Newswires
AXIS CAPITAL HOLDINGS LTD – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of our results of operations for the years endedDecember 31, 2021 and 2020, and our financial condition atDecember 31, 2021 and 2020. This should be read in conjunction with Item 8 'Financial Statements and Supplementary Data' of this report. Unless otherwise noted, tabular dollars are in thousands, except per share amounts. Amounts may not reconcile due to rounding differences. Page 2021 Financial Highlights 57 Overview 58 Consolidated Results of Operations 60 Results by Segment: i) Insurance Segment 62 ii) Reinsurance Segment 65 Net Investment Income and Net Investment Gains (Losses) 68 Other Expenses (Revenues), Net 71 Financial Measures 72 Non-GAAP Financial Measures Reconciliation 74 Cash and Investments 77 Liquidity and Capital Resources 84 Critical Accounting Estimates 89 i) Reserve for Losses and Loss Expenses 90 ii) Reinsurance Recoverable on Unpaid Losses and Loss Expenses 96 iii) Gross Premiums Written 97 iv) Net Premiums Earned 98 v) Fair Value Measurements of Financial Assets and Liabilities 99
vi) Impairment Losses and the Allowance for Expected Credit Losses - Fixed Maturities, 100
Available for Sale
Recent Accounting Pronouncements 101
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2021 FINANCIAL HIGHLIGHTS
2021 Consolidated Results of Operations
•Net income attributable to common shareholders of
common share, and
•Operating income(1) of
•Gross premiums written of
•Net premiums written of
•Net premiums earned of
•Pre-tax catastrophe and weather-related losses, net of reinsurance and reinstatement premiums, of$443 million (Insurance:$175 million ; Reinsurance:$268 million ), or 9.5 points on the current accident year loss ratio, primarily attributable to Hurricane Ida,Winter Storms Uri and Viola which principally impacted the state ofTexas , July European floods, and other weather-related events.
•Net favorable prior year reserve development of
•Underwriting income(2) of
•Net investment income of
•Net investment gains of
2021 Consolidated Financial Condition
•Total cash and investments of
investments, and cash and cash equivalents comprise 86% of total cash and
investments and have an average credit rating of AA-
•Total assets of
•Reserve for losses and loss expenses of
recoverable on unpaid and paid losses and loss expenses of
•Debt of
•Common shareholders' equity of
share of
(1) Operating income (loss) and operating income (loss) per diluted common share
are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K.
The reconciliations to the most comparable GAAP financial measures, net income
(loss) available (attributable) to common shareholders and earnings (loss) per
diluted common share, respectively, and a discussion of the rationale for the
presentation of these items are provided in 'Management's Discussion and
Analysis of Financial Condition and Results of Operations - Non-GAAP Financial
Measures Reconciliation'.
(2)Consolidated underwriting income (loss) is a non-GAAP financial measure as
defined in Item 10(e) of SEC Regulation S-K. The reconciliation to the most
comparable GAAP financial measure, net income (loss), is presented in
'Management's Discussion and Analysis of Financial Condition and Results of
Operations - Consolidated Results of Operations', and a discussion of the
rationale for its presentation is provided in 'Management's Discussion and
Analysis of Financial Condition and Results of Operations - Non-GAAP Financial
Measures Reconciliation'.
(3)The debt to total capital ratio is calculated by dividing debt by total
capital. Total capital represents the sum of total shareholders' equity and
debt.
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OVERVIEW Business OverviewAXIS Capital , through its operating subsidiaries, is a global provider of specialty lines insurance and treaty reinsurance with operations inBermuda , theU.S. ,Europe ,Singapore andCanada . 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 excellent financial strength. We manage our portfolio holistically, aiming to construct the optimum portfolio of risks, consistent with our risk appetite and the development of our franchise. We nurture an ethical, entrepreneurial, disciplined and diverse culture that promotes outstanding client service, intelligent risk taking, operating efficiency, corporate citizenship and the achievement of superior risk-adjusted returns for our shareholders. We believe that the achievement of our objectives will position us as a global leader in specialty risks. The execution of our business strategy in 2021 included the following:
•increasing our relevance in a select number of attractive specialty lines
insurance and treaty reinsurance markets including
lines,
business;
•re-balancing our portfolio towards less volatile lines of business that carry attractive returns while deploying capital with risk limits, diversification and risk management;
•continuing the implementation of a more focused distribution strategy while
building mutually beneficial relationships with clients and partners;
•improving the effectiveness and efficiency of our operating platforms and
processes;
•investing in data and technology capabilities, and tools to empower our
underwriters and enhance the service we provide to our customers;
•utilizing reinsurance markets and third-party capital relationships;
•fostering a positive workplace environment that enables us to attract, retain
and develop top talent; and
•growing our corporate citizenship program to give back to our communities and
help contribute to a more sustainable future.
For discussion of our results of operations and changes in financial condition for year endedDecember 31, 2020 , compared to year endedDecember 31, 2019 , refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2020 Form 10-K, which was filed with theSEC onFebruary 26, 2021 , and such discussions are incorporated herein by reference. 58 --------------------------------------------------------------------------------
Outlook
We are committed to leadership in our core specialty insurance and global
reinsurance markets, where we have depth of talent and expertise. We believe our
market positioning, underwriting expertise, claims management capabilities and
strong relationships with our distributors and clients will provide
opportunities for increased profitability, with differences among our lines
driven by our tactical response to market conditions.
Rates, and terms and conditions across virtually all insurance lines and
geographies continued to be favorable through the fourth quarter of 2021. We
expect many specialty segments will continue to experience further pricing
improvements, as carriers assess pricing adequacy, portfolio construction,
economic conditions and account preferences. In this market environment, we are
focusing on growth in lines of business and market segments that are adequately
priced.
The reinsurance market is also experiencing an improvement in rates, and terms
and conditions, but more is needed to achieve price adequacy. In light of 2021
marking the fifth consecutive year of challenging market loss events, carriers
are aiming to reduce net volatility and increase profitability. However, the
case for change is dampened due to the very strong industry capitalization.
Overall, we believe the reinsurance market will continue to gain momentum and
will achieve the required risk adjusted rate increases.
We are encouraged by the pricing improvements we are seeing across both the
insurance and reinsurance segments, that we expect will carry into 2022 and
beyond. Where prices deliver adequate profitability, we will look to grow within
our risk and volatility guidelines. With a strengthened book of business, and
growing footprint in attractive markets that are seeing the most favorable
conditions, we believe AXIS is well positioned to drive profitable growth within
the current environment.
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CONSOLIDATED RESULTS OF OPERATIONS
Years ended December 31, 2021 % Change 2020 % Change 2019
Underwriting revenues:
Gross premiums written $ 7,685,984 13% $ 6,826,938 (1%) $
6,898,858
Net premiums written 4,926,624 14% 4,336,409 (3%)
4,489,615
Net premiums earned 4,709,850 8% 4,371,309 (5%)
4,587,178
Other insurance related income (loss) 23,295 nm (8,089) nm
16,444
Underwriting expenses:
Net losses and loss expenses (3,008,783)
(8%) (3,281,252) 8% (3,044,798)
Acquisition costs (921,834) (1%) (929,517) (9%) (1,024,582)
Underwriting-related general and administrative (536,834)
12% (477,968) (5%)
(505,735)
expenses(1)
Underwriting income (loss)(2) 265,694 (325,517)
28,507
Net investment income 454,301 30% 349,601 (27%)
478,572
Net investment gains 134,279 4% 129,133 42%
91,233
Corporate expenses(1) (126,470) 24% (101,822) (21%)
(129,096)
Foreign exchange (losses) gains (315) nm (81,069) nm
12,041
Interest expense and financing costs (62,302) (17%) (75,049) 10%
(68,107)
Reorganization expenses - nm (7,881) (79%)
(37,384)
Amortization of value of business acquired (3,854) (25%) (5,139) (81%)
(26,722)
Amortization of intangible assets (12,424) 9% (11,390) (2%)
(11,597)
Income (loss) before income taxes and interest 648,909 (129,133)
337,447
in income (loss) of equity method investments
Income tax (expense) benefit (62,384) nm 12,321 nm
(23,692)
Interest in income (loss) of equity method 32,084
nm (3,612) nm 9,718
investments
Net income (loss) 618,609 (120,424) 323,473
Preferred share dividends (30,250) -% (30,250) (26%)
(41,112)
Net income (loss) available (attributable) to
$ (150,674) $ 282,361 common shareholders nm - not meaningful is defined as a variance greater than +/-100% (1)Underwriting-related general and administrative expenses is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to general and administrative expenses, the most comparable GAAP financial measure, also included corporate expenses of$126 million ,$102 million , and$129 million for 2021, 2020, and 2019, respectively. Refer to 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Other Expenses (Revenues), Net'' for further details on corporate expenses. Refer also to 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures Reconciliation' for further details. (2)Consolidated underwriting income (loss) is a non-GAAP financial measure as defined in in Item 10(e) of SEC Regulation S-K. The reconciliation to net income (loss), the most comparable GAAP financial measure, is presented in the table above. Refer also to 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures Reconciliation' for further details. 60 --------------------------------------------------------------------------------
Underwriting Revenues
Underwriting revenues by segment were as follows:
Years ended December 31, 2021 % Change 2020 % Change 2019
Gross premiums written:
Insurance $ 4,863,232 21% $ 4,018,399 9% $ 3,675,931
Reinsurance 2,822,752 1% 2,808,539 (13%) 3,222,927
Total gross premiums written $ 7,685,984 13% $ 6,826,938 (1%) $ 6,898,858
Percent of gross premiums
written ceded:
Insurance 40% (1 pt ) 41% 1 pt 40%
Reinsurance 28% (2 pts) 30% 1 pt 29%
Total percent of gross 36% - pts 36% 1 pt 35%
premiums ceded
Net premiums written:
Insurance $ 2,894,885 23% $ 2,357,501 7% $ 2,209,155
Reinsurance 2,031,739 3% 1,978,908 (13%) 2,280,460
Total net premiums written $ 4,926,624 14% $ 4,336,409 (3%) $ 4,489,615
Net premiums earned:
Insurance $ 2,651,339 15% $ 2,299,038 5% $ 2,190,084
Reinsurance 2,058,511 (1%) 2,072,271 (14%) 2,397,094
Total net premiums earned $ 4,709,850 8% $ 4,371,309 (5%) $ 4,587,178
Refer to 'Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results by Segment' for further details on underwriting
revenues.
CombinedRatio
The components of the combined ratio were as follows:
% Point % Point
Years ended December 31, 2021 Change 2020 Change 2019
Current accident year loss ratio,
excluding catastrophe and 55.1 % (2.6) 57.7 % (2.9) 60.6 %
weather-related losses
Catastrophe and weather-related losses 9.5 % (8.2) 17.7 % 10.2 7.5 %
ratio
Current accident year loss ratio 64.6 % (10.8) 75.4 % 7.3 68.1 %
Prior year reserve development ratio (0.7 %) (0.4) (0.3 %) 1.4 (1.7
%)
Net losses and loss expenses ratio 63.9 % (11.2) 75.1 % 8.7 66.4 %
Acquisition cost ratio 19.6 % (1.7) 21.3 % (1.0) 22.3 %
General and administrative expense 14.0 %
0.8 13.2 % (0.7) 13.9 %
ratio(1)
Combined ratio 97.5 % (12.1) 109.6 % 7.0 102.6 %
(1)The general and administration expense ratio included corporate expenses not
allocated to underwriting segments of 2.7%, 2.3% and 2.8% for 2021, 2020 and
2019, respectively. Refer to 'Management's Discussion and Analysis of Financial
Condition and Results of Operations - Other Expenses (Revenues), Net' for
further details.
Refer to 'Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results by Segment' for further details on underwriting
expenses.
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RESULTS BY SEGMENT Insurance Segment
Results for the insurance segment were as follows:
Year ended December 31, 2021 % Change 2020 % Change 2019
Revenues:
Gross premiums written$ 4,863,232 21%$ 4,018,399 9%$ 3,675,931 Net premiums written 2,894,885 23% 2,357,501 7% 2,209,155 Net premiums earned 2,651,339 15% 2,299,038 5% 2,190,084 Other insurance related income 1,662 (37%) 2,647 (7%) 2,858 Expenses: Current accident year net losses and loss (1,533,358) (1,705,951) (1,331,981) expenses Prior year reserve development 18,360 8,937 53,302 Acquisition costs (484,344) (461,533) (468,281) Underwriting-related general and (429,282) (378,839) (401,963) administrative expenses Underwriting income (loss)$ 224,377 $ (235,701) $ 44,019 % Point % Point Ratios: Change Change Current accident year loss ratio, excluding 51.4 % (3.7) 55.1 % (1.9) 57.0 %
catastrophe and weather-related losses
Catastrophe and weather-related losses ratio 6.4 % (12.7)
19.1 % 15.3 3.8 %
Current accident year loss ratio 57.8 % (16.4) 74.2 % 13.4 60.8 %
Prior year reserve development ratio (0.7 %) (0.3) (0.4 %) 2.0 (2.4 %)
Net losses and loss expenses ratio 57.1 % (16.7) 73.8 % 15.4 58.4 %
Acquisition cost ratio 18.3 % (1.8) 20.1 % (1.3) 21.4 %
Underwriting-related general and 16.2 % (0.3) 16.5 % (1.8) 18.3 %
administrative expense ratio
Combined ratio 91.6 % (18.8) 110.4 % 12.3 98.1 %
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Gross Premiums Written
Gross premiums written by line of business were as follows:
% Change
2019 to
Year ended December 31, 2021 2020 2019 2020 to 2021 2020
Property $ 1,136,508 24 % $ 996,650 26 % $ 943,760 26 % 14 % 6 %
Marine 469,853 10 % 419,405 10 % 411,309 11 % 12 % 2 %
Terrorism 56,117 1 % 55,781 1 % 60,120 2 % 1 % (7 %)
Aviation 110,809 2 % 87,671 2 % 74,670 2 % 26 % 17 %
Credit and political risk 163,602 3 %
156,414 4 % 154,999 4 % 5 % 1 %
Professional lines 1,816,041 37 % 1,378,503 34 % 1,177,274 32 % 32 % 17 %
Liability 931,075 19 % 763,155 19 % 699,876 19 % 22 % 9 %
Accident and health 178,899 4 % 158,585 4 % 144,103 4 % 13 % 10 %
Discontinued lines - Novae 328 - %
2,235 - % 9,820 - % nm nm
Total $ 4,863,232 100 % $ 4,018,399 100 % $ 3,675,931 100 % 21 % 9 %
nm - not meaningful
Gross premiums written in 2021 increased by
or 20% on a constant currency basis(1)), compared to 2020. The increase was
primarily attributable to professional lines, liability, property, marine,
aviation, and accident and health lines.
The increases in professional lines, liability, property, and marine lines were due to new business and favorable rate changes. The increase in aviation lines was due to premium adjustments, favorable rate changes, and new business. The increase in accident and health lines was due to new business.
Ceded Premiums Written
Ceded premiums written in 2021 was
written, compared to
premiums written of
professional lines, liability, property, and accident and health lines,
partially offset by a decrease in marine lines.
Net Premiums Earned
Net premiums earned by line of business were as follows:
% Change
Year ended December 31, 2021 2020 2019 2020
to 2021 2019 to 2020
Property $ 662,977 25 % $ 605,650 26 % $ 633,550 29 % 9 % (4 %)
Marine 354,193 13 % 293,746 13 % 281,764 13 % 21 % 4 %
Terrorism 47,995 2 % 47,378 2 % 47,345 2 % 1 % - %
Aviation 84,882 3 % 70,910 3 % 55,028 3 % 20 % 29 %
Credit and political risk 96,604 4 %
105,869 5 % 91,698 4 % (9 %) 15 %
Professional lines 898,307 34 % 715,276 31 % 661,250 30 % 26 % 8 %
Liability 354,518 13 % 313,291 14 % 264,667 12 % 13 % 18 %
Accident and health 151,134 6 % 143,723 6 % 144,499 7 % 5 % (1 %)
Discontinued lines - Novae 729 - %
3,195 - % 10,283 - % (77 %) (69 %)
Total $ 2,651,339 100 % $ 2,299,038 100 % $ 2,190,084 100 % 15 % 5 %
(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.
