For the six months ended June 30, 2019, net investment gains were primarily due to net unrealized gains on equity securities. For the six months ended June 30, 2018, net investment losses were primarily due to the sale of U.S. government and Agency RMBS and net unrealized losses on equity securities.

On Sale of Investments

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

OTTI Charges

The OTTI charges for the three months ended June 30, 2019 and 2018 were $1 million and $2 million, respectively. The OTTI charges for the six months ended June 30, 2019 were $5 million, compared to $2 million for the six months ended June 30, 2018, an increase of $3 million. These OTTI charges were primarily due to impairments of non-U.S. denominated securities due to the impact of the strengthening of the U.S. dollar.

Change in Fair Value of Investment Derivatives

From time to time, we economically hedge foreign exchange exposure and interest rate risk with derivative contracts.

For the three months ended June 30, 2019, we recorded gains of $1 million related to foreign exchange contracts and losses of $1 million related to interest rates swaps. For the three months ended June 30, 2018, we recorded gains of $3 million related to foreign exchange contracts and gains of $2 million related to interest rates swaps.

For the six months ended June 30, 2019, we recorded gains of $1 million related to foreign exchange contracts and losses of $3 million related to interest rates swaps. For the six months ended June 30, 2018, we recorded gains of $1 million related to foreign exchange contracts and gains of $6 million related to interest rates swaps.



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Total Return

The following table provides details of the total return on cash and investments for the period indicated:
 
  
Three months ended June 30,
 
Six months ended June 30,
 
 
  
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
Net investment income
$
137,949

 
$
109,960

 
$
245,254

 
$
210,961

 
 
Net investments gains (losses)
21,225

 
(45,093
)
 
33,996

 
(59,923
)
 
 
Change in net unrealized gains (losses) on fixed maturities (1)
138,766

 
(75,745
)
 
359,445

 
(183,010
)
 
 
Interest in income (loss) of equity method investments
2,635

 
3,378

 
4,853

 
3,378

 
 
Total
$
300,575

 
$
(7,500
)
 
$
643,548

 
$
(28,594
)
 
 
 
 
 
 
 
 
 
 
 
 
Average cash and investments(2)
$
15,040,615

 
$
15,165,153

 
$
15,049,282

 
$
15,440,159

 
 
 
 
 
 
 
 
 
 
 
 
Total return on average cash and investments, pre-tax:
 
 
 
 
 
 
 
 
 
Including investment related foreign exchange movements
2.0
%
 
—
%
 
4.3
%
 
(0.2
%)
 
 
Excluding investment related foreign exchange movements(3)
2.1
%
 
0.3
%
 
4.3
%
 
(0.1
%)
 
 
 
 
 
 
 
 
 
 
 
(1)
Change in net unrealized investment gains (losses) on fixed maturities is calculated by taking net unrealized investment gains (losses) at period end less net unrealized investment 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.
(3)
Pre-tax total return on cash and investments excluding foreign exchange movements is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to pre-tax total return on cash and investments, the most comparable GAAP financial measure, included foreign exchange (losses) gains of $(8) million and $(59) million for the three months ended June 30, 2019 and 2018, respectively, and foreign exchange (losses) gains of $2 million and $(19) million for six months ended June 30, 2019 and 2018, respectively.

CASH AND INVESTMENTS

The table below provides details of our cash and investments:
 
  
June 30, 2019
 
December 31, 2018
 
 
  
 
Fair Value
 
 
Fair Value
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
$
12,522,955

 
 
$
11,435,347

 
 
Equity securities
 
433,407

 
 
381,633

 
 
Mortgage loans
 
394,179

 
 
298,650

 
 
Other investments
 
802,064

 
 
787,787

 
 
Equity method investments
 
112,956

 
 
108,103

 
 
Short-term investments
 
32,421

 
 
144,040

 
 
Total investments
 
$
14,297,982

 
 
$
13,155,560

 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents(1)
 
$
1,094,714

 
 
$
1,830,020

 
 
 
 
 
 
 
 
 
(1)
Includes restricted cash and cash equivalents of $382 million and $597 million at June 30, 2019 and at December 31, 2018, respectively.



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Overview

The fair value of total investments increased by $1.1 billion for the six months ended June 30, 2019, driven by the investment of cash balances and the increase in market value of fixed maturities and equity securities due to improved valuations.

