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, 2022 and 2021, and our financial condition atDecember 31, 2022 and 2021. 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 2022 Financial Highlights 57 Overview 58 Consolidated Results of Operations 61 Results by Segment: i) Insurance Segment 63 ii) Reinsurance Segment 66 Net Investment Income and Net Investment Gains (Losses) 70 Other Expenses (Revenues), Net 72 Financial Measures 74 Non-GAAP Financial Measures Reconciliation 76 Cash and Investments 79 Liquidity and Capital Resources 86 Critical Accounting Estimates 92 i) Reserve for Losses and Loss Expenses 93 ii) Reinsurance Recoverable on Unpaid Losses and Loss Expenses 100 iii) Gross Premiums Written 101 iv) Net Premiums Earned 103 v) Fair Value Measurements of Financial Assets and Liabilities 103
vi) Impairment Losses and the Allowance for Expected Credit Losses - Fixed Maturities, 105
Available for Sale
Recent Accounting Pronouncements 106
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2022 FINANCIAL HIGHLIGHTS
2022 Consolidated Results of Operations
•Net income available 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$403 million ($350 million , after-tax), (Insurance:$207 million ; Reinsurance:$196 million ), or 7.8 points on the current accident year loss ratio, including natural catastrophe and weather-related losses of$338 million , or 6.5 points, primarily attributable to Hurricane Ian, Winter Storm Elliot, June European Convective Storms, and other weather-related events. The remaining losses included$43 million , or 0.8 points, attributable to theRussia -Ukraine war, and$23 million , or 0.4 points, attributable to the COVID-19 pandemic.
•Net favorable prior year reserve development of
•Net loss of$11 million related to loss portfolio transfer reinsurance agreements including adverse prior year reserve development of$5 million and acquisition costs of$6 million . Refer to 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview - Recent Developments - Loss Portfolio Transfer Reinsurance Agreements'.
•Underwriting income(2) of
•Net investment income of
•Net investment losses of
•Foreign exchange gains of
•Reorganization expenses of
2022 Consolidated Financial Condition
•Total cash and investments of
investments, and cash and cash equivalents comprise 85% 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
including
agreements. Refer to 'Management's Discussion and Analysis of Financial
Condition and Results of Operations - Overview - Recent Developments - Loss
Portfolio Transfer Reinsurance Agreements'.
•Debt of
•Common shares repurchased were 897,000 common shares for a total of
million
•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.
57 --------------------------------------------------------------------------------
OVERVIEW Business OverviewAXIS Capital , through its operating subsidiaries, is a global specialty underwriter and provider of insurance and reinsurance solutions 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 strong 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 2022 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, including
the exit from catastrophe and property reinsurance lines in
carry attractive returns while deploying capital with risk limits,
diversification and risk management;
•investing in attractive growth markets, including the launch of our dedicated Wholesale division inSeptember 2022 , and advancing capabilities to address more transactional specialist business (small to mid-sized customers) with our key distribution partners;
•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, 2021 , compared to year endedDecember 31, 2020 , refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Form 10-K, which was filed with theSEC onFebruary 25, 2022 , and such discussions are incorporated herein by reference. 58
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Outlook
We are committed to leadership in specialty insurance and reinsurance, where we have a depth of talent and expertise. We believe our market positioning, underwriting expertise, best-in-class claims management capabilities and strong relationships with our distributors and clients, supported by a conservative and well performing investment portfolio, will provide opportunities for increased profitability, with differences among our lines of business driven by our tactical response to market conditions. The industry has observed rising loss cost trends and, across most lines, we expect rate improvement to continue as carriers assess the impact of heightened catastrophe loss activity, financial and social inflation, and geopolitical uncertainty, among other factors. In this market environment, we continue to focus on growth in attractive lines of business and market segments that are adequately priced. Rates, terms and conditions across the majority of insurance lines continued to be favorable as pricing generally continues to rise, albeit at varying levels based on market dynamics relative to the individual lines. Market dislocations continue to drive more risks into the Wholesale channel, and we anticipate this to sustain throughout 2023 with the strongest market opportunities occurring in Specialty and E&S lines. For AXIS, we're continuing to pursue a highly targeted and disciplined underwriting strategy across every line we write and across all our channels of distribution. The reinsurance market is experiencing material improvements in rates, and terms and conditions. In light of 2022 marking the sixth consecutive year of challenging market loss events, reinsurance carriers are aiming to reduce net volatility and increase profitability. We expect to see opportunity to drive profitable growth among the specialty and casualty reinsurance lines that we offer. We are encouraged by the pricing improvements we are seeing across most markets, which we expect will carry through 2023, and that rate will continue to keep pace with loss cost trends. Where prices deliver adequate profitability, we will look to grow within our risk and volatility guidelines. With a strengthened book of business, and a growing footprint in specialty markets that are seeing the most favorable conditions, we believe AXIS is well positioned to drive profitable growth within the current environment.