63 -------------------------------------------------------------------------------- Net premiums earned in 2021 increased by$352 million , or 15%, ($317 million , or 14% on a constant currency basis), compared to 2020. The increase was primarily driven by increases in gross premiums earned in professional lines, liability, property, marine, and aviation lines, partially offset by increases in ceded premiums earned in professional lines, liability and property lines.
Loss
The components of the loss ratio were as follows:
% Point
% Point
Year ended December 31, 2021 Change
2020 Change 2019
Current accident year loss ratio 57.8 % (16.4) 74.2
% 13.4 60.8 %
Prior year reserve development ratio (0.7 %) (0.3) (0.4
%) 2.0 (2.4 %) Loss ratio 57.1 % (16.7) 73.8 % 15.4 58.4 %
Current Accident Year Loss Ratio
The current accident year loss ratio decreased to 57.8% in 2021 from 74.2% in 2020. The decrease in the current accident year loss ratio was impacted by a lower level of catastrophe and weather-related losses. During 2021, catastrophe and weather-related losses, net of reinstatement premiums, were$175 million , or 6.4 points, primarily attributable to Hurricane Ida,Winter Storms Uri and Viola, and other weather-related events. Comparatively, in 2020, catastrophe and weather-related losses, net of reinstatement premiums, were$443 million , or 19.1 points, primarily attributable to the COVID-19 pandemic, Hurricanes Laura, Sally, Zeta and Delta, and other weather-related events. During 2020, catastrophe and weather-related losses included$204 million , or 8.8 points, attributable to the COVID-19 pandemic which were largely associated with property-related coverages, but also included event cancellation coverages. After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 51.4% in 2021 from 55.1% in 2020. The decrease in the current accident year loss ratio, after adjusting for the impact of the catastrophe and weather-related losses was principally due to the impact of favorable pricing over loss trends and a decrease in loss experience in property lines, largely associated with repositioning the portfolio, professional lines, and credit and political risk lines.
Prior
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for Losses and Loss Expenses' for details on the reserve classes, the expected claim tails, and prior year development.
Acquisition Cost Ratio
The acquisition cost ratio decreased to 18.3% in 2021 from 20.1% in 2020, respectively, principally related to changes in business mix attributable to the decrease in program business in property lines written in recent periods, a decrease in variable acquisition costs associated with marine lines, partially offset by an increase in variable acquisition costs associated with professional lines.
Underwriting-Related General and Administrative Expense Ratio
The underwriting-related general and administrative expense ratio decreased to
16.2% in 2021 from 16.5% in 2020, mainly driven by an increase in net premiums
earned, partially offset by an increase in personnel costs, performance-related
compensation costs and information technology costs together with a decrease in
fees related to arrangements with strategic capital partners.
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Reinsurance Segment
Results for the reinsurance segment were as follows:
Year ended December 31, 2021 % Change 2020 % Change 2019
Revenues:
Gross premiums written$ 2,822,752 1%$ 2,808,539 (13%)$ 3,222,927 Net premiums written 2,031,739 3% 1,978,908 (13%) 2,280,460 Net premiums earned 2,058,511 (1%) 2,072,271 (14%) 2,397,094 Other insurance related income (loss) 21,633 nm (10,736) nm 13,586 Expenses: Current accident year net losses and loss (1,507,835) (1,591,210) (1,791,717) expenses Prior year reserve development 14,049 6,972 25,598 Acquisition costs (437,490) (467,984) (556,301) Underwriting-related general and (107,552) (99,129) (103,772) administrative expenses Underwriting income (loss)$ 41,317 $ (89,816) $ (15,512) % Point % Point Ratios: Change Change Current accident year loss ratio, excluding 59.9 % (0.7) 60.6 % (3.4) 64.0 %
catastrophe and weather-related losses
Catastrophe and weather-related losses ratio 13.3 %
(2.9) 16.2 % 5.5 10.7 %
Current accident year loss ratio 73.2 % (3.6) 76.8 % 2.1 74.7 %
Prior year reserve development ratio (0.6 %) (0.2) (0.4 %) 0.6 (1.0 %)
Net losses and loss expenses ratio 72.6 % (3.8) 76.4 % 2.7 73.7 %
Acquisition cost ratio 21.3 % (1.3) 22.6 % (0.6) 23.2 %
Underwriting-related general and 5.1 % 0.3 4.8 % 0.5 4.3 %
administrative expense ratio
Combined ratio 99.0 % (4.8) 103.8 % 2.6 101.2 %
nm - not meaningful
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Gross Premiums Written:
Gross premiums written by line of business were as follows:
% Change
Year ended December 31, 2021 2020 2019 2020
to 2021 2019 to 2020
Catastrophe $ 492,397 16 % $ 551,143 19 % $ 718,514 24 % (11 %) (23 %)
Property 213,394 8 % 245,744 9 % 304,166 9 % (13 %) (19 %)
Credit and surety 208,108 7 % 232,699 8 % 269,733 8 % (11 %) (14 %)
Professional lines 353,671 13 %
312,935 11 % 261,072 8 % 13 % 20 %
Motor 279,960 10 % 304,439 11 % 334,887 10 % (8 %) (9 %)
Liability 722,316 26 % 618,913 22 % 546,479 17 % 17 % 13 %
Engineering (6,464) - % 25,886 1 % 57,028 2 % nm (55 %)
Agriculture 86,128 3 % 70,500 3 % 224,961 7 % 22 % (69 %)
Marine and aviation 73,866 3 % 73,103 3 % 74,781 2 % 1 % (2 %)
Accident and health 398,641 14 % 371,828 13 % 432,670 13 % 7 % (14 %)
Discontinued lines - Novae 735 - %
1,349 - % (1,364) - % (46 %) nm
Total $ 2,822,752 100 % $ 2,808,539 100 % $ 3,222,927 100 % 1 % (13 %)
nm - not meaningful
Gross premiums written in 2021 increased by $14 million , or 1%, (decreased by
$16 million , or 1% on a constant currency basis), compared to 2020. The increase
was primarily attributable to liability, professional lines, and accident and
health lines, partially offset by decreases in catastrophe, property,
engineering, credit and surety, and motor lines.
The increases in liability, professional lines, and accident and health lines
were driven by favorable market conditions associated with renewals and new
business. The increase in liability lines was also due to the restructuring of
several significant contracts. The increase in professional lines was also due
to premium adjustments associated with favorable market conditions. The increase
in accident and health lines was also due to premium adjustments following the
exit from Middle East business in 2020.
The decrease in catastrophe lines was driven by non-renewals and decreased line
sizes associated with the repositioning of the portfolio, partially offset by
reinstatement premiums associated with significant catastrophe losses. The
decreases in property and motor lines were driven by non-renewals and decreased
line sizes associated with the repositioning of the portfolio. The decrease in
engineering lines was driven by non-renewals and premium adjustments following
the exit from this line of business in 2020. The decrease in credit and surety
lines was driven by premium adjustments.
Ceded Premiums Written
Ceded premiums written in 2021 was
written, compared to
premiums written of
catastrophe, property, and credit and surety lines, partially offset by
increases in liability, and accident and health lines.
The decrease in catastrophe lines was attributable to the non-renewal of
significant excess of loss treaties and a significant quota share retrocessional
treaty, partially offset by an increase in premiums ceded to strategic partners
largely due to the restructuring of several quota share retrocessional treaties
and additional costs associated with the purchase of catastrophe bond
protection. The decrease in property lines was attributable to the non-renewal
of a fronting arrangement and the non-renewal of significant excess of loss
treaties. The decrease in credit and surety lines reflected the decrease in
gross premiums written in 2021, compared to 2020, partially offset by an
increase in premium ceded due to the restructuring of two significant quota
share retrocessional treaties.
The increase in liability lines reflected the increase in gross premiums written
in 2021, compared to 2020, partially offset by a decrease in premiums ceded due
to the restructuring of a significant quota share retrocessional treaty. The
increase in accident and health lines reflected the increase in gross premiums
written in 2021, compared to 2020.
66
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Net Premiums Earned
Net premiums earned by line of business were as follows:
% Change
Year ended December 31, 2021 2020 2019 2020
to 2021 2019 to 2020
Catastrophe $ 238,775 11 % $ 244,934 12 % $ 267,591 10 % (3 %) (8 %)
Property 231,080 11 % 256,244 12 % 311,625 13 % (10 %) (18 %)
Credit and surety 158,549 8 % 187,721 9 % 208,717 9 % (16 %) (10 %)
Professional lines 220,448 11 %
207,605 10 % 206,328 9 % 6 % 1 %
Motor 247,092 12 % 255,916 12 % 398,565 17 % (3 %) (36 %)
Liability 431,012 21 % 396,906 19 % 373,664 16 % 9 % 6 %
Engineering 28,238 1 % 60,521 3 % 63,899 3 % (53 %) (5 %)
Agriculture 82,744 4 % 73,696 4 % 188,925 8 % 12 % (61 %)
Marine and aviation 58,678 3 % 53,516 3 % 59,209 2 % 10 % (10 %)
Accident and health 361,197 18 % 333,996 16 % 319,619 13 % 8 % 4 %
Discontinued lines - Novae 698 - %
1,216 - % (1,048) - % (43 %) nm
Total $ 2,058,511 100 % $ 2,072,271 100 % $ 2,397,094 100 % (1 %) (14 %)
nm - not meaningful
Net premiums earned in 2021 decreased by $14 million , or 1%, ($10 million , or
0.5% on a constant currency basis), compared to 2020. The decrease was primarily
driven by decreases in gross premiums earned in credit and surety, property and
engineering lines, together with increases in ceded premiums earned in liability
and professional lines. These decreases were partially offset by increases in
gross premiums earned in liability, professional lines, and accident and health
lines and decreases in ceded premiums earned in credit and surety, accident and
health, and property lines.
Other Insurance Related Income (Loss)
Other insurance related income was$22 million in 2021, compared to other insurance related loss of$11 million in 2020. Other insurance related income in 2021, was primarily associated with fees related to arrangements with strategic capital partners. Other insurance related loss in 2020 was primarily due to the recognition of a full limit loss of$10 million associated with the WHO pandemic risk-linked swap. LossRatio
The components of the loss ratio were as follows:
% Point % Point
Year ended December 31, 2021 Change
2020 Change 2019
Current accident year loss ratio 73.2 % (3.6)
76.8 % 2.1 74.7 %
Prior year reserve development ratio (0.6 %) (0.2) (0.4 %) 0.6 (1.0 %) Loss ratio 72.6 % (3.8) 76.4 % 2.7 73.7 %
Current Accident Year Loss Ratio
The current accident year loss ratio decreased to 73.2% in 2021 from 76.8% in 2020. The decrease in the current accident year loss ratio was impacted by a lower level of catastrophe and weather-related losses. During 2021, catastrophe and weather-related losses, net of reinstatement premiums, were$268 million , or 13.3 points, primarily attributable to Hurricane Ida, July European Floods,Winter Storms Uri and Viola, June European Convective Storms, December Convective Storms which principally impacted theU.S. Southwest and the Upper Midwest, Quad-state tornadoes, and other weather-related events. 67 -------------------------------------------------------------------------------- Comparatively, in 2020, catastrophe and weather-related losses, net of reinstatement premiums, were$330 million or 16.2 points, primarily attributable to the COVID-19 pandemic, the Midwest derecho, Hurricane Laura, wildfires across theWest Coast ofthe United States , and other weather-related events. During 2020, catastrophe and weather-related losses included$156 million , or 7.6 points, attributable to the COVID-19 pandemic which were largely associated with property-related coverages, but also included accident and health, and mortgage-related coverages. After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 59.9% in 2021 from 60.6% in 2020, principally due to the impact of favorable pricing over loss trends, partially offset by the impact of changes to retrocessional arrangements.
Prior
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for Losses and Loss Expenses' for details on the reserve classes, the expected claim tails, and prior year development.
Acquisition Cost Ratio:
The acquisition cost ratio decreased to 21.3% in 2021 from 22.6% in 2020,
principally related to the impact of retrocessional contracts.
Underwriting-Related General and Administrative Expense Ratio
The underwriting-related general and administrative expense ratio increased to 5.1% in 2021 from 4.8% in 2020, mainly driven by an increase in performance-related compensation costs, partially offset by an increase in fees related to arrangements with strategic capital partners.
NET INVESTMENT INCOME AND NET INVESTMENT GAINS (LOSSES)
Net Investment Income
Net investment income from our cash and investment portfolio by major asset
class was as follows:
Year ended December 31, 2021 % Change 2020 % Change 2019 Fixed maturities$ 262,049 (17%)$ 317,121 (17%)$ 384,053 Other investments 181,906 nm 16,059 (73%) 60,038 Equity securities 12,752 37% 9,328 (11%) 10,434 Mortgage loans 17,427 13% 15,432 5% 14,712 Cash and cash equivalents 4,454 (67%) 13,582 (49%) 26,882 Short-term investments 664 (76%) 2,749 (61%) 7,053 Gross investment income 479,252 28% 374,271 (26%) 503,172 Investment expense (24,951) 1% (24,670) -% (24,600) Net investment income$ 454,301 30%$ 349,601 (27%)$ 478,572 Pre-tax yield:(1) Fixed maturities 2.2 % 2.6 % 3.2 % nm - not meaningful (1)Pre-tax yield is calculated by dividing net investment income by the average month-end amortized cost balances.
Fixed Maturities
2021 versus 2020: Net investment income in 2021 decreased by
compared to 2020 due to a decrease in yields.
68 --------------------------------------------------------------------------------
Other Investments
Other investments include hedge funds, direct lending funds, private equity
funds, real estate funds, other privately held investments and an indirect
investment in
changes in fair value and income distributions reported in net investment
income. Consequently, the pre-tax return on other investments may vary
materially year over year, particularly during volatile equity and credit
markets.
Net investment income from other investments was as follows:
Year ended December 31, 2021 2020 2019
Hedge, direct lending, private equity and real $ 133,923 $ 16,267 $ 42,186
estate funds
Other privately held investments 44,482 5,809 18,050
CLO-Equities 3,501 (6,017) (198)
Total net investment income from other $ 181,906 $ 16,059 $ 60,038
investments(1)
Pre-tax return on other investments(2) 21.4 % 2.2 % 8.5 %
(1)Excluded overseas deposits in 2020 and 2019. Overseas deposits in 2020 and
2019 included investments in private funds held by Syndicate 2007 where the
underlying investments were primarily U.S. government, non-U.S. government and
corporate debt securities.
(2)The pre-tax return on other investments is calculated by dividing total net
investment income from other investments by the average month-end fair value
balances held for the periods indicated, excluding overseas deposits.
2021 versus 2020: Pre-tax return on other investments in 2021 increased to
21.4%, compared to 2.2% in 2020. The increase was primarily attributable to
higher returns from direct lending, real estate and private equity funds and
other privately held investments.
Net Investment Gains (Losses)
Fixed maturities classified as available for sale are reported at fair value. Realized gains (losses) on fixed maturities are reported in net investment gains (losses) when these securities are sold or impaired. Equity securities are reported at fair value. Realized gains (losses) on equity securities are also reported in net investment gains (losses) when securities are sold or impaired. In addition, changes in the fair values of equity securities are reported in net investment gains (losses). Changes in the fair value of investment derivatives, mainly foreign exchange forward contracts and exchange traded interest rate swaps, are recorded in net investment gains (losses).
Net investment gains (losses) were as follows:
Year ended December 31, 2021 2020 2019
On sale of investments:
Fixed maturities and short-term investments$ 95,116 $ 92,119 $ 36,645 Equity securities 4,717 19,808 3,126 99,833 111,927 39,771 Change in allowance for expected credit losses 11 (323) - Impairment losses (1) (22) (1,486) - Other-than-temporary-impairment ("OTTI") losses -
- (6,984)
Change in fair value of investment derivatives 4,346
(2,434) (1,823)
Net unrealized gains (losses) on equity securities 30,111 21,449 60,269
Net investment gains (losses)$ 134,279 $
129,133
(1) Related to instances where we intend to sell securities, or it is more
likely than not that we will be required to sell securities before their
anticipated recovery.
2021 versus 2020: Net investment gains in 2021 were$134 million compared to net investment gains of$129 million in 2020. Net investment gains reported in 2021 mainly reflected net realized gains on the sale of corporate debt, non-U.S. government and CMBS and net unrealized gains on equity securities. Net investment gains reported in 2020 mainly reflected 69 --------------------------------------------------------------------------------
net realized gains on the sale of
traded funds and net unrealized gains 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.