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

Fixed Maturities

The table below provides details of our fixed maturities portfolio:
 
  
June 30, 2019
 
December 31, 2018
 
 
  
Fair Value
 
% of Total
 
Fair Value
 
% of Total
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
2,317,427

 
19
%
 
$
1,515,697

 
13
%
 
 
Non-U.S. government
537,824

 
4
%
 
493,016

 
4
%
 
 
Corporate debt
4,945,585

 
39
%
 
4,876,921

 
44
%
 
 
Agency RMBS
1,686,912

 
13
%
 
1,643,308

 
14
%
 
 
CMBS
1,184,268

 
9
%
 
1,092,530

 
10
%
 
 
Non-Agency RMBS
55,980

 
1
%
 
40,687

 
—
%
 
 
ABS
1,600,771

 
13
%
 
1,637,603

 
14
%
 
 
Municipals(1)
194,188

 
2
%
 
135,585

 
1
%
 
 
Total
$
12,522,955

 
100
%
 
$
11,435,347

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
Credit ratings:
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
2,317,427

 
19
%
 
$
1,515,697

 
13
%
 
 
AAA(2)
4,486,856

 
36
%
 
4,569,632

 
40
%
 
 
AA
1,080,532

 
8
%
 
874,932

 
8
%
 
 
A
1,767,759

 
14
%
 
1,769,686

 
15
%
 
 
BBB
1,705,773

 
14
%
 
1,678,962

 
15
%
 
 
Below BBB(3)
1,164,608

 
9
%
 
1,026,438

 
9
%
 
 
Total
$
12,522,955

 
100
%
 
$
11,435,347

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

At June 30, 2019, fixed maturities had a weighted average credit rating of AA- (2018: AA-), a book yield of 3.0% (2018: 3.1%) and an average duration of 3.0 years (2018: 3.0 years). The interest rate swap positions, which reduced duration to 2.8 years at December 31, 2018, were closed during the six months ended June 30, 2019. At June 30, 2019, fixed maturities together with short-term investments and cash and cash equivalents (i.e. total investments of $13.7 billion), had an average credit rating of AA- (2018: AA-), an average duration of 2.8 years (2018: 2.6 years) and duration inclusive of interest rate swaps was 2.5 years at December 31, 2018.

At June 30, 2019, net unrealized investment gains on fixed maturities were $179 million, compared to net unrealized investment losses of $181 million at December 31, 2018, an increase of $360 million due to the decrease in U.S. Treasury rates and the tightening of credit spreads.

Equity Securities

At June 30, 2019, net unrealized investment gains on equity securities were $56 million, compared to unrealized investment gains of $16 million at December 31, 2018, an increase of $40 million driven by the rally in equity markets.



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Mortgage Loans

During the six months ended June 30, 2019, our investment in commercial mortgage loans increased by $96 million. 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 June 30, 2019, there were no credit losses or past due amounts associated with our commercial mortgage loans portfolio.

Other Investments

The table below provides details of our other investments portfolio:
 
 
June 30, 2019
 
December 31, 2018
 
 
  
Fair Value
 
% of Total
 
Fair Value
 
% of Total
 
 
 
 
 
 
 
 
 
 
 
 
Hedge funds
 
 
 
 
 
 
 
 
 
Long/short equity funds
$
30,526

 
4
%
 
$
26,779

 
3
%
 
 
Multi-strategy funds
165,123

 
21
%
 
167,819

 
22
%
 
 
Total hedge funds
195,649

 
25
%
 
194,598

 
25
%
 
 
 
 
 
 
 
 
 
 
 
 
Direct lending funds
273,864

 
34
%
 
274,478

 
35
%
 
 
Private equity funds
60,285

 
8
%
 
64,566

 
8
%
 
 
Real estate funds
134,763

 
17
%
 
84,202

 
11
%
 
 
Total hedge, direct lending, private equity and real estate funds
664,561

 
84
%
 
617,844

 
79
%
 
 
 
 
 
 
 
 
 
 
 
 
CLO-Equities
17,798

 
1
%
 
21,271

 
2
%
 
 
Other privately held investments
28,452

 
4
%
 
44,518

 
6
%
 
 
Overseas deposits
91,253

 
11
%
 
104,154

 
13
%
 
 
Total other investments
$
802,064

 
100
%
 
$
787,787

 
100
%
 
 
 
 
 
 
 
 
 
 
 

During the six months ended June 30, 2019, the fair value of total hedge funds increased by $1 million driven by $7 million of net redemptions, offset by $8 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 3(c) to the Consolidated Financial Statements 'Investments' for further details on these restrictions and details on unfunded commitments relating to our other investment portfolio.

Overseas deposits include investments in private funds held by Syndicate 2007 where the underlying investments are primarily U.S. government, non-U.S. government and corporate debt securities. The funds do not trade on an exchange and therefore are not included within the available for sale investments category.