Impairment and OTTI Losses
The impairment losses (refer to 'Critical Accounting Estimates - Impairment
losses' for further details) recognized in net income by asset class were as
follows:
2021 versus 2020: Impairment losses in 2021 were $nil compared to impairment losses of$1 million in 2020. The impairment losses in 2020 were principally due to impairments of non-investment grade corporate debt securities that we intended to sell or more likely than not were required to sell.
Change in Fair Value of Investment Derivatives
From time to time, we economically hedge foreign exchange exposure and interest
rate risk with derivative contracts.
During 2021, foreign exchange hedges resulted in$4 million of net gains which primarily related to securities denominated in euro which experienced volatility during 2021. During 2020, foreign exchange hedges resulted in$2 million of net losses which primarily related to securities denominated in euro which experienced volatility during 2020. Our derivative instruments are not designated as hedges under current accounting guidance, therefore, net unrealized gains (losses) on the hedged securities were recorded in accumulated other comprehensive income in the statement of changes in shareholders' equity. Total Return Our investment strategy is to take a long-term view by actively managing our investment portfolio to maximize total return within certain guidelines and constraints. In assessing returns under this approach, we include net investment income, net investment gains (losses), the change in unrealized gains (losses) on fixed maturities, and interest in income (loss) of equity method investments generated by our investment portfolio.
Total return on cash and investments was as follows:
Year ended December 31, 2021 2020 2019
Net investment income $ 454,301 $ 349,601 $ 478,572
Net investments gains (losses) 134,279 129,133 91,233
Change in net unrealized gains (losses) on fixed (405,378) 269,937 385,364
maturities(1)
Interest in income (loss) of equity method 32,084 (3,612) 9,718
investments
Total $ 215,286 $ 745,059 $ 964,887
Average cash and investments(2) $ 16,107,523 $ 15,562,097 $ 15,322,688
Total return on average cash and investments,
pre-tax:
Including investment related foreign exchange 1.3 % 4.8 % 6.3 %
movements
Excluding investment related foreign exchange 1.6 % 4.4 % 6.1 %
movements(3)
(1)Change in net unrealized gains (losses) on fixed maturities is calculated by
taking net unrealized gains (losses) at period end less net unrealized gains
(losses) at the prior period end.
(2)The average cash and investments balance represents the average of total cash
and investments including receivable for investments sold, payable for
investments purchased and accrued interest for each period
(3)Pre-tax total return on cash and investments excluding foreign exchange rate
movements is a non-GAAP financial measure as defined in Item 10(e) of SEC
Regulation S-K. The reconciliation to pre-tax total return on cash and
investments, the most comparable GAAP financial measure, included foreign
exchange gains (losses) of $(40) million , $55 million and $25 million for the
years ended December 31, 2021 , 2020 and 2019, respectively.
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OTHER EXPENSES (REVENUES), NET
The following table provides a summary of other expenses (revenues), net:
Year ended December 31, 2021 % Change 2020 % Change 2019
Corporate expenses $ 126,470 24% $ 101,822 (21%) $ 129,096
Foreign exchange losses (gains) 315 nm 81,069 nm (12,041)
Interest expense and financing costs 62,302 (17%) 75,049 10% 68,107
Income tax expense (benefit) 62,384 nm (12,321) nm 23,692
Total $ 251,471 $ 245,619 $ 208,854
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 increased to 2.7% in 2021 from 2.3% in 2020.
The increase in corporate expenses in 2021 was mainly driven by increases in
performance-related compensation costs and personnel costs.
Foreign Exchange Losses (Gains)
Some of our business is written in currencies other than the
Foreign exchange losses in 2021 were primarily related to the impact of the
weakening of the
liabilities denominated in pound sterling, Australian dollar and other
currencies, largely offset by the strengthening of the
remeasurement of net insurance-related liabilities denominated in euro and
Japanese yen.
Foreign exchange losses in 2020 were primarily related to the impact of the
weakening of the
liabilities denominated in pound sterling and the euro.
Interest Expense and Financing Costs
Interest expense and financing costs are related to interest due on the 5.875%
senior unsecured notes ("5.875% Senior Notes") issued in 2010 and repaid in June
2020 , the 5.150% senior unsecured notes ("5.150% Senior Notes") issued in 2014,
the 4.000% senior unsecured notes ("4.000% Senior Notes") issued in 2017, the
3.900% senior unsecured notes ("3.900% Senior Notes"), and the 4.900% fixed-rate
reset junior subordinated notes ("Junior Subordinated Notes") issued in 2019.
Interest expense and financing costs decreased by
to 2020, due to the repayment of the 5.875% Senior Notes on
Income Tax Expense (Benefit)
Income tax expense (benefit) primarily results from income (loss) generated by our foreign operations in theU.S. andEurope . Our effective tax rate, which is calculated as income tax expense (benefit), divided by income (loss) before tax including interest in income (loss) of equity method investments, was 9.2%, 9.3%, and 6.8% in 2021, 2020, and 2019, respectively. This effective rate can vary between years depending on the distribution of net income (loss) among tax jurisdictions, as well as other factors. 71 --------------------------------------------------------------------------------
The tax expense of
pre-tax income in our
The tax benefit of
pre-tax losses in our
FINANCIAL MEASURES
We believe that the following financial indicators are important in evaluating
performance and measuring the overall growth in value generated for common
shareholders:
Year ended and at December 31, 2021 2020 2019
Return on average common equity(1) 12.2 % (3.2 %) 6.3 %
Operating return on average common equity(2) 9.1 % (3.7 %) 4.7 %
Book value per diluted common share(3) $ 55.78 $ 55.09 $ 55.79
Cash dividends declared per common share $ 1.69 $ 1.65 $ 1.61
Increase in book value per diluted common share $ 2.38 $ 0.95 $ 7.47
adjusted for dividends
(1) Return on average common equity ("ROACE") is calculated by dividing net
income (loss) available (attributable) to common shareholders for the year by
the average common shareholders' equity determined using the common
shareholders' equity balances at the beginning and end of the year.
(2) Operating return on average common equity ("operating ROACE"), 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, ROACE, and a
discussion of the rationale for its presentation is provided in 'Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Non-GAAP Financial Measures Reconciliation'.
(3) Book value per diluted common share represents common shareholders' equity
divided by the number of diluted common share outstanding, determined using the
treasury stock method. Cash-settled restricted stock units are excluded.
Return on Average Common Equity
Our objective is to generate superior returns on capital that appropriately reward common shareholders for the risks we assume and to grow revenue only when we expect the returns will meet or exceed our requirements. We recognize that the nature of underwriting cycles and the frequency or severity of large loss events in any one year may challenge the ability to achieve a profitability target in any specific period. ROACE reflects the impact of net income (loss) available (attributable) to common shareholders, including net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
The increase in ROACE in 2021 compared to 2020, was primarily driven by the
underwriting income, an increase in net investment income, a decrease in foreign
exchange losses and the interest in income of equity method investments,
partially offset by the income tax expense, and an increase in corporate
expenses.
Operating ROACE excludes the impact of net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
The increase in operating ROACE in 2021, compared to 2020, was primarily driven
by the underwriting income and an increase in investment income, partially
offset by the income tax expense, and an increase corporate expenses.
Book Value per Diluted Common Share
We consider book value per diluted common share to be an appropriate measure of
returns to common shareholders, as we believe growth in book value on a diluted
basis will ultimately translate into appreciation of our stock price.
In 2021, book value per diluted common share increased by 1%, due to the net
income generated, partially offset by a decrease in net unrealized investment
gains reported in other comprehensive income and common dividends declared.
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In 2020, book value per diluted common share decreased by 1%, due to the net
loss generated and common dividends declared, partially offset by net unrealized
investment gains reported in other comprehensive income.
Cash Dividends Declared per Common Share
We believe in returning excess capital to shareholders by way of dividends.
Accordingly, dividend policy is an integral part of the value we create for
shareholders. Our Board of Directors have approved eighteen successive annual
increases in quarterly common share dividends.
Book Value per Diluted Common Share Adjusted for Dividends
Taken together, we believe that growth in book value per diluted common share and common share dividends declared represent the total value created for common shareholders. As companies in the insurance industry have differing dividend payout policies, we believe that investors use the book value per diluted common share adjusted for dividends metric to measure comparable performance across the industry.
In 2021, the increase in total value of
income generated in the year, partially offset by a decrease in net unrealized
investment gains recognized in other comprehensive income.
In 2020, the increase in total value of
unrealized investment gains recognized in other comprehensive income, partially
offset by the net loss generated for the year.
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NON-GAAP FINANCIAL MEASURES RECONCILIATION
Years ended December 31, 2021 2020 2019
Net income (loss) available (attributable) to common $ 588,359
shareholders
Net investment gains(1) (134,279) (129,133) (91,233)
Foreign exchange losses (gains)(2) 315 81,069 (12,041)
Reorganization expenses(3) - 7,881 37,384
Interest in (income) loss of equity method
(32,084) 3,612 (9,718)
investments(4)
Income tax expense 14,166 13,023 6,656
Operating income (loss) $ 436,477 $ (174,222) $ 213,409
Earnings (loss) per diluted common share (5) $
6.90
Net investment gains (1.57) (1.53) (1.08)
Foreign exchange losses (gains) - 0.96 (0.14)
Reorganization expenses - 0.09 0.44
Interest in (income) loss of equity method investments (0.38) 0.04 (0.12)
Income tax expense 0.17 0.15 0.08
Operating income (loss) per diluted common share(5) $ 5.12 $ (2.08) $ 2.52
Weighted average diluted common shares outstanding(6) 85,291 84,262 84,473
Average common shareholders' equity $
4,803,175
Return on average common equity 12.2% (3.2%) 6.3%
Operating return on average common equity 9.1% (3.7%) 4.7%
(1)Tax expense (benefit) of $11 million , $18 million and $12 million for the
years ended December 31, 2021 , 2020 and 2019, respectively. Tax impact is
estimated by applying the statutory rates of applicable jurisdictions, after
consideration of other relevant factors including the ability to utilize capital
losses.
(2)Tax expense (benefit) of $3 million , $(4) million and $1 million for the
years ended December 31, 2021 , 2020 and 2019, respectively. Tax impact is
estimated by applying the statutory rates of applicable jurisdictions, after
consideration of other relevant factors including the tax status of specific
foreign exchange transactions.
(3)Tax (benefit) of $(1) million and $(7) million for the years ended December
31, 2020 and 2019, respectively. Tax impact is estimated by applying the
statutory rates of applicable jurisdictions.
(4)Tax expense (benefit) of $nil for the years ended December 31, 2021 , 2020 and
2019, respectively, Tax impact is estimated by applying the statutory rates of
applicable jurisdictions.
(5)Loss per diluted common share and operating loss per diluted common share for
the year ended December 31, 2020 , were calculated using weighted average common
shares outstanding due to the net loss attributable to common shareholders and
the operating loss recognized in that year.
(6)Refer to Item 8, Note 13 to the Consolidated Financial Statements 'Earnings
Per Common Share' for further details.
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Rationale for the Use of Non-GAAP Financial Measures
We present our results of operations in a way we believe will be meaningful and useful to investors, analysts, rating agencies and others who use our financial information to evaluate our performance. Some of the measurements we use are considered non-GAAP financial measures underSEC rules and regulations. In this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we present underwriting-related general and administrative expenses, consolidated underwriting income (loss), operating income (loss) (in total and on a per share basis), operating return on average common equity ("operating ROACE"), amounts presented on a constant currency basis and pre-tax total return on cash and investments excluding foreign exchange movements which are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. We believe that these non-GAAP financial measures, which may be defined and calculated differently by other companies, help explain and enhance the understanding of our results of operations. However, these measures should not be viewed as a substitute for those determined in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP").
Underwriting-Related General and Administrative Expenses
Underwriting-related general and administrative expenses include those general and administrative expenses that are incremental and/or directly attributable to our underwriting operations. While this measure is presented in Item 8, Note 3 to the Consolidated Financial Statements 'Segment Information', it is considered a non-GAAP financial measure when presented elsewhere on a consolidated basis. Corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As these costs are not incremental and/or directly attributable to our underwriting operations, these costs are excluded from underwriting-related general and administrative expenses, and therefore, consolidated underwriting income (loss). General and administrative expenses, the most comparable GAAP financial measure to underwriting-related general and administrative expenses, also includes corporate expenses.
The reconciliation of underwriting-related general and administrative expenses
to general and administrative expenses, the most comparable GAAP financial
measure, is presented in 'Management's Discussion and Analysis of Financial
Condition and Results of Operations - Consolidated Results of Operations'.
Consolidated Underwriting Income (Loss)
Consolidated underwriting income (loss) is a pre-tax measure of underwriting profitability that takes into account net premiums earned and other insurance related income (loss) as revenues and net losses and loss expenses, acquisition costs and underwriting-related general and administrative expenses as expenses. While this measure is presented in Item 8, Note 3 to the Consolidated Financial Statements 'Segment Information', it is considered a non-GAAP financial measure when presented elsewhere on a consolidated basis.
We evaluate our underwriting results separately from the performance of our
investment portfolio. As a result, we believe it is appropriate to exclude net
investment income and net investment gains (losses) from our underwriting
profitability measure.
Foreign exchange losses (gains) in our consolidated statements of operations
primarily relate to the impact of foreign exchange rate movements on our net
insurance-related liabilities. However, we manage our investment portfolio in
such a way that unrealized and realized foreign exchange losses (gains) on our
investment portfolio generally offset a large portion of the foreign exchange
losses (gains) arising from our underwriting portfolio. As a result, we believe
that foreign exchange losses (gains) in our consolidated statements of
operations in isolation are not a meaningful contributor to our underwriting
performance, therefore, foreign exchange losses (gains) are excluded from
consolidated underwriting income (loss).
Interest expense and financing costs primarily relate to interest payable on our
debt. As these expenses are not incremental and/or directly attributable to our
underwriting operations, these expenses are excluded from underwriting-related
general and administrative expenses, and therefore, consolidated underwriting
income (loss).
Reorganization expenses are related to the transformation program which was
launched in 2017. This program encompasses the integration of Novae, which
commenced in the fourth quarter of 2017, the realignment of our accident and
health business, together with other initiatives designed to increase efficiency
and enhance profitability, while delivering a customer-centric operating model.
Reorganization expenses are primarily driven by business decisions, the nature
and timing of which are not related to the underwriting process, therefore,
these expenses are excluded from consolidated underwriting income (loss).
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Amortization of intangible assets including value of business acquired ("VOBA")
arose from business decisions, the nature and timing of which are not related to
the underwriting process, therefore, these expenses are excluded from
consolidated underwriting income (loss).
We believe that the presentation of underwriting-related general and
administrative expenses and consolidated underwriting income (loss) provides
investors with an enhanced understanding of our results of operations, by
highlighting the underlying pre-tax profitability of our underwriting
activities. The reconciliation of consolidated underwriting income (loss) to net
income (loss), the most comparable GAAP financial measure, is presented in
'Management's Discussion and Analysis of Financial Condition and Results of
Operations - Consolidated Results of Operations'.
Operating Income (Loss)
Operating income (loss) represents after-tax operational results exclusive of net investment gains (losses), foreign exchange losses (gains), reorganization expenses and interest in income (loss) of equity method investments. Although the investment of premiums to generate income and investment gains (losses) is an integral part of our operations, the determination to realize investment gains (losses) is independent of the underwriting process and is heavily influenced by the availability of market opportunities. Furthermore, many users believe that the timing of the realization of investment gains (losses) is somewhat opportunistic for many companies. Foreign exchange losses (gains) in our consolidated statements of operations primarily relate to the impact of foreign exchange rate movements on net insurance-related liabilities. In addition, we recognize unrealized foreign exchange losses (gains) on our equity securities and foreign exchange losses (gains) realized on the sale of our available for sale investments and equity securities in net investment gains (losses). We also recognize unrealized foreign exchange losses (gains) on our available for sale investments in other comprehensive income (loss). These unrealized foreign exchange losses (gains) generally offset a large portion of the foreign exchange losses (gains) reported in net income (loss), thereby minimizing the impact of foreign exchange rate movements on total shareholders' equity. As a result, we believe that foreign exchange losses (gains) in our consolidated statements of operations in isolation are not a meaningful contributor to the performance of our business, therefore, foreign exchange losses (gains) are excluded from consolidated operating income (loss) Reorganization expenses are related to the transformation program which was launched in 2017. This program encompasses the integration of Novae, which commenced in the fourth quarter of 2017, the realignment of our accident and health business, together with other initiatives designed to increase efficiency and enhance profitability, while delivering a customer-centric operating model. Reorganization expenses are primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from operating income (loss). Interest in income (loss) of equity method investments is primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, this income (loss) is excluded from operating income (loss).
Certain users of our financial statements evaluate performance exclusive of
after-tax net investment gains (losses), foreign exchange losses (gains),
reorganization expenses, and interest in income (loss) of equity method
investments to understand the profitability of recurring sources of income.
We believe that showing net income (loss) available (attributable) to common
shareholders exclusive of after-tax net investment gains (losses), foreign
exchange losses (gains), reorganization expenses and interest in income (loss)
of equity method investments reflects the underlying fundamentals of our
business. In addition, we believe that this presentation enables investors and
other users of our financial information to analyze performance in a manner
similar to how our management analyzes the underlying business performance. We
also believe this measure follows industry practice and, therefore, facilitates
comparison of our performance with our peer group. We believe that equity
analysts and certain rating agencies that follow us, and the insurance industry
as a whole, generally exclude these items from their analyses for the same
reasons. The reconciliation of operating income (loss) to net income (loss)
available (attributable) to common shareholders, the most comparable GAAP
financial measure, is presented above.
We also present operating income (loss) per diluted common share and operating
ROACE, which are derived from the operating income (loss) measure and are
reconciled above to the most comparable GAAP financial measures, earnings (loss)
per diluted common share and return on average common equity ("ROACE"),
respectively.
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Constant Currency Basis
We present gross premiums written, net premiums written and net premiums earned on a constant currency basis in this MD&A. The amounts presented on a constant currency basis are calculated by applying the average foreign exchange rate from the current year to the prior year amounts. We believe this presentation enables investors and other users of our financial information to analyze growth in gross premiums written, net premiums written and net premiums earned on a constant basis. The reconciliation to gross premiums written, net premiums written and net premiums earned on a GAAP basis is presented in 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Results by Segment'.
Pre-Tax Total Return on Cash and Investments excluding Foreign Exchange
Movements
Pre-tax total return on cash and investments excluding foreign exchange movements measures net investment income (loss), net investments gains (losses), interest in income (loss) of equity method investments, and change in unrealized gains (losses) generated by average cash and investment balances. We believe this presentation enables investors and other users of our financial information to analyze the performance of our investment portfolio. The reconciliation of pre-tax total return on cash and investments excluding foreign exchange movements to pre-tax total return on cash and investments, the most comparable GAAP financial measure, is presented in 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Net Investment Income and Net Investment Gains (Losses)'. CASH AND INVESTMENTS
Details of cash and investments are as follows:
December 31, 2021 December 31, 2020
Fair value Fair value
Fixed maturities, available for sale $ 12,313,200 $ 12,041,799
Fixed maturities, held to maturity(1) 445,033 -
Equity securities 655,675 518,445
Mortgage loans 594,088 593,290
Other investments 947,982 829,156
Equity method investments 146,293 114,209
Short-term investments 31,063 161,897
Total investments $ 15,133,334 $ 14,258,796
Cash and cash equivalents(2) $ 1,317,690 $ 1,503,232
(1)Presented at net carrying value of
consolidated balance sheets.
(2)Includes restricted cash and cash equivalents of
million
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Overview
The fair value of total investments increased by$875 million in 2021, driven by cash inflows from operations, partially offset by the decrease in market value of fixed maturities due to the increase in yields.
An analysis of our investment portfolio by asset class is detailed below:
Fixed Maturities
Details of our fixed maturities portfolio are as follows:
December 31, 2021 December 31, 2020
Fair value % of total Fair value % of total
Fixed maturities:
U.S. government and agency $ 2,682,448 21 % $ 1,918,699 16 %
Non-U.S. government 795,178 6 % 671,273 6 %
Corporate debt 4,532,884 36 % 4,655,951 39 %
Agency RMBS 1,074,589 8 % 1,286,209 11 %
CMBS 1,248,191 10 % 1,353,587 11 %
Non-agency RMBS 186,164 1 % 140,104 1 %
ABS 2,029,941 16 % 1,720,078 14 %
Municipals(1) 208,838 2 % 295,898 2 %
Total $ 12,758,233 100 % $ 12,041,799 100 %
Credit ratings:
U.S. government and agency $ 2,682,448 21 % $ 1,918,699 16 %
AAA(2) 4,491,643 34 % 4,551,312 37 %
AA 981,837 8 % 913,707 8 %
A 1,917,006 15 % 1,896,407 16 %
BBB 1,595,285 13 % 1,732,058 14 %
Below BBB(3) 1,090,014 9 % 1,029,616 9 %
Total $ 12,758,233 100 % $ 12,041,799 100 %
(1)Includes bonds issued by states, municipalities, and political subdivisions.
(2)Includes
securities ("RMBS") and commercial mortgage-backed securities ("CMBS").
(3)Non-investment grade and non-rated securities.
AtDecember 31, 2021 , fixed maturities had a weighted average credit rating of AA- (2020: AA-), a book yield of 1.9% (2020: 2.3%), and an average duration of 3.0 years (2020: 3.3 years). AtDecember 31, 2021 , fixed maturities together with short-term investments and cash and cash equivalents (i.e. total investments of$14.1 billion ), had a weighted average credit rating of AA- (2020: AA-) and an average duration of 2.8 years (2020: 3.0 years). Our methodology for assigning credit ratings to fixed maturities is in line with the methodology used for the BarclaysU.S. Aggregate Bond index. This methodology uses the midpoint ofStandard & Poor's (S&P), Moody's and Fitch ratings. When ratings from only two of these agencies are available, the lower rating is used. When only one agency rates a security, that rating is used. When ratings provided by S&P, Moody's and Fitch are not available, ratings from other nationally recognized agencies are used. To calculate the weighted average credit rating for fixed maturities, we assign points to each rating with the highest points assigned to the highest rating (AAA) and the lowest points assigned to the lowest rating (D) and then calculate the weighted average based on the fair values of the individual securities. Securities that are not rated are excluded from weighted average calculations. AtDecember 31, 2021 , the fair value of fixed maturities not rated was$18 million (2020:$50 million ).
In addition to managing credit risk exposure within our fixed maturities
portfolio we also monitor the aggregation of country risk exposure on a
group-wide basis (refer to Item 1 'Risk and Capital Management' for further
details). Country risk
78 -------------------------------------------------------------------------------- exposure is the risk that events in a country, such as currency crises, regulatory changes and other political events, will adversely affect the ability of obligors in the country to honor their obligations. For corporate debt and structured securities, we measure the country of risk exposure based on a number of factors including, but not limited to, location of management, principal operations and country of revenues.
An analysis of our fixed maturities portfolio by major asset classes is detailed
below.
Non-U.S. Government Non-U.S. government securities include bonds issued by non-U.S. governments and their agencies along with supranational organizations (collectively also known as sovereign debt securities).
Details of exposures to governments in the eurozone and other non-
government concentrations by fair value are as follows:
December 31, 2021 December 31, 2020
Weighted Weighted
average average
Country Fair value % of total credit rating Fair value % of total credit rating
Eurozone countries:
Supranationals(1) $ 16,799 2 % AAA $ 19,773 3 % AAA
Netherlands 10,065 1 % AA+ 14,482 2 % AA+
Germany 5,083 1 % AAA 3,689 1 % AAA
Austria 2,317 - % AA+ 3,629 1 % AA+
France 1,303 - % AA 503 - % AA
Total eurozone 35,567 4 % AA+ 42,076 7 % AA+
Other concentrations:
United Kingdom 248,601 31 % AA- 305,083 45 % AA-
Canada 372,333 47 % AAA 139,834 21 % AAA
Mexico 19,839 2 % BBB 21,404 3 % BBB
Other 118,838 16 % AA+ 162,876 24 % AA
Total other concentrations 759,611 96 % AAA 629,197 93 % AA+
Total non-U.S. government $ 795,178 100 % AA $ 671,273 100 % AA-
(1)Includes supranationals only in the eurozone.
AtDecember 31, 2021 , net unrealized gains on non-U.S. government securities were$0.5 million (2020:$38 million ) which included gross unrealized foreign exchange losses of$5 million (2020:$1 million ), mainly related toU.K. government bonds. 79 --------------------------------------------------------------------------------
Corporate Debt
Corporate debt securities consist primarily of investment grade debt of a wide
variety of corporate issuers and industries.
Details of our corporate debt securities portfolio by sector are as follows:
December 31, 2021 December 31, 2020
Weighted Weighted
average average
Fair value % of total credit rating Fair value % of total credit rating
Financial institutions:
U.S. banking $ 821,650 18 % A $ 905,944 19 % A
Foreign banking 383,360 8 % A 274,462 6 % A+
Corporate/commercial finance 380,558 8 % BBB- 273,682 6 % BBB-
Insurance 155,735 3 % A+ 135,843 3 % A+
Investment brokerage 87,923 2 % A- 62,340 1 % A-
Total financial institutions 1,829,226 39 % A- 1,652,271 35 % A-
Consumer non-cyclicals 597,163 13 % BBB- 660,513 14 % BBB
Consumer cyclical 435,314 10 % BB 463,953 10 % BB+
Communications 406,700 9 % BB+ 427,266 9 % BBB-
Industrials 390,674 9 % BB- 424,506 9 % BB
Technology 288,754 6 % BB+ 339,666 7 % BBB-
Utilities 198,387 4 % BBB+ 181,641 4 % BBB+
Energy 173,606 4 % BBB 179,570 4 % BBB+
Other 213,060 6 % A 326,565 8 % A+
Total $ 4,532,884 100 % BBB $ 4,655,951 100 % BBB
Credit quality summary:
Investment grade $ 3,501,370 77 % A- $ 3,720,558 80 % A-
Non-investment grade 1,031,514 23 % B 935,393 20 % B
Total $ 4,532,884 100 % BBB $ 4,655,951 100 % BBB
At December 31, 2021 , our non-investment grade portfolio had a fair value of
$1,032 million (2020: $935 million ), a weighted average credit rating of B
(2020: B) and duration of 1.7 years (2020: 2.0 years). At December 31, 2021 , our
corporate debt portfolio, including non-investment grade securities, had a
duration of 3.7 years (2020: 3.7 years).
Details of the fair values of our RMBS and CMBS portfolios by credit rating are
as follows:
December 31, 2021 December 31, 2020
RMBS CMBS RMBS CMBS
Government agency $ 1,074,589 $ 83,936 $ 1,286,209 $ 311,698
AAA 166,553 1,069,276 109,903 972,222
AA 3,601 89,813 8,378 64,459
A 9,936 5,166 7,101 1,608
BBB 621 - 677 2,375
Below BBB(1) 5,453 - 14,045 1,225
Total $ 1,260,753 $ 1,248,191 $ 1,426,313 $ 1,353,587
(1)Non-investment grade securities.
80 --------------------------------------------------------------------------------
Residential MBS
Agency RMBS consist of bonds issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and theGovernment National Mortgage Association which are primarily AAA rated and are supported by loans which are diversified across geographical areas. AtDecember 31, 2021 , agency RMBS had an average duration of 4.4 years (2020: 3.2 years). Non-agency RMBS mainly include investment grade bonds originated by non-agencies. AtDecember 31, 2021 , approximately 91% (2020: 84%) of our non-agency RMBS were rated AA or better. AtDecember 31, 2021 , non-agency RMBS had an average duration of 2.1 years (2020: 1.5 years) and weighted average life of 4.8 years (2020: 4.7 years).
Commercial MBS
CMBS mainly include investment grade bonds originated by non-agencies. AtDecember 31, 2021 , approximately 99% (2020: 99%) of our CMBS were rated AA or better. AtDecember 31, 2021 , the weighted average estimated subordination percentage of the portfolio was 37% (2020: 29%), which represents the current weighted average estimated percentage of the capital structure subordinated to the investment holding that is available to absorb losses before the security incurs the first dollar loss of principal. AtDecember 31, 2021 , CMBS had an average duration of 3.1 years (2020: 4.8 years) and weighted average life of 4.0 years (2020: 5.5 years). Asset-Backed Securities ABS mainly include investment grade bonds backed by pools of loans with a variety of underlying collateral, including auto loans, student loans, credit card receivables and collateralized loan obligations ("CLOs") originated by a variety of financial institutions.
Details of the fair value of our ABS portfolio by underlying collateral and
credit rating are as follows:
Asset-backed securities
AAA AA A BBB Below BBB Total
At December 31, 2021
CLO - debt tranches $ 953,731 $ 251,204 $ 73,595 $ 33,343 $ 31,707 $ 1,343,580
Auto 245,653 4,938 - - - 250,591
Student loan 149,801 5,166 2,476 - - 157,443
Credit card 12,977 - - - - 12,977
Other 224,348 11,893 23,311 5,394 404 265,350
Total $ 1,586,510 $ 273,201 $ 99,382 $ 38,737 $ 32,111 $ 2,029,941
% of total 78% 13% 5% 2% 2% 100%
At December 31, 2020
CLO - debt tranches $ 820,870 $ 55,107 $ 48,269 $ 46,150 $ 75,954 $ 1,046,350
Auto 278,964 - - - - 278,964
Student loan 113,294 7,513 - - - 120,807
Credit card 10,254 - - - - 10,254
Other 214,749 15,744 17,075 15,641 494 263,703
Total $ 1,438,131 $ 78,364 $ 65,344 $ 61,791 $ 76,448 $ 1,720,078
% of total 84% 5% 4% 4% 3% 100%
At
(2020: 0.9 years) and the weighted average life was 4.1 years (2020: 3.6 years).
81 --------------------------------------------------------------------------------
Municipals
Municipals comprise revenue bonds and general obligation bonds issued byU.S. domiciled state and municipal entities and are primarily held in the taxable portfolios of ourU.S. subsidiaries.
Details of the fair value of our municipals portfolio by state and between
Revenue bonds and General Obligation bonds are as follows:
Gross Gross Weighted
General % of total unrealized unrealized average
Obligation Revenue Total fair value gains losses credit rating
At December 31, 2021
New York $ 798 $ 31,900 $ 32,698 16% $ 1,416 $ (2) AA+
California 2,472 43,945 46,417 22% 1,118 (223) A+
Texas 9,327 16,587 25,914 12% 677 (238) AA
Massachusetts 12,511 2,577 15,088 7% 403 (5) AA
Michigan - 14,894 14,894 7% 460 (31) AA-
Other 7,612 66,215 73,827 36% 1,854 (147) A+
$ 32,720 $ 176,118 $ 208,838 100% $ 5,928 $ (646) AA-
At
New York$ 18,346 $ 39,597 $ 57,943 20%$ 3,287 $ - AA California 8,041 33,340 41,381 14% 1,881 (2) AA- Texas 8,884 25,193 34,077 12% 1,635 - AA Massachusetts 21,090 10,842 31,932 11% 700 - AA+ Michigan - 15,413 15,413 5% 948 - AA- Other 20,426 94,726 115,152 38% 4,697 (29) A+$ 76,787 $ 219,111 $ 295,898 100%$ 13,148 $ (31) AA- General Obligation bonds are backed by the full faith and credit of the authority that issued the debt and are secured by the taxing powers of those authorities. Revenue bonds are backed by the revenue stream generated by the services provided by the issuer (e.g. sewer, water or utility projects). As issuers of revenue bonds do not have the ability to draw from tax revenues or levy taxes to fund obligations, revenue bonds may carry a greater risk of default than General Obligation bonds. AtDecember 31, 2021 , 97% (2020: 75%) of municipals are taxable with the remainder being tax exempt.