Equity Method Investments

During 2016, we paid $108 million including direct transactions costs to acquire 19% of the common equity of Harrington Reinsurance Holdings Limited ("Harrington"), the parent company of Harrington Re Ltd. ("Harrington Re"), an independent reinsurance company jointly sponsored by AXIS Capital and The Blackstone Group L.P. ("Blackstone"). Harrington is not a variable interest entity that is required to be included in our consolidated financial statements. We account for our ownership interest in Harrington under the equity method of accounting.




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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, 2018 for a general discussion of our liquidity and capital resources.

The following table summarizes our consolidated capital:
 
 
June 30, 2019
 
December 31, 2018
 
 
 
 
 
 
 
 
Debt
$
1,387,748

 
$
1,341,961

 
 
 
 
 
 
 
 
Preferred shares
775,000

 
775,000

 
 
Common equity
4,791,477

 
4,255,071

 
 
Shareholders’ equity
5,566,477

 
5,030,071

 
 
Total capital
$
6,954,225

 
$
6,372,032

 
 
 
 
 
 
 
 
Ratio of debt to total capital
20.0
%
 
21.1
%
 
 
Ratio of debt and preferred equity to total capital
31.1
%
 
33.2
%
 
 
 
 
 
 
 

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.

On April 1, 2019, we repaid $250 million aggregate principal amount of 2.65% senior unsecured notes at their stated maturity.

On June 19, 2019, we issued $300 million aggregate principal amount of 3.90% senior unsecured notes. Refer to Item 1, Note 10 'Debt and Financing Arrangements' to the Consolidated Financial Statements for details on recent debt transactions.

We believe that our financial flexibility remains strong.
 
Secured Letter of Credit Facility

On March 28, 2019, certain of AXIS Capital’s operating subsidiaries (the "Participating Subsidiaries") amended their existing $250 million secured letter of credit facility with Citibank Europe plc (the "$250 Million Facility") under their aggregate $750 million secured letter of credit facility with Citibank Europe plc (the "$750 Million Facility") to extend the expiration date to March 31, 2020.

The terms and conditions of the additional $500 million secured letter of credit facility under the $750 Million Facility remain unchanged. The $500 million secured letter of credit facility expires December 31, 2019. 

Letters of credit issued under the $750 Million Facility are principally used to support the reinsurance obligations of the Participating Subsidiaries. The Participating Subsidiaries are subject to certain covenants, including the requirement to maintain sufficient collateral to cover the obligations outstanding under the $750 Million Facility. In the event of default, Citibank Europe plc may exercise certain remedies, including the exercise of control over pledged collateral and the termination of the availability of the $750 Million Facility to any or all of the Participating Subsidiaries.




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Common Equity

During the six months ended June 30, 2019, our common equity increased by $536 million. The following table reconciles our opening and closing common equity positions:
 
Six months ended June 30,
2019
 
 
 
 
 
 
Common equity - opening
$
4,255,071

 
 
Treasury shares reissued
1,733

 
 
Share-based compensation expense
15,067

 
 
Change in unrealized gains (losses) on available for sale investments, net of tax
328,036

 
 
Foreign currency translation adjustment
5,219

 
 
Net income
285,828

 
 
Preferred share dividends
(21,313
)
 
 
Common share dividends
(68,750
)
 
 
Treasury shares repurchased
(9,414
)
 
 
Common equity - closing
$
4,791,477

 
 
 
 
 

During the six months ended June 30, 2019, we repurchased 7,000 common shares for a total cost of $0.4 million in connection with the vesting of restricted stock awards granted under our 2007 and 2017 Long-Term Equity Compensation Plans.

A common share repurchase plan has not been authorized for 2019.

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

The Company's Consolidated Financial Statements include certain amounts that are inherently uncertain and judgmental in nature. As a result, the Company is required to make assumptions and best estimates in order to determine the reported values. The Company considers 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 the Company's results of operations, financial condition or liquidity.

As disclosed in the Company's 2018 Annual Report on Form 10-K, the Company believes the material items requiring such subjective and complex estimates are:

•
reserves for losses and loss expenses;

•
reinsurance recoverable on unpaid losses, including the provision for uncollectible amounts;

•
gross premiums written;

•
fair value measurements of financial assets and liabilities; and

•
other-than-temporary impairments ("OTTI") in the carrying value of available-for-sale securities.