Gross Unrealized Losses
At
portfolio were
The severity of the unrealized loss position as a percentage of amortized cost
for all investment grade fixed maturities in an unrealized loss position
including any impact of foreign exchange losses (gains) was as follows:
December 31, 2021 December 31, 2020
% of % of
Gross total gross Gross total gross
Severity of unrealized unrealized unrealized unrealized
Unrealized Loss Fair value losses losses Fair value losses losses
0-10% $ 6,172,912 $ (83,380) 96 % $ 1,212,074 $ (9,553) 87 %
10-20% 10,127 (1,639) 2 % 6,102 (726) 7 %
20-30% 3,576 (1,138) 1 % 2,374 (626) 6 %
30-40% 1,188 (539) 1 % - - - %
40-50% - - - % - - - %
> 50% 6 (25) - % - - - %
Total $ 6,187,809 $ (86,721) 100 % $ 1,220,550 $ (10,905) 100 %
82
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The increase in gross unrealized losses on investment grade fixed maturities
reflected the impact of the increase in yields and the widening of credit
spreads on investment grade corporate debt securities.
The severity of the unrealized loss position as a percentage of amortized cost
for all non-investment grade fixed maturities in an unrealized loss position
including any impact of foreign exchange losses (gains) was as follows:
December 31, 2021 December 31, 2020
% of % of
Gross total gross Gross total gross
Severity of unrealized unrealized unrealized unrealized
Unrealized Loss Fair value losses losses
Fair value losses losses 0-10%$ 396,033 $ (6,493) 85 %$ 220,424 $ (4,833) 60 % 10-20% 3,085 (448) 6 % 14,068 (1,889) 24 % 20-30% 209 (38) 1 % 258 (87) 1 % 30-40% - - - % 1,279 (799) 10 % 40-50% 267 (194) 3 % 88 (1) - % > 50% 427 (352) 5 % 346 (397) 5 % Total$ 400,021 $ (7,525) 100 %$ 236,463 $ (8,006) 100 % The decrease in gross unrealized losses on non-investment grade fixed maturities reflected the impact of the tightening of credit spreads on non-investment grade high yield corporate debt securities.
At
million
global equity markets.
Mortgage Loans During 2021, investment in commercial mortgage loans increased to$594 million from$593 million , an increase of$1 million . The commercial mortgage loans are high quality and collateralized by a variety of commercial properties and are diversified geographically throughout theU.S. and by property type to reduce the risk of concentration. AtDecember 31, 2021 and 2020, there were no credit losses or past due amounts associated with our commercial mortgage loans portfolio.
Other Investments
Details of our other investments portfolio are as follows:
December 31, 2021 December 31, 2020
Hedge funds
Long/short equity funds $ 3,476 - % $ 25,300 3 %
Multi-strategy funds 56,012 6 % 121,420 15 %
Total hedge funds 59,488 6 % 146,720 18 %
Direct lending funds 289,867 31 % 272,131 33 %
Private equity funds 249,974 26 % 124,706 15 %
Real estate funds 238,222 25 % 164,250 20 %
Total hedge, direct lending, private equity and real 837,551 88 % 707,807 86 %
estate funds
CLO-Equities 5,910 1 % 6,173 1 %
Other privately held investments 104,521 11 % 70,011 8 %
Overseas deposits - - % 45,165 5 %
Total other investments $ 947,982 100 % $ 829,156 100 %
Refer to Item 8, Note 5(c) to the Consolidated Financial Statements
'Investments'.
83 --------------------------------------------------------------------------------
Equity Method Investments
In our consolidated results, our ownership interest in
Holdings Limited
equity method investments. Interest in income (loss) of equity method
investments was
increase was attributable to positive investment returns realized by Harrington.
Restricted Assets
Refer to Item 8, Note 5(g) to the Consolidated Financial Statements
'Investments'.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Liquidity is a measure of a company's ability to generate cash flows sufficient to meet the short-term and long-term cash requirements of its business operations. We manage liquidity at the holding company and operating subsidiary level. Holding Company As a holding company,AXIS Capital has no operations of its own and its assets consist primarily of investments in its subsidiaries. Accordingly,AXIS Capital's future cash flows depend on the availability of dividends or other statutorily permissible distributions, such as returns of capital, from its subsidiaries. The ability to pay such dividends and/or distributions is limited by the applicable laws and regulations of the various countries and states in whichAXIS Capital's subsidiaries operate (refer to Item 8, Note 21 to the Consolidated Financial Statements 'Statutory Financial Information' for further details), as well as the need to maintain capital levels to adequately support insurance and reinsurance operations, and to preserve financial strength ratings issued by independent rating agencies. During 2021,AXIS Capital received$300 million (2020:$350 million ) of distributions from its subsidiaries.AXIS Capital's primary uses of funds are dividend payments to common and preferred shareholders, interest and principal payments on debt, capital investments in subsidiaries, and payment of corporate operating expenses. We believe the dividend/distribution capacity ofAXIS Capital's subsidiaries, which was$0.9 billion atDecember 31, 2021 , will provideAXIS Capital with sufficient liquidity for the foreseeable future.
Operating Subsidiaries
AXIS Capital's operating subsidiaries primarily derive cash from the net inflow of premiums less claim payments related to underwriting activities and from net investment income. Historically, these cash receipts have been sufficient to fund the operating expenses of these subsidiaries, as well as to fund dividend payments toAXIS Capital . The subsidiaries' remaining cash flows are generally invested in our investment portfolio. The remaining cash flows have also been used to fund common share repurchases and to fund acquisitions in recent years. The insurance and reinsurance business of our operating subsidiaries inherently provide liquidity, as premiums are received in advance (sometimes substantially in advance) of the time losses are paid. However, the amount of cash required to fund loss payments can fluctuate significantly from period to period, due to the low frequency/high severity nature of certain types of business we write.
Consolidated cash flows from operating, investing and financing activities in
the last three years were as follows:
Total cash provided by (used in)(1) 2021 2020 2019 Operating activities$ 1,114,822 $ 343,503 $ 199,004 Investing activities (1,114,195) 489,921 (774,315) Financing activities (186,095) (908,803) 277,510 Effect of exchange rate changes on cash (74) 2,154
44,238
Decrease in cash and cash equivalents
(1) Refer to Item 8, 'Consolidated Statements of Cash Flows' for further
details.
84 -------------------------------------------------------------------------------- •Net cash provided by operating activities was$1,115 million in 2021 compared to$344 million in 2020. Cash inflows from insurance and reinsurance operations typically include premiums, net of acquisition costs, and reinsurance recoverables. Cash outflows principally include payments of losses and loss expenses, payments of premiums to reinsurers and operating expenses. Cash provided by operating activities can fluctuate due to timing differences between the collection of premiums and reinsurance recoverables and the payment of losses and loss expenses, and the payment of premiums to reinsurers. Operating cash inflows increased in 2021 compared to 2020, primarily attributable to an increase in premiums received, a decrease in payments of losses and loss expenses, partially offset by a decrease in interest and dividends received from our fixed maturity securities portfolio, an increase in income taxes paid and an increase in operating expenses. •Investing cash outflows in 2021 principally related to the net purchases of fixed maturities of$1,154 million and equity securities of$112 million , partially offset by the net proceeds from the sale and redemption of short-term investments of$130 million , and the net proceeds from the sale of other investments of$61 million . Investing cash inflows in 2020 principally related to the net proceeds from the sale and redemption of fixed maturities of$816 million , partially offset by net purchases of mortgage loans of$160 million and short-term investments of$123 million . •Financing cash outflows in 2021 were principally due to dividends paid to common and preferred shareholders of$176 million . In 2020, financing cash outflows were principally due to the repayment of$500 million 5.875% Senior Notes, the redemption of$225 million Series D preferred shares and dividends paid to common and preferred shareholders of$173 million . The declaration and payment of future dividends and share repurchases is at the discretion of our Board of Directors and will depend on many factors including, but not limited to, our net income, financial condition giving due consideration to the impact of the COVID-19 pandemic, business needs, capital and surplus requirements of our operating subsidiaries and regulatory and contractual restrictions, including those set forth in our credit facilities (refer to 'Capital Resources - Share Repurchases' below for further details). We have generated positive operating cash flows in all years since 2003, with the exception of 2009 which was impacted by the global financial crisis. These positive cash flows were generated even with the recognition of significant catastrophe and weather-related losses including the impact of the COVID-19 pandemic in 2020 and 2021. Net losses and loss expenses, gross of reinstatement premiums, included estimates of ultimate losses for catastrophe and weather-related losses of$450 million in 2021,$773 million in 2020 and$351 million in 2019. There remains significant uncertainty associated with estimates of ultimate losses for certain of these events (refer to 'Underwriting Results - Insurance segment - Current Accident Year Loss' and 'Underwriting Results - Reinsurance segment - Current Accident Year Loss Ratio' for further details), as well as the timing of the associated cash outflows. Should claim payment obligations accelerate beyond our ability to fund payments from operating cash flows, we would utilize cash and cash equivalent balances and/or liquidate a portion of our investment portfolio. Our investment portfolio is heavily weighted towards conservative, high quality and highly liquid securities. We expect that, if necessary, approximately$13.3 billion of cash and invested assets atDecember 31, 2021 could be available in one to three business days under normal market conditions; of this amount,$5.4 billion related to restricted assets, which primarily support our obligations in regulatory jurisdictions where we operate as a non-admitted carrier (refer to Item 8, Note 5(g) to the Consolidated Financial Statements 'Investments' for further details). For context, atJanuary 1, 2022 . our largest 1-in-250 year return period, single occurrence, single-zone modeled probable maximum loss (Southeast U.S. Hurricane) was approximately$0.3 billion , net of reinsurance. Claim payments pertaining to such an event would be paid out over a period spanning many months. Our internal risk tolerance framework aims to limit the loss of capital due to a single event, and the loss of capital that would occur from multiple but perhaps smaller events, in any year (refer to Item 1 'Risk and Capital Management' for further details). We expect that cash flows generated from operations, combined with the liquidity provided by our investment portfolio, to be sufficient to cover required cash outflows and other contractual commitments through the foreseeable future (refer to 'Contractual Obligations and Commitments' below for further details). 85 --------------------------------------------------------------------------------
Capital Resources
In addition to common equity, we have utilized other external sources of financing, including debt, preferred shares, and letter of credit facilities to support our business operations. We believe that we hold sufficient capital to allow us to take advantage of market opportunities and to maintain our financial strength ratings, as well as to comply with various local statutory regulations. We monitor capital adequacy on a regular basis and will seek to adjust our capital base according to the needs of our business (refer to Item 1 'Risk and Capital Management' for further details).
The following table summarizes consolidated capital:
At December 31, 2021 2020 Debt$ 1,310,975 $ 1,309,695 Preferred shares 550,000 550,000 Common equity 4,860,656 4,745,694 Shareholders' equity 5,410,656 5,295,694 Total capital$ 6,721,631 $ 6,605,389 Ratio of debt to total capital 19.5 %
19.8 %
Ratio of debt and preferred equity to total capital 27.7 %
28.2 %
We finance our operations with a combination of debt and equity capital. Debt to total capital, and debt and preferred equity to total capital ratios, provide an indication of our capital structure, along with some insight into our financial strength. While the impact of catastrophe and weather-related losses have reduced common shareholders' equity, we believe that our financial flexibility remains strong, and adjustments are made if there are developments that are different from previous expectations.
Debt
Debt represents the 5.150% Senior Notes issued in 2014, which will mature in 2045, the 4.000% Senior Notes issued in 2017, which will mature in 2027, the 3.900% Senior Notes issued in 2019, which will mature in 2029, and the 4.900% Junior Subordinated Notes issued in 2019, which will mature in 2040 (refer to Item 8, Note 10(a) to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details). The 3.900% Senior Notes and the 4.900% Junior Subordinated Notes were issued to finance the repayment of$500 million aggregate principal amount of 5.875% Senior Notes that matured inJune 2020 and to finance the redemption of Series D preferred shares onJanuary 17, 2020 (refer to 'Preferred Shares' below for further details). Preferred Shares Series D Preferred Shares OnMay 20, 2013 , we issued$225 million of 5.50% Series D preferred shares with a liquidation preference of$25.00 per share. Dividends on the Series D preferred shares were non-cumulative. To the extent declared, dividends accumulated, with respect to each dividend period, in an amount per share equal to 5.50% of the liquidation preference per annum. OnJanuary 17, 2020 , we redeemed all outstanding Series D preferred shares, for an aggregate liquidation preference of$225 million (refer to Item 8, Note 14 to the Consolidated Financial Statements 'Shareholders' Equity' for further details).
Series E Preferred Shares
OnNovember 7, 2016 , we issued$550 million of 5.50% Series E preferred shares with a liquidation preference of$2,500 per share (equivalent to$25 per depositary share). Dividends on the Series E preferred shares are non-cumulative. To the extent declared, dividends accumulate, with respect to each dividend period, in an amount per share equal to 5.50% of the liquidation preference per annum (equivalent to$137.50 per Series E preferred share and$1.375 per depositary share). We may redeem these shares on or afterNovember 7, 2021 at a redemption price of$2,500 per Series E preferred share (equivalent to$25 per depositary share). 86
--------------------------------------------------------------------------------
Secured Letter of Credit Facilities
We routinely enter into agreements with financial institutions to obtain secured letter of credit facilities. These facilities are primarily used for the issuance of letters of credit, in the normal course of operations, to certain insurance and reinsurance entities that purchase reinsurance protection from us. These letters of credit allow those operations to take credit, under local insurance regulations, for reinsurance obtained in jurisdictions whereAXIS Capital's subsidiaries are not licensed or otherwise admitted as an insurer. The value of our letters of credit outstanding is driven by, among other factors, the amount of unearned premiums, development of loss reserves, the payment patterns of loss reserves, the expansion of our business and the loss experience of that business. A portion of these facilities may also be used for liquidity purposes.
On
"Participating Subsidiaries") entered into an amendment to extend the term of
its secured
("Citibank") (the "
OnMarch 31, 2015 , the Participating Subsidiaries entered into an amendment to reduce the maximum aggregate utilization capacity of the$750 million Facility to$500 million (the "$500 million Facility"). All other material terms and conditions remained unchanged. OnMarch 27, 2017 , the Participating Subsidiaries amended their existing$500 million Facility to include an additional$250 million of secured letter of credit capacity (the "$250 million Facility"). Under the terms of the amended$750 million Facility, letters of credit to a maximum aggregate amount of$250 million are available for issuance on behalf of the Participating Subsidiaries once the$500 million Facility has been fully utilized.
On
extended to
On
to
OnMarch 31, 2021 , the Participating Subsidiaries amended their existing secured$750 million Facility to extend the expiration date of the$250 million Facility toMarch 31, 2022 , to reduce the utilization capacity available under the$250 million Facility to$150 million , and to make administrative changes to the remaining$500 million Facility. AtDecember 31, 2021 , letters of credit outstanding were$356 million (refer to Item 8, Note 10 to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details).
Common Equity
During the year ended
million
positions:
Year ended December 31, 2021 2020
Common equity - opening $
4,745,694
Net income (loss) 618,609 (120,424)
Change in unrealized gains on available for sale (358,480) 239,114
investments, net of tax
Share repurchases (10,242) (10,382)
Common share dividends (147,221) (142,405)
Preferred share dividends (30,250) (30,250)
Share-based compensation expense 40,780 35,574
Foreign currency translation adjustment 621 3,571
Other 1,145 1,888
Common equity - closing $ 4,860,656 $ 4,745,694
Share Repurchases
During 2021, we repurchased 205,000 common shares from employees to facilitate
the satisfaction of their personal withholding tax liabilities that arise on
vesting of share-settled restricted stock units granted under our 2017 Long-Term
Equity Compensation Plans for a total cost of $10 million .
On December 2, 2021 , the Company's Board of Directors authorized a new share
repurchase plan for up to $100 million of the Company's common shares through
December 31, 2022 . The new plan is effective January 1, 2022 .
87
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Shelf Registrations
OnNovember 19, 2019 , we filed an unallocated universal shelf registration statement with theSEC , which became effective on filing. Pursuant to the shelf registration, we may issue an unlimited amount of equity, debt, warrants, purchase contracts or a combination of these securities. Our intent and ability to issue securities pursuant to this registration statement will depend on market conditions at the time of any proposed offering.
Financial Strength Ratings
Our principal insurance and reinsurance operating subsidiaries are assigned financial strength ratings from internationally recognized rating agencies, includingStandard & Poor's ,A.M. Best , and Moody's Investors Service. These ratings are publicly announced and are available directly from the agencies, and on our website. Financial strength ratings represent the opinions of the rating agencies on the overall financial strength of a company and its capacity to meet the obligations of its insurance and reinsurance contracts. Independent ratings are one of the important factors that establish a competitive position in insurance and reinsurance markets. The rating agencies consider many factors in determining the financial strength rating of an insurance company, including the relative level of statutory surplus necessary to support the business operations of the company. These ratings are based on factors considered by the rating agencies to be relevant to policyholders, agents and intermediaries and are not directed toward the protection of investors. Ratings are not recommendations to buy, sell or hold securities.
The following are the most recent financial strength ratings from
internationally recognized agencies in relation to our principal insurance and
insurance operating subsidiaries:
Agency's description of Agency's rating
Rating agency rating Rating and outlook definition Ranking of rating
Standard & Poor's An "opinion about the A+ "Strong capacity to The 'A' category is the third
financial security (Negative) (1) meet its financial highest out of ten major
characteristics of an commitments" rating categories. The second
insurance organization, through eighth major rating
with respect to its ability categories may be modified by
to pay under its insurance the addition of a plus or
policies and contracts, in minus sign to show relative
accordance with their standing within the major
terms". rating categories.
A.M. Best An "opinion of an insurer's A "Excellent ability The 'A' category is the third
financial strength and (Stable) (2) to meet ongoing highest rating out of
ability to meet its ongoing insurance fourteen. Ratings outlooks
insurance policy and obligations" ('Positive', 'Negative' and
contract obligations". 'Stable') are assigned to
indicate a rating's potential
direction over an intermediate
term, generally defined as 36
months.
Moody's Investors Service "Opinions of the ability of
A2 "Offers good The 'A' category is the third
insurance companies to pay (Negative) (3) financial security" highest out of nine rating
punctually senior categories. Each of the second
policyholder claims and through seventh categories are
obligations." subdivided into three
subcategories, as indicated by
an appended numerical modifier
of '1', '2' and '3'. The '1'
modifier indicates that the
obligation ranks in the higher
end of the rating category,
the '2' modifier indicates a
mid-category ranking and the
'3' modifier indicates a
ranking in the lower end of
the rating category.
(1) On May 11, 2020 , Standard & Poor's revised its outlook from stable to
negative due to unfavorable trends in operating performance.
(2) On May 5, 2020 , A.M. Best revised its rating and outlook from A+ and
negative to A and stable, respectively. The revised rating was based on
unfavorable trends in operating performance over the past five years,
particularly emanating from the insurance segment. The revised outlook continues
to reflect our strong balance sheet, favorable business profile and appropriate
risk management practices.
(3) In April 2019 , Moody's Investor Service revised its outlook from stable to
negative reflecting higher operational and financial leverage and lower
capitalization relative to peers.
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Contractual Obligations and Commitments
AtDecember 31, 2021 , contractual obligations and commitments by period due were: Payment due by period Less than 1 More than Contractual obligations and commitments Total year 1-3 years 3-5 years 5 years
Operating activities
Estimated gross losses and loss expenses payments(1)
Operating lease obligations(2) 119,512 18,653 26,176 18,393 56,290
Investing activities
Unfunded investment commitments(3) 700,229 265,910 182,956 120,937 130,426
Financing activities
Debt (principal payments)(4) 1,325,000 - - - 1,325,000
Debt (interest payments)(4)(5) 652,050 60,739 121,665 121,934 347,712
Total
(1)We are obligated to pay claims for specified loss events covered by the insurance and reinsurance contracts that we write. Loss payments represent our most significant future payment obligation. In contrast to our other contractual obligations, cash payments are not determinable from the terms specified within the underlying contracts. Our best estimate of reserve for losses and loss expenses is reflected in the table above. Actual amounts and timing may differ materially from our best estimate (refer to 'Critical Accounting Estimates - Reserve for Losses and Loss Expenses' for further details). We have not taken into account corresponding reinsurance recoverable on unpaid amounts that would be due to us. (2)In the ordinary course of business, we renew and enter into new leases for office space which expire at various dates (refer to Item 8, Note 12 to the Consolidated Financial Statements 'Leases' for further details). (3)We have$649 million of unfunded investment commitments related to our other investments portfolio, which are callable by our investment managers (refer to Item 8, Note 5(c) to the Consolidated Financial Statements 'Investments' for further details). In addition, we have$33 million of unfunded commitments related to our commercial mortgage loans portfolio and$19 million of unfunded commitments related to our corporate debt portfolio. (4)Refer to Item 8, Note 10(a) to the Consolidated Financial Statements 'Debt and Financing Arrangements' for further details. (5)Debt (interest payments) includes$14 million of unamortized discount and debt issuance expenses. CRITICAL ACCOUNTING ESTIMATES The consolidated financial statements include certain amounts that are inherently uncertain and judgmental in nature. As a result, we are required to make assumptions and best estimates in order to determine the reported values. We consider an accounting estimate to be critical if: (1) it requires that significant assumptions be made in order to deal with uncertainties and (2) changes in the estimate could have a material impact on our results of operations, financial condition or liquidity.
We believe that the material items requiring such subjective and complex
estimates are:
•reserves for losses and loss expenses;
•reinsurance recoverable on unpaid losses and loss expenses, including the
allowance for expected credit losses;
•gross premiums written and net premiums earned;
•fair value measurements of financial assets and liabilities; and
•the allowance for credit losses associated with fixed maturities, available for
sale.
Significant accounting policies are also important to understanding the
consolidated financial statements (refer to Item 8, Note 2 to the Consolidated
Financial Statements 'Basis of Presentation and Significant Accounting Policies'
for further details).
We believe that the amounts included in the consolidated financial statements
reflect management's best judgment. However, factors such as those described in
Item 1A 'Risk Factors' could cause actual events or results to differ materially
from the underlying assumptions and estimates which could lead to a material
adverse impact on our results of operations, financial condition or liquidity.
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Reserve for Losses and Loss Expenses
Overview
We believe the most significant accounting judgment we make is the estimate of
reserve for losses and loss expenses ("loss reserves"). Loss reserves represent
management's estimate of the unpaid portion of our ultimate liability for losses
and loss expenses ("ultimate losses") for insured and reinsured events that have
occurred at or before the balance sheet date. Loss reserves reflect claims that
have been reported ("case reserves") to us and claims that have been incurred
but not reported ("IBNR") to us. Loss reserves represent our best estimate of
what the ultimate settlement and administration of claims will cost, based on
our assessment of facts and circumstances known at that particular point in
time.
Loss reserves are not an exact calculation of the liability but instead, are
complex estimates. The process of estimating loss reserves involves a number of
variables (refer to 'Selection of Reported Reserves - Management's Best
Estimate' below for further details). We review estimates of loss reserves each
reporting period and consider all significant facts and circumstances known at
that particular point in time. As additional experience and other data become
available and/or laws and legal interpretations change, we may adjust previous
estimates of loss reserves. Adjustments are recognized in the period in which
they are determined, therefore they can impact that period's underwriting
results either favorably (indicating that current estimates are lower than
previous estimates) or adversely (indicating that current estimates are higher
than previous estimates).
Case Reserves
With respect to insurance business, we are generally notified of losses by our
insureds and/or their brokers. Based on this information, our claims personnel
estimate ultimate losses arising from the claim, including the cost of
administering the claims settlement process. These estimates reflect the
judgment of our claims personnel based on general reserving practices, the
experience and knowledge of such personnel regarding the nature of the specific
claim and, where appropriate, the advice of legal counsel, loss adjusters and
other relevant consultants.
With respect to reinsurance business, we are generally notified of losses by
ceding companies and/or their brokers. For excess of loss contracts, we are
typically notified of insured losses on specific contracts and record a case
reserve for the estimated ultimate liability arising from the claim. For
contracts written on a proportional basis, we typically receive aggregated
claims information and record a case reserve for the estimated ultimate
liability arising from the claim based on that information. Proportional
reinsurance contracts typically require that losses in excess of pre-defined
amounts be separately notified so we can adequately evaluate them. Our claims
department evaluates each specific loss notification we receive and records
additional case reserves when a ceding company's reserve for a claim is not
considered adequate. We also undertake an extensive program of cedant audits,
using outsourced legal and industry experience where necessary. This allows us
to review cedants' claims administration practices to ensure that reserves are
consistent with exposures, adequately established, and properly reported in a
timely manner.
IBNR
The estimation of IBNR is necessary due to potential development on reported
claims and the time lag between when a loss event occurs and when it is actually
reported, which is referred to as a reporting lag. Reporting lags may arise from
a number of factors, including but not limited to, the nature of the loss, the
use of intermediaries and complexities in the claims adjusting process. As we do
not have specific information on IBNR, it must be estimated. IBNR is calculated
by deducting incurred losses (i.e. paid losses and case reserves) from
management's best estimate of ultimate losses. In contrast to case reserves,
which are established at the contract level, IBNR reserves are generally
estimated at an aggregate level and cannot be identified as reserves for a
particular loss event or contract (refer to 'Reserving for Significant
Catastrophic Events' below for further details).
Reserving Methodology
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for
Losses and Loss Expenses - Reserving Methodology - Sources of Information' for a
description of the collection and analysis of data used in our quarterly loss
reserving process;
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for
Losses and Loss Expenses - Reserving Methodology - Actuarial Analysis' for a
description of the reserve estimation methods, Expected Loss Ratio Method ("ELR
Method"), Loss Development Method (also referred to as the "Chain Ladder Method"
or "Link Ratio Method") and Bornhuetter-Ferguson Method ("BF Method") which are
commonly employed by our actuaries together with a discussion of their strengths
and weaknesses.
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Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for
Losses and Loss Expenses - Reserving Methodology - Key Actuarial Assumptions
which notes that the most significant assumptions used in our quarterly loss
reserving process are expected loss ratios ("ELRs) and loss development patterns
and that the weight given to our experience differs for each of the three claim
tail classes (refer to 'Claim Tail Analysis' below for further details).
Claim Tail Analysis
Gross loss reserves for each of the reportable segments, segregated between case
reserves and IBNR, by reserve class are shown below:
2021 2020
At December 31, Case reserves IBNR Total Case reserves IBNR Total
Insurance segment:
Property and other $ 612,611 $ 530,369 $ 1,142,980 $ 704,107 $ 642,413 $ 1,346,520
Marine 258,758 365,472 624,230 221,243 317,869 539,112
Aviation 127,545 38,228 165,773 132,613 38,018 170,631
Credit and political risk(1) (105,469) 146,175
40,706 8,917 152,134 161,051
Professional lines 1,003,660 2,577,021 3,580,681 801,565 2,279,712 3,081,277
Liability 408,443 1,840,716 2,249,159 376,486 1,635,421 2,011,907
Total Insurance 2,305,548 5,497,981 7,803,529 2,244,931 5,065,567 7,310,498
Reinsurance segment:
Property and other 1,191,909 1,042,732 2,234,641 1,086,265 1,027,316 2,113,581
Credit and surety 134,616 170,024 304,640 149,778 157,196 306,974
Professional lines 559,204 670,305 1,229,509 516,011 673,082 1,189,093
Motor 737,097 486,978 1,224,075 809,389 540,623 1,350,012
Liability 611,597 1,245,103 1,856,700 525,526 1,131,082 1,656,608
Total Reinsurance 3,234,423 3,615,142 6,849,565 3,086,969 3,529,299 6,616,268
Total $ 5,539,971 $ 9,113,123 $ 14,653,094 $ 5,331,900 $ 8,594,866 $ 13,926,766
(1)During 2021, significant gross claims associated with certain political risk
contracts were paid in advance of recoveries being received from the
corresponding security which resulted in negative case reserves of $(128)
million (2020: $(15) million ) and related negative reinsurance recoverable on
unpaid losses and loss expenses of $(56) million (2020: $12 million ). Refer to
Reserving for Credit and Political Risk Business below for further details.
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for
Losses and Loss Expenses - Reserving Methodology - Sources of Information' for
the mapping of our lines of business to reserve classes and expected claim
tails.
In order to capture the key dynamics of loss reserve development and potential
volatility, reserve classes should be considered according to their potential
expected length of loss emergence and settlement, generally referred to as the
"tail". We consider our business to consist of three claim tail classes,
short-tail, medium-tail and long-tail. Favorable development on prior accident
year reserves indicates that current estimates are lower than previous
estimates, while adverse development on prior accident year reserves indicates
that current estimates are higher than previous estimates. Below is a discussion
of the specifics of our loss reserve process as it applies to each claim tail
class.
Short-tail Business
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for
Losses and Loss Expenses - Reserving Methodology - Claim Tail Analysis' for
details of the reserve classes included in short-tail business and the
associated key actuarial assumptions.
Although estimates of ultimate losses for short-tail business are inherently
more certain than for medium and long-tail business, significant judgment is
still required. For example, much of our excess insurance and excess of loss
reinsurance business has high attachment points, therefore, it is often
difficult to estimate whether claims will exceed those attachment points. In
addition, the inherent uncertainties relating to catastrophe events further add
to the complexity of estimating potential exposure. Further, we use managing
general agents ("MGAs") and other producers for certain business in the
insurance segment which can delay the reporting of loss information. We expect
the majority of development for an accident year or underwriting year to be
recognized in the subsequent one to three years.
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Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for
Losses and Loss Expenses - Reserve for Losses and Loss Expenses - Prior Year
Reserve Development ' for a detailed discussion of prior year reserve development
by line of business and see further details below.
Medium-tail Business
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for
Losses and Loss Expenses - Reserving Methodology - Claim Tail Analysis' for
details of the reserve classes included in medium-tail business and the
associated key actuarial assumptions.
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for Losses and Loss Expenses - Reserve for Losses and Loss Expenses - PriorYear Reserve Development ' for a detailed discussion of prior year reserve development by line of business. Refer to 'Reserving for Credit and Political Risk Business' below for a detailed discussion of specific loss reserve issues related to the credit and political risk line of business. Long-tail Business Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for Losses and Loss Expenses - Reserving Methodology - Claim Tail Analysis' for details of the reserve classes included in long-tail business and the associated key actuarial assumptions.
Factors that contribute additional uncertainty to estimates for long-tail
business include, but are not limited to:
•more significant weight given to industry benchmarks in forming our key
actuarial assumptions;
•potential volatility of actuarial estimates, given the number of years of development it takes to produce a meaningful incurred loss as a percentage of ultimate losses;
•inherent uncertainties about loss trends, claims inflation (e.g. medical,
judicial, social) and general economic conditions; and
•the possibility of future litigation, legislative or judicial change that may impact future loss experience relative to the prior industry loss experience relied on in reserve estimation. Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for Losses and Loss Expenses - Reserve for Losses and Loss Expenses - PriorYear Reserve Development ' for a detailed discussion of prior year reserve development by line of business and see further details below.
Reserving for Credit and Political Risk Business
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for Losses and Loss Expenses - 'Net incurred and Paid Claims Development Tables by Accident Year - Insurance segment - Insurance Credit and Political Risk' for details of the lines of business included in this reserve class and the associated key actuarial assumptions. An important and distinguishing feature of many of these contracts is the contractual right, subsequent to payment of a claim to an insured, to be subrogated to, or otherwise have an interest in, the insured's rights of recovery under an insured loan or facility agreement. These estimated recoveries are recorded as an offset to credit and political risk gross loss reserves. The lag between the date of a claim payment and the ultimate recovery from the corresponding security can result in negative case reserves at a point in time. During 2021, significant gross claims associated with certain political risk contracts were paid in advance of recoveries being received from the corresponding security which resulted in negative case reserves of$(128) million (2020:$(15) million ) and related negative reinsurance recoverable on unpaid losses and loss expenses of$(56) million (2020:$12 million ). Refer to 'Critical Accounting Estimates - Reinsurance Recoverable on Unpaid Losses and Loss Expenses' for further details. The nature of the underlying collateral is specific to each transaction therefore we estimate the value of this collateral on a contract-by-contract basis. This valuation process is inherently subjective and involves the application of management's judgment because active markets for the collateral often do not exist. Estimates of values are based on numerous inputs, including information provided by our insureds, as well as third-party sources including rating agencies, asset valuation specialists and other publicly available information. We also assess any post-event circumstances, including restructurings, liquidations and possession of asset proposals/agreements. 92 -------------------------------------------------------------------------------- In some instances, on becoming aware of a loss event related to credit and political risk business, we negotiate a final settlement of all of our policy liabilities for a fixed amount. In most circumstances, this occurs when the insured moves to realize the benefit of the collateral that underlies the insured loan or facility and presents us with a net settlement proposal that represents a full and final payment by us under the terms of the policy. In consideration for this payment, we secure a cancellation of the policy, or a release of all claims, and waive our right to pursue a recovery of these settlement payments against the collateral that may have been available to us under the insured loan or facility agreement. In certain circumstances, cancellation by way of net settlement or full payment can result in an adjustment to the premium associated with the policy. Additionally, when we consider prior year reserve development for the credit and political risk line of business, it is important to note that the multi-year nature of this business distorts loss ratios when a single accident year is considered in isolation. In recent years, the average term of these contracts has been four to five years. Premiums for these contracts generally earn evenly over the contract term, therefore, are reflected in multiple accident years. In contrast, losses incurred on these contracts, which can be characterized as low in frequency and high in severity, are reflected in a single accident year. Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for Losses and Loss Expenses - Reserve for Losses and Loss Expenses - PriorYear Reserve Development ' for further details.