The Company believes that the critical accounting estimates discussion in Item 7 of its Annual Report on Form 10-K for the year ended December 31, 2018, continues to describe the significant estimates and judgments included in the preparation of the Consolidated Financial Statements.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Item 1, Note 1 'Basis of Presentation and Significant Accounting Policies' to the Consolidated Financial Statements and Item 8, Note 2 'Basis of Presentation and Significant Accounting Policies' to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2018, for a discussion of recently issued accounting pronouncements.
 
OFF-BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS
At June 30, 2019, the Company had 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 Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes to this item since December 31, 2018, with the exception of the changes in exposure to foreign currency risk presented below.

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 June 30, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net managed assets (liabilities), excluding derivatives
$
26,081

 
$
(5,363
)
 
$
124,990

 
$
(191,493
)
 
$
(80,707
)
 
$
22,866

 
$
158,337

 
$
54,710

 
 
Foreign currency derivatives, net
(48,374
)
 
5,032

 
(119,339
)
 
271,468

 
(57,763
)
 
(4,171
)
 
(7,204
)
 
39,649

 
 
Net managed foreign currency exposure
(22,292
)
 
(330
)
 
5,651

 
79,974

 
(138,471
)
 
18,694

 
151,132

 
94,359

 
 
Other net foreign currency exposure
1

 
—

 
115

 
192

 
599

 
—

 
52,857

 
53,764

 
 
Total net foreign currency exposure
$
(22,291
)
 
$
(330
)
 
$
5,766

 
$
80,166

 
$
(137,872
)
 
$
18,694

 
$
203,989

 
$
148,123

 
 
Net foreign currency exposure as a percentage of total shareholders’ equity
(0.4
%)
 
—
%
 
0.1
%
 
1.4
%
 
(2.5
%)
 
0.3
%
 
3.7
%
 
2.7
%
 
 
Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement(1)
$
(2,229
)
 
$
(33
)
 
$
577

 
$
8,017

 
$
(13,787
)
 
$
1,869

 
$
20,399

 
$
14,813

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

Total Net Foreign Currency Exposure

At June 30, 2019, our total net foreign currency exposure was $148 million net long, driven by increases in our exposures to the euro and other non-core currencies primarily due to new business written during the six months ended June 30, 2019. Of this balance, $53 million is from other net foreign currency exposures including assets managed by specific investment managers who have the discretion to hold foreign currency exposures as part of their total return strategy. Our emerging market debt portfolio is the primary contributor to this group of assets.

ITEM 4.     CONTROLS AND PROCEDURES
Disclosure 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 the Company's 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")) at June 30, 2019. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, at June 30, 2019, the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits 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.


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Changes in Internal Control Over Financial Reporting

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 June 30, 2019. Based upon that evaluation, there were no changes in the Company's internal control over financial reporting that occurred during the three months ended June 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


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PART II     OTHER INFORMATION
 
ITEM 1.     LEGAL PROCEEDINGS

From time to time, the Company is subject to routine legal proceedings, including arbitrations, arising in the ordinary course of business. These legal proceedings generally relate to claims asserted by or against the Company 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.

The Company is not party to any material legal proceedings arising outside the ordinary course of business.

ITEM 1A.     RISK FACTORS
There were no material changes from the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

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

Issuer Purchases of Equity Securities
Common Shares
Information regarding the number of common shares repurchased in the quarter ended June 30, 2019 is shown in the following table:
Period
Total number
of shares
purchased(a) (b)
 
Average
price paid
per share
 
Total number of shares purchased as part of
publicly announced
plans or programs
 
Maximum number (or approximate
dollar value) of shares that may yet be
purchased under the plans
or programs(b)
 
 
 
 
 
 
 
 
 
 
April 1-30, 2019
—

 

$—

 
—

 
—

 
May 1-31, 2019
6

 
58.19

 
—

 
—

 
June 1-30, 2019
1

 
59.58

 
—

 
—

 
Total  
7

 
 
 
—

 
—

 
 
 
 
 
 
 
 
 
 
(a)
In thousands.
(b)
Shares are repurchased from employees to satisfy withholding tax liabilities that arise upon the vesting of restricted stock units.


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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 June 30, 2019, there has been no material amount of premium allocated or apportioned to activities relating to Iran. We intend for our non-U.S. subsidiaries to continue to provide such coverage only to the extent permitted by applicable law.