Reserving for Significant Catastrophic Events
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for Losses and Loss Expenses - Reserving Methodology - Reserving for Significant Catastrophic Events' for further details. In addition to those noted in Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for Losses and Loss Expenses - Reserving Methodology - Reserving for Significant Catastrophic Events' there are additional risks that affect our ability to accurately estimate ultimate losses for catastrophic events. For example, the estimates of loss reserves related to hurricanes and earthquakes can be affected by factors including, but not limited to, the inability to access portions of impacted areas, infrastructure disruptions, the complexity of factors contributing to losses, legal and regulatory uncertainties, complexities involved in estimating business interruption losses and additional living expenses, the impact of demand surge, fraud and the limited nature of information available. For hurricanes, additional complex coverage factors may include determining whether damage was caused by flooding or wind, evaluating general liability and pollution exposures, and mold damage. The timing of a catastrophe, for example, near the end of a reporting period, can also affect the level of information available to us to estimate loss reserves for that reporting period. Results of operations for 2021 were impacted by natural catastrophe activity (refer to 'Underwriting Results - Insurance segment - Current Accident Year LossRatio ' and 'Underwriting Results - Reinsurance segment - Current Accident Year Loss Ratio' for further details).
Selection of Reported Reserves - Management's Best Estimate
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for
Losses and Loss Expenses - Reserving Methodology - Selection of Reported
Reserves - Management's Best Estimate' for further details.
Acquisition of
With regard to establishing the fair value of reserves for losses and loss expenses for Novae at the acquisition date, weight was given to the observable value of these reserves based on the RITC transaction of the 2015 and prior years of account of Syndicate 2007, which was completed prior to the allocation of purchase price. Management made no change to the initial estimate when establishing its best estimate of reserves for losses and loss expenses atDecember 31, 2017 . This is consistent with our general approach of recognizing all or part of the anticipated cost of third-party liability commutations if the transaction has either completed or is considered sufficiently likely to be completed in the near term.
Independent Actuarial Review
On an annual basis, we use an independent actuarial firm to provide an actuarial
opinion on the reasonableness of loss reserves for each of our operating
subsidiaries and statutory reporting entities as these actuarial opinions are
required to meet various insurance regulatory requirements. The actuarial firm
also discusses its conclusions from the annual review with management and
presents its findings to the Audit Committee of the Board of Directors.
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Sensitivity Analysis
While we believe that loss reserves atDecember 31, 2021 are adequate, new information, events or circumstances may result in ultimate losses that are materially greater or less than provided for in our loss reserves. As previously noted, there are many factors that may cause reserves to increase or decrease, particularly those related to catastrophe losses and long-tail lines of business. Expected loss ratios are a key assumption in estimates of ultimate losses for business at an early stage of development. A higher expected loss ratio results in a higher ultimate loss estimate, and vice versa. Assumed loss development patterns are another significant assumption in estimating loss reserves. Accelerating a loss reporting pattern (i.e. shortening the claim tail) results in lower ultimate losses, as the estimated proportion of losses already incurred would be higher. The uncertainty in the timing of the emergence of claims (i.e. the length of the development pattern) is generally greater for a company with a relatively limited operating history, therefore, we rely on industry benchmarks to a certain extent when establishing loss reserve estimates. The effect on estimates of gross loss reserves of reasonably likely changes in the two key assumptions used to estimate gross loss reserves atDecember 31, 2021 was as follows: INSURANCE Development pattern Expected loss ratio Higher Loss Reserves (Lower Loss Reserves) Property and other 5% lower Unchanged 5% higher 3 months shorter$ (90,585) $ (51,822) $ (42,924) Unchanged (10,383) - 10,356 3 months longer 61,130 73,957 87,981 Marine 5% lower Unchanged 5% higher 3 months shorter$ (36,363) $ (21,821) $ (7,211) Unchanged (14,412) - 15,369 3 months longer 14,809 29,926 45,336 Aviation 5% lower Unchanged 5% higher 3 months shorter $ (7,598)$ (6,659) $ (5,720) Unchanged (1,272) - 1,272 3 months longer 8,235 10,007 11,780 Credit and political risk 10% lower Unchanged 10% higher 6 months shorter$ (20,611) $ -$ 20,611 Unchanged (20,611) - 20,611 6 months longer (20,177) - 20,611 Professional lines 10% lower Unchanged 10% higher 6 months shorter$ (363,296) $ (161,658) $ 46,618 Unchanged (207,829) - 214,430 6 months longer 18,287 239,411 462,549 Liability 10% lower Unchanged 10% higher 6 months shorter$ (187,221) $ (41,862) $ 103,889 Unchanged (143,504) - 144,452 6 months longer (74,598) 64,916 212,119 94
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REINSURANCE
Development pattern Expected loss ratio
Higher Loss Reserves (Lower Loss Reserves)
Property and other 5% lower Unchanged 5% higher
3 months shorter $ (89,314) $ (60,686) $ (27,526)
Unchanged (33,527) - 34,132
3 months longer 23,202 62,581 96,973
Credit and surety 10% lower Unchanged 10% higher
6 months shorter $ (28,284) $ (11,702) $ 5,015
Unchanged (17,434) - 17,282
6 months longer 2,080 18,401 35,116
Professional lines 10% lower Unchanged 10% higher
6 months shorter $ (124,483) $ (54,814) $ 19,389
Unchanged (72,235) - 73,581
6 months longer (9,345) 69,012 144,525
Motor 10% lower Unchanged 10% higher
6 months shorter $ (64,540) $ (20,517) $ 24,900
Unchanged (46,005) - 46,867
6 months longer (11,492) 37,098 87,775
Liability 10% lower Unchanged 10% higher
6 months shorter $ (210,106) $ (72,057) $ 74,080
Unchanged (138,579) - 143,393
6 months longer (53,967) 84,092 231,478
The results show the cumulative increase (decrease) in loss reserves across all
accident years. For example, if assumed loss development pattern for insurance
property and other business was three months shorter with no accompanying change
in ELR assumption, loss reserves may decrease by approximately $52 million . Each
of the impacts set forth in the tables is estimated individually, without
consideration for any correlation among key assumptions or among reserve
classes. Therefore, it would be inappropriate to take each of the amounts and
add them together in an attempt to estimate total volatility. Additionally, it
is noted that in some instances, for example the projection of catastrophe
estimates or credit and political risks, development patterns are not
appropriate as more bespoke techniques are used. While we believe the variations
in the expected loss ratios and loss development patterns presented could be
reasonably expected, our historical loss data regarding variability is generally
limited and actual variations may be greater or less than these amounts. It is
also important to note that the variations are not meant to be a "best-case" or
"worst-case" series of scenarios and, therefore, it is possible that future
variations in loss reserves may be more or less than the amounts presented.
While we believe that these are reasonably likely scenarios, we do not believe
this sensitivity analysis should be considered an actual reserve range.
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Reinsurance Recoverable on Unpaid Losses and Loss Expenses
In the normal course of business, we purchase treaty and facultative reinsurance
protection to limit ultimate losses from catastrophic events and to reduce loss
aggregation risk. To the extent that reinsurers do not meet their obligations
under the reinsurance agreements, we remain liable. Consequently, we are exposed
to credit risk associated with reinsurance recoverable on unpaid losses and loss
expenses ("reinsurance recoverables") to the extent that any of our reinsurers
are unable or unwilling to pay claims.
Reinsurance recoverables for each of the reportable segments, segregated between
case reserves and IBNR, by reserve class are shown below:
2021 2020
Case Case
At December 31, reserves IBNR Total reserves IBNR Total
Insurance segment:
Property and other $ 201,279 $ 216,535 $ 417,814 $ 232,796 $ 275,429 $ 508,225
Marine 94,078 88,506 182,584 74,065 88,331 162,396
Aviation 55,508 2,559 58,067 60,955 3,297 64,252
Credit and political risk (1) (53,764) 30,383
(23,381) 7,239 44,428 51,667
Professional lines 436,903 1,057,585 1,494,488 317,600 909,583 1,227,183
Liability 188,705 1,132,764 1,321,469 185,453 997,191 1,182,644
Total Insurance 922,709 2,528,332 3,451,041 878,108 2,318,259 3,196,367
Reinsurance segment:
Property and other 315,236 268,965 584,201 235,508 261,703 497,211
Credit and surety 22,022 44,943 66,965 29,138 41,005 70,143
Professional lines 67,453 183,888 251,341 58,646 127,599 186,245
Motor 104,500 124,695 229,195 105,793 122,660 228,453
Liability 104,914 329,954 434,868 76,352 241,870 318,222
Total Reinsurance 614,125 952,445 1,566,570 505,437 794,837 1,300,274
Total $ 1,536,834 $ 3,480,777 $ 5,017,611 $ 1,383,545 $ 3,113,096 $ 4,496,641
(1)During 2021, significant gross claims associated with certain political risk
contracts were paid in advance of recoveries being received from the
corresponding security which resulted in negative case reserves of $(128)
million (2020: $(15) million ) and related negative reinsurance recoverable on
unpaid losses and loss expenses of $(56) million (2020: $12 million ). Refer to
Critical Accounting Estimates - Reserve for Losses and Loss Expenses - Reserving
for Credit and Political Risk Business for further details.
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for
Losses and Loss Expenses' for the mapping of our lines of business to reserve
classes and the expected claim tails.
At December 31, 2021 , reinsurance recoverables as a percentage of loss reserves
was 34% (2020: 32%). At December 31, 2021 , reinsurance recoverables that were
collectible from reinsurers rated A- or better by A.M Best were 85.7% (2020:
87.6%). Refer to Item 8, Note 11 to the Consolidated Financial Statements
'Commitments and Contingencies' for an analysis of the credit risk associated
with reinsurance recoverables at December 31, 2021 .
The recognition of reinsurance recoverables requires two key estimates as
follows:
•The first estimate is the amount of loss reserves to be ceded to our
reinsurers. This amount consists of amounts related to case reserves and amounts
related to IBNR. Refer to Item 8, Note 2 to the Consolidated Financial
Statements 'Basis of Presentation and Significant Accounting Policies' for
further details.
•The second estimate is the amount of the reinsurance recoverable balance that
we believe ultimately will not be collected from reinsurers. We are selective in
choosing reinsurers, buying reinsurance principally from reinsurers with a
strong financial condition and industry ratings. The amount we ultimately
collect may differ from our estimate due to the ability and willingness of
reinsurers to pay claims, which may be negatively impacted by factors such as
insolvency, contractual disputes over contract language or coverage and/or other
reasons. In addition, economic conditions and/or operational performance of a
particular reinsurer may deteriorate, and this could also affect the ability and
willingness of a reinsurer to meet their contractual obligations.
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Consequently, we review reinsurance recoverables at least quarterly to estimate
an allowance for expected credit losses. Refer to Item 8, Note 2 to the
Consolidated Financial Statements 'Basis of Presentation and Significant
Accounting Policies' for further details.
At
(2020:
recoverable balances in the last three years.
AtDecember 31, 2021 , the use of different assumptions could have a material effect on the allowance for expected credit losses. To the extent the creditworthiness of our reinsurers deteriorates due to an adverse event affecting the reinsurance industry, such as a large number of catastrophes, uncollectible amounts could be significantly greater than the allowance for expected credit losses. Given the various considerations used to estimate the allowance for expected credit losses, we cannot precisely quantify the effect a specific industry event may have on the allowance for expected credit losses.
Gross Premiums Written
Revenues primarily relate to premiums generated by our underwriting operations. The basis for recognizing gross premiums written varies by policy or contract type. Refer to Item 8, Note 2 to the Consolidated Financial Statements 'Basis of Presentation and Significant Accounting Policies' for further details.
Insurance Segment
For the majority of our insurance business, a fixed premium which is identified in the policy is recorded at the inception of the policy. This premium is adjusted if underlying insured values change. We actively monitor underlying insured values and any adjustments to premiums are recognized in the period in which they are determined. Gross premiums written on a fixed premium basis accounted for 87% and 86% of the segment's gross premiums written for the years endedDecember 31, 2021 and 2020, respectively. Some of this business is written through MGAs, third parties granted authority to bind risks on our behalf in accordance with our underwriting guidelines. For this business, premiums are recorded based on monthly statements received from MGAs or best estimates based on historical experience. The remainder our insurance business is written on a line slip or proportional basis, where we assume an agreed proportion of the premiums and losses of a particular risk or group of risks along with other unrelated insurers. As premiums for this business are not identified in the policy, premiums are recognized at the inception of the policy based on estimates provided by clients through brokers (refer to 'Reinsurance Segment' below for further details). We review these premium estimates on a quarterly basis and any adjustments to premium estimates are recognized in the period in which they are determined. Gross premiums written on a line slip or proportional basis accounted for 13% and 14% of the segment's gross premiums written for the years endedDecember 31, 2021 and 2020, respectively. For the credit and political risk line of business, we write certain policies on a multi-year basis. Premiums in respect of these policies are recorded at the inception of the policy based on management's best estimate of premiums to be received, including assumptions relating to prepayments/refinancing. AtDecember 31, 2021 , the average duration of unearned premiums for credit and political risk line of business was 5.2 years (2020: 5.3 years).
Reinsurance Segment
The reinsurance segment provides cover to cedants (i.e. insurance companies) on an excess of loss or on a proportional basis. In most cases, cedants seek protection from us for business that they have not yet written at the time they enter into agreements with us, therefore, cedants must estimate their underlying premiums when purchasing reinsurance cover from us. Excess of loss reinsurance contracts with cedants typically include minimum or deposit premium provisions. For excess of loss reinsurance contracts, minimum or deposit premiums are generally considered to be the best estimate of premiums at the inception of the contract. The minimum or deposit premium is normally adjusted at the end of the contract period to reflect changes in the underlying risks in force during the contract period. Any adjustments to minimum or deposit premiums are recognized in the period in which they are determined. Gross premiums written for excess of loss reinsurance contracts accounted for 49% and 52% of the reinsurance segment's gross premiums written for the years endedDecember 31, 2021 and 2020, respectively. Many of our excess of loss reinsurance contracts also include provisions for automatic reinstatement of coverage in the event of a loss. In a year of significant loss events, reinstatement premiums will be higher than in a year in which there are no large loss events. Refer to Item 8, Note 2 to the Consolidated Financial Statements 'Basis of Presentation and Significant Accounting Policies' and 'Critical Accounting Estimates - Reserve for Losses and Loss Expenses' above for further details. 97 -------------------------------------------------------------------------------- For proportional reinsurance contracts, premiums are recognized at the inception of the contract based on estimates received from ceding companies. We review these premium estimates on a quarterly basis and evaluate their reasonability in light of premiums reported by cedants. Factors contributing to changes in initial premium estimates may include: •changes in renewal rates or rates of new business accepted by cedants (changes could result from changes in the relevant insurance market that could affect more than one of our cedants or could be a consequence of changes in the marketing strategy or risk appetite of an individual cedant);
•changes in underlying exposure values; and/or
•changes in rates being charged by cedants.