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ITEM 6.     EXHIBITS
2.1
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).
2.2
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).
3.1
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).
3.2
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).
4.1
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).
4.2
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).
4.3
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).
4.4
First Supplemental Indenture, dated as of April 3, 2019, among AXIS Specialty Finance PLC, AXIS Capital Holdings Limited and The Bank of New York Mellon Trust Company, N.A., relating to the 5.150% Senior Notes due 2045 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on April 4, 2019).
4.5
Form of 3.900% Senior Notes due 2029 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed on June 19, 2019).
†*10.1
Amendment No. 7 to Consulting Agreement by and between Michael A. Butt and AXIS Specialty Limited dated July 18, 2019.
†31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
†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 June 30, 2019 formatted in Inline XBRL: (i) Consolidated Balance Sheets at June 30, 2019 and December 31, 2018; (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2019 and 2018; (iv) Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2019 and 2018; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.
†104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*
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: August 7, 2019
 
AXIS CAPITAL HOLDINGS LIMITED
By:
 
/S/ ALBERT BENCHIMOL
 
Albert Benchimol
 
President and Chief Executive Officer
 
(Principal Executive Officer)
 
 
 
/S/ PETER VOGT
 
Peter Vogt
 
Chief Financial Officer
 
(Principal Financial Officer)



96

AMENDMENT NO. 7

to

CONSULTING AGREEMENT
dated May 3, 2012

by and between
AXIS Specialty Limited (the “Company”)
and
Michael A. Butt (the “Consultant”)

Dated July 18, 2019

WHEREAS, the Company and the Consultant entered into a consulting agreement dated as of May 3, 2012, as amended (the “Agreement”); and

WHEREAS, the Compensation Committee of the Board of Directors of AXIS Capital Holdings Limited, the Company and the Consultant have determined that it is in the best interests of the Company and its shareholders to make certain revisions to the Agreement in order to further extend the term of service and schedule of payments;

NOW, THEREFORE, the Agreement is hereby amended, effective as of the date hereof, as follows:

1.
Section 3 of the Agreement (Consulting Fee) is hereby amended to insert the following after “April 2019.”:

“For service from the date of the Annual General Meeting of AXIS Capital Holdings Limited in 2019 through December 31, 2020, the Company shall pay the Consultant a fee in the amount of $500,000 to be payable as follows:

$50,000 due no later than July 30, 2019
$50,000 due no later than October 1, 2019
$100,000 due no later than January 2, 2020
$100,000 due no later than April 1, 2020
$100,000 due no later than July 1, 2020
$100,000 due no later than October 1, 2020”
2.
Section 4 of the Agreement (Consulting Term) is hereby amended by deleting the reference to “at the Annual General Meeting of AXIS Capital Holdings Limited in 2020” and replacing such reference with “on December 31, 2020”.

3.
Section 8 of the Agreement (Noncompetition and Nonsolicitation) is hereby amended by deleting the reference to “May 31, 2021” in the last line thereof and replacing such reference with “December 31, 2021”.

4.
Except as set forth herein, all other terms and conditions of the Agreement shall remain in full force and effect.





IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the date first written above.

                        
AXIS Specialty Limited
 
/s/ Peter J. Vogt
Executive Vice President and Chief Financial Officer
 
Consultant
 
/s/ Michael A. Butt
 
 


2



Exhibit 31.1
CERTIFICATION
AXIS Capital Holdings Limited
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Albert Benchimol, certify that:
 

1.
I have reviewed this Quarterly Report on Form 10-Q of AXIS Capital Holdings Limited for the period ended June 30, 2019;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
 
/S/ ALBERT BENCHIMOL
Date:
August 7, 2019
Albert Benchimol
President and Chief Executive Officer





Exhibit 31.2
CERTIFICATION
AXIS Capital Holdings Limited
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Peter Vogt, certify that:
 

1.
I have reviewed this Quarterly Report on Form 10-Q of AXIS Capital Holdings Limited for the period ended June 30, 2019;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
 
 
/S/ PETER VOGT
Date:
August 7, 2019
Peter Vogt
Chief Financial Officer





Exhibit 32.1
AXIS CAPITAL HOLDINGS LIMITED
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of AXIS Capital Holdings Limited (the “Company”) for the quarterly period ended June 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Albert Benchimol, Chief Executive Officer of the Company, hereby certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
  
Date:
August 7, 2019
/s/ ALBERT BENCHIMOL
 
 
Albert Benchimol
 
 
President and Chief Executive Officer

This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.





Exhibit 32.2
AXIS CAPITAL HOLDINGS LIMITED
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of AXIS Capital Holdings Limited (the “Company”) for the quarterly period ended June 30, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Peter Vogt, Chief Financial Officer of the Company, hereby certify, to the best of my knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
  
Date:
August 7, 2019
/s/ PETER VOGT
 
 
Peter Vogt
 
 
Chief Financial Officer

This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.