As a result of this review process, any adjustments to premium estimates are recognized in the period in which they are determined. Changes in premium estimates could be material to gross premiums written in the period. Changes in premium estimates could be also material to net premiums earned in the period in which they are determined as any adjustment may be substantially or fully earned. Gross premiums written for proportional reinsurance contracts, including adjustments to premium estimates established in prior years, accounted for 51% and 48% of the reinsurance segment's gross premiums written for the years endedDecember 31, 2021 and 2020, respectively. Gross premiums written for proportional reinsurance contracts incepting during the year were as follows: Year ended December 31, 2021 2020 2019 Catastrophe$ 12,733 $ 13,863 $ 17,149 Property 117,397 135,312 184,552
Credit and surety 93,638 91,940 162,948
Professional lines 205,305
156,643 159,234
Motor 187,569 228,754 194,871
Liability 383,232 265,358 251,515
Engineering - 15,472 51,052
Agriculture 72,897 52,682 194,379
Accident and health 302,520 300,646 335,538
Marine and Aviation 23,912 19,065 22,697
Total estimated premiums $ 1,399,203
Gross premiums written (reinsurance segment)
As a % of total gross premiums written 50 % 46 % 49 % Historical experience has shown that cumulative adjustments to initial premium estimates for proportional reinsurance contracts have ranged from 0% to 5% over the last 5 years. Giving more weight to recent years where premium volume was comparable to current levels, we believe that a reasonably likely change to 2021 initial premium estimates for proportional reinsurance contracts would be 3% in either direction. A change in initial premium estimates of this magnitude would result in a change in gross premiums written of approximately$44 million . A change in initial premium estimates of this magnitude would not have a material impact on pre-tax net income, after considering current losses and loss expenses ratios. However, larger variations, positive or negative, are possible. Net Premiums Earned Premiums are earned evenly over the period during which we are exposed to the underlying risk. Changes in circumstances subsequent to the inception of contracts can impact the earning periods. For example, when exposure limits for a contract are reached, any associated unearned premiums are fully earned. This can have a significant impact on net premiums earned, particularly for multi-year contracts such as those in the credit and political risk line of business. Fixed premium insurance policies and excess of loss reinsurance contracts are generally written on a "losses occurring" or "claims made" basis over the term of the contract. Consequently, premiums are earned evenly over the contract term, which is generally 12 months. Line slip or proportional insurance policies and proportional reinsurance contracts are generally written on a "risks attaching" basis, covering claims that relate to the underlying policies written during the terms of these contracts. As the underlying business incepts throughout the contract term which is typically one year, and the underlying business typically has a one year coverage period, these premiums are generally earned evenly over a 24-month period. 98 --------------------------------------------------------------------------------
Fair Value Measurements of Financial Assets and Liabilities
Fair value is defined as the price to sell an asset or transfer a liability (i.e. the "exit price") in an orderly transaction between market participants. Refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value Measurements' for information on the valuation techniques including significant inputs and assumptions generally used in estimating the fair values of our financial instruments.
AtDecember 31, 2021 , the fair values of 94% (2020: 95%) of total fixed maturities and equity securities were based on prices provided by globally recognized independent pricing services where we have a current and detailed understanding of how their prices were derived. The remaining securities were priced by either non-binding broker quotes or internal valuation models. Generally, we obtain quotes directly from broker-dealers who are active in the corresponding markets when prices are unavailable from independent pricing services. This may also be the case if the pricing from pricing services is not reflective of current market levels, as detected by our pricing control tolerance procedures. Generally, broker-dealers value securities through their trading desks based on observable market inputs. Their pricing methodologies include mapping securities based on trade data, bids or offers, observed spreads and performance on newly issued securities. They may also establish pricing through observing secondary trading of similar securities.
At
independent pricing services.
Management Pricing Validation
While we obtain pricing from pricing services and/or broker-dealers, management is ultimately responsible for determining the fair value measurements of all securities. To ensure fair value measurement is applied consistently and in accordance withU.S. GAAP, annually, we update our understanding of the pricing methodologies used by the pricing services and broker-dealers. We also challenge any prices we believe may not be representative of fair value under current market conditions. Our review process includes, but is not limited to:
•initial and ongoing evaluation of the pricing methodologies and valuation
models used by outside parties to calculate fair value;
•quantitative analysis;
•a review of multiple quotes obtained in the pricing process and the range of
resulting fair values for each security, if available; and
•randomly selecting purchased or sold securities and comparing the executed prices to the fair value estimates provided by the independent pricing sources and broker-dealers. Other Investments
Hedge Funds, Direct Lending Funds, Private Equity Funds and Real Estate Funds
The fair values of hedge funds, direct lending funds, private equity funds and real estate funds are estimated using net asset values (NAVs) as advised by external fund managers or third-party administrators. AtDecember 31, 2021 , the estimated fair value of our investments in these funds was$838 million (2020:$708 million ). Refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value Measurements' for further details.
CLO-Equities , is estimated using a discounted cash flow model prepared by an external investment manager. AtDecember 31, 2021 , the estimated fair value of our indirect investment inCLO-Equities was$6 million (2020:$6 million ). Refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value Measurements' for further details. 99 --------------------------------------------------------------------------------
Other Privately Held Investments
Other privately held investments include convertible preferred shares, common shares, convertible notes, investments in limited partnership and a variable yield security. These investments are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these investments are generally based on transaction prices from capital raises, capital statements obtained from each investee or by applying a multiplier to investee company earnings. In 2021, the fair value of the variable yield security was determined using an externally developed discounted cash flow model. AtDecember 31, 2021 , the estimated fair value of these investments was$105 million (2020:$70 million ). Refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value Measurements' for further details.
Overseas Deposits
Refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value
Measurements' for further details.
Impairment Losses and the Allowance for Expected Credit Losses - Fixed
Maturities, Available for Sale
Fixed maturities classified as available for sale are reported at fair value at
the balance sheet date and are presented net of an allowance for expected credit
losses. Our available for sale ("AFS") investment portfolio is the largest
component of consolidated total assets and it is a multiple of shareholders'
equity. As a result, impairment losses could be material to our results of
operations and financial condition particularly during periods of dislocation in
financial markets.
Fixed maturities, available for sale are impaired if the fair value of the
investment is below amortized cost. On a quarterly basis, the Company evaluates
all fixed maturities, available for sale for impairment losses.
Details regarding our processes for the identification of impairments of fixed maturities, available for sale following the adoption of ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments," onJanuary 1, 2020 and the recognition of the related impairment losses are disclosed in Item 8, Note 2 to the Consolidated Financial Statements 'Basis of Presentation and Significant Accounting Policies'.
In addition, the methodologies and significant inputs used to estimate the
allowance for expected credit losses are disclosed in Item 8, Note 5 (f) to the
Consolidated Financial Statements 'Investments'.
During 2021, we recorded an allowance for expected credit losses of$0.3 million (2020:$0.3 million ) and an impairment loss of $nil (2020:$1.5 million ) (refer to 'Net Investment Income and Net Investment Gains (Losses)' for further details).The allowance for expected credit loss is charged to net income (loss) and is included in net investment gains (losses) in the consolidated statements of operations.
Intent or Requirement to Sell
From time to time, we may sell fixed maturities, available for sale subsequent to the balance sheet date that we did not intend to sell at the balance sheet date. Conversely, we may not sell fixed maturities, available for sale that we intended to sell at the balance sheet date. These changes in intent may arise due to events occurring subsequent to the balance sheet date. The types of events that may result in a change in intent include, but are not limited to, significant changes in the economic facts and circumstances related to the specific issuer, changes in liquidity needs, or changes in tax laws or the regulatory environment.
Our credit impairment review process excludes fixed maturities, available for sale guaranteed, either explicitly or implicitly, by theU.S. government and its agencies (U.S. Government ,U.S. Agency andU.S. Agency RMBS) because we anticipate these securities will not be settled below amortized cost. These securities are evaluated for intent or requirement to sell at a loss. 100 --------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
AtDecember 31, 2021 , there were no recently issued accounting pronouncements that we have not yet adopted that we expect could have a material impact on our results of operations, financial condition or liquidity. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Market risk is the risk that our financial instruments may be negatively impacted by movements in financial market prices or rates such as equity prices, interest rates, credit spreads and foreign currency exchange rates (refer to Item 1 'Risk and Capital Management' for further details).
We own a substantial amount of assets whose fair values are subject to market
risks.
AtDecember 31, 2021 97% (2020: 100%) our fixed maturities are classified as available for sale, therefore changes in fair values caused by changes in interest rates and foreign currency exchange rates have an immediate impact on other comprehensive income, total shareholders' equity and book value per common share but do not have an immediate impact on net income. Changes in these market risks impact net income when, and if, securities are sold, or an impairment charge or an allowance for expected credit losses is recorded.
Equity securities are reported at fair value, with changes in fair values
recognized in net income.
AtDecember 31, 2021 and 2020, we also invested in alternative investments including hedge funds, direct lending funds, private equity funds, real estate funds,CLO-Equities , other privately held investments and overseas deposits. These investments are also exposed to market risks, with the changes in fair values immediately reported in net income.
Sensitivity Analysis
The following is a sensitivity analysis of our primary market risk exposures at
Our policies to address these risks in 2021 were not materially different from 2020. We do not currently anticipate significant changes in our primary market risk exposures or in how those exposures are managed in future reporting periods based on what is known or expected to be in effect in future reporting periods.
Interest Rate and Credit Spread Risk
Interest rate risk includes fluctuations in interest rates and credit spreads
that have a direct impact on the fair values of fixed maturities. As interest
rates rise and credit spreads widen, the fair value of fixed maturities falls.
We monitor sensitivity to interest rate and credit spread changes by revaluing
fixed maturities using a variety of different interest rates (inclusive of
credit spreads). We use duration and convexity at the security level to estimate
the change in fair value that would result from a change in each security's
yield. Duration measures the price sensitivity of an asset to changes in yield
rates. Convexity measures how the duration of the security changes with interest
rates. The duration and convexity analysis take into account changes in
prepayment expectations for MBS and ABS. The analysis is performed at the
security level and aggregated to the asset category levels.
101
--------------------------------------------------------------------------------
The following table presents the estimated pre-tax impact on the fair value of
fixed maturities classified as available for sale due to an instantaneous
increase in the U.S. yield curve of 100 basis points and an additional 100 basis
point credit spread widening for corporate debt, non-agency residential and
commercial MBS, ABS and municipal bond securities.
Potential adverse change in fair value
Increase in Widening of
interest rate credit spreads
by 100 by 100
Fair value basis points basis points Total
At
U.S. government and agency$ 2,682,448 $
(85,129) $ -$ (85,129) Non-U.S. government 795,178 (22,607) - (22,607) Agency RMBS 1,074,589 (47,406) - (47,406)
Securities exposed to credit spreads:
Corporate debt 4,495,312 (163,656) (172,830) (336,486)
CMBS 1,248,191 (38,536) (49,568) (88,104)
Non-agency RMBS 186,164 (3,927) (5,036) (8,963)
ABS 1,622,480 (14,552) (62,633) (77,185)
Municipals 208,838 (8,941) (9,593) (18,534)
$ 12,313,200 $ (384,754) $ (299,660) $ (684,414)
At
U.S. government and agency$ 1,918,699 $
(67,495) $ -$ (67,495) Non-U.S. government 671,273 (23,491) - (23,491) Agency RMBS 1,286,209 (41,345) - (41,345)
Securities exposed to credit spreads:
Corporate debt 4,655,951 (169,961) (174,114) (344,075)
CMBS 1,353,587 (64,430) (68,978) (133,408)
Non-agency RMBS 140,104 (2,137) (4,022) (6,159)
ABS 1,720,078 (15,460) (53,007) (68,467)
Municipals 295,898 (15,314) (15,375) (30,689)
$ 12,041,799 $ (399,633) $ (315,496) $ (715,129)
U.S. government agencies have a limited range of spread widening, therefore, 100
basis points of spread widening for these securities is highly improbable in
normal market conditions. Our non-U.S. government debt obligations are
highly-rated and we believe the potential for future widening of credit spreads
would also be limited for these securities. Certain of our holdings in
non-agency RMBS and ABS have floating interest rates, which mitigate interest
rate risk exposure.
The above sensitivity analysis reflects our view of changes that are reasonably
possible over a one-year period. Note this should not be construed as our
prediction of future market events, but rather an illustration of the impact of
such events.
In addition, our investment in bond mutual funds is exposed to interest rate
risk, however, this exposure is largely mitigated by the short duration of the
underlying securities.
Our investment in
increase in the risk free yield curve of 100 basis points would have an
insignificant impact on its fair value.
Equity Price Risk
Our portfolio of equity securities, excluding the bond mutual funds, has exposure to equity price risk. This risk is defined as the potential loss in fair value resulting from adverse changes in stock prices. The global equity portfolio is managed to a benchmark composite index, which consists of a blend of the S&P 500 andMSCI World indices. Changes in the underlying indices have a corresponding impact on the overall portfolio. AtDecember 31, 2021 , the fair value of equity securities was 102 --------------------------------------------------------------------------------
decline in the overall market prices of our equity exposures would be
million
Our investment in hedge funds has significant exposure to equity strategies with net long positions. AtDecember 31, 2021 , the fair value of hedge funds was$59 million (2020:$147 million ). AtDecember 31, 2021 , the impact of an instantaneous 15% decline in the fair value of our investment in hedge funds would be$9 million (2020:$22 million ), on a pre-tax basis.
Foreign Currency Risk
The following table presents a sensitivity analysis of total net foreign
currency exposures.
AUD NZD CAD EUR GBP JPY Other Total
At December 31, 2021
Net managed assets
(liabilities), excluding
derivatives $ 34,315 $ 8,565 $
270,300
Foreign currency derivatives, (6,549) (1,713) (260,890)
476,603 332,251 83,152 524 623,378
net
Net managed foreign currency 27,766 6,852 9,410 (51,827) (893) 10,922 (13,697) (11,467)
exposure
Other net foreign currency 1 - 141 (699) (1,374) - 33,867 31,936
exposure
Total net foreign currency $ 27,767 $ 6,852 $ 9,551 $ (52,526) $ (2,267) $ 10,922 $ 20,170 $ 20,469
exposure
Net foreign currency exposure as
a percentage of total
shareholders' equity 0.5 % 0.1 % 0.2 % (1.0 %) - % 0.2 % 0.4 % 0.4 %
Pre-tax impact of net foreign
currency exposure on
shareholders' equity given a
hypothetical 10% rate
movement(1) $ 2,777 $ 685 $ 955 $ (5,253) $ (227) $ 1,092 $ 2,017 $ 2,047
At December 31, 2020
Net managed assets
(liabilities), excluding
derivatives $ 7,100 $ 2,067 $
231,382
Foreign currency derivatives, (769) 5,752 (205,005) 466,006 329,055 122,459 9,097 726,595
net
Net managed foreign currency 6,331 7,819 26,377 (61,040) (82,994) (3,064) 79,593 (26,978)
exposure
Other net foreign currency 1 - 118 (2,369) (1,245) - 38,631 35,136
exposure
Total net foreign currency $ 6,332 $ 7,819 $
26,495
$ 118,224 $ 8,158 exposure Net foreign currency exposure as a percentage of total shareholders' equity 0.1 % 0.1 % 0.5 % (1.2 %) (1.6 %) (0.1 %) 2.2 % 0.2 % Pre-tax impact of net foreign currency exposure on shareholders' equity given a hypothetical 10% rate movement(1)$ 633 $ 782 $ 2,650 $ (6,341) $ (8,424) $ (306) $ 11,822 $ 816
(1)Assumes 10% appreciation in underlying currencies relative to the
dollar.
Net Managed Foreign Currency Exposure
Our net managed foreign currency exposure is subject to internal risk tolerance standards. For significant foreign currency exposures, defined as those where net asset/liability position exceeds the greater of 1% of total shareholders' equity or$54 million the value of assets denominated in those currencies should fall within a range of 90 - 110% of liabilities denominated in the same currency. In addition, aggregate foreign currency exposure is subject to the same tolerance range. We may use derivative instruments to maintain net managed foreign currency exposures within our risk tolerance levels.
Other Net Foreign Currency Exposure
Other net foreign currency exposure includes those assets managed by specific investment managers who have the discretion to hold foreign currency exposures as part of their total return strategy. AtDecember 31, 2021 , other net foreign currency exposure primarily consisted of our emerging market debt securities portfolio. 103
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FIDELITY NATIONAL FINANCIAL, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
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