Response to Russia-Ukraine War
Following the Russian invasion of
against the countries involved, organizations and named individuals, we
established a task-force to coordinate our response to this situation.
The
risk to which we are exposed from an underwriting and reserving perspective.
Our team is tracking the situation closely, and is performing stress and
scenario testing on existing underwriting exposures. A range of economic impacts
and external pressures across individual product lines are being considered.
Underwriting
We are monitoring international sanctions which impact our global operations and were effectiveMarch 27, 2022 . The impact on gross premiums written for the year endedDecember 31, 2022 of the cancellation of policies with exposures to theRussia -Ukraine war was immaterial. We continue to evaluate opportunities to write business in the region, not includingRussia orUkraine risks. We are also closely monitoring cash due from our customers and reinsurers, giving due consideration to theRussia -Ukraine war and associated international sanctions. AtDecember 31, 2022 , we considered the potential financial impact of theRussia -Ukraine war when determining allowances for expected credit losses for insurance and reinsurance premium balances receivable and reinsurance recoverable balances on unpaid losses and loss expenses. Based on facts and circumstances at that time, we did not adjust allowances for expected credit losses atDecember 31, 2022 . We will continue to monitor the appropriateness of allowances for expected credit losses as new information comes to light. Adjustments to allowances for expected credit losses in subsequent periods could be material. Reserving
At
The estimate of net reserves for losses and loss expenses related to theRussia -Ukraine war is subject to significant uncertainty. This uncertainty is driven by the difficulty in performing on-site evaluations, and by the inherent difficulty in making assumptions due to the lack of comparable events, the ongoing nature of the event, and its far-reaching impacts. 59 -------------------------------------------------------------------------------- While we believe the overall estimate of net reserves for losses and loss expenses is adequate for losses and loss adjustment expenses that have been incurred atDecember 31, 2022 , based on current facts and circumstances, we will continue to monitor the appropriateness of our assumptions as new information comes to light and will adjust the estimate of net reserves for losses and loss adjustment expenses, as appropriate. Actual losses for this event may ultimately differ materially from current estimates.
Refer to 'Management's Discussion and Analysis of Financial Condition and
Results of Operations - Results by Segment' for further information.
Investments
At
investments portfolio.
Refer to Item 1A, 'Risk Factors' in our most recent Annual Report on Form 10-K
for further details.
Recent Developments
AXIS Re's exit from Catastrophe and Property lines of business
OnJune 7, 2022 , we announced the decision to exit catastrophe and property reinsurance lines of business. This strategic initiative is part of an overall approach to reduce our exposure to volatile catastrophe risk. Reorganization expenses, mainly related to this strategic initiative for the year endedDecember 31, 2022 of$31 million , were attributable to compensation-related costs associated with the termination of certain employees and software asset impairments.
Loss Portfolio Transfer Reinsurance Agreements
OnDecember 9, 2022 (the "transaction date" or "closing date"), we entered into loss portfolio transfer reinsurance agreements with a third-party to reinsure several of our professional lines and liability insurance portfolios, predominantly relating to 2019 and prior accident years.
The transaction covers net reserves for losses and loss expenses of
approximately
The transaction was deemed to have met the established criteria for retroactive reinsurance accounting. At the closing date, we recognized a loss of$17 million as adverse prior year reserve development associated with the transaction. Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for Losses and Loss Expenses' for further details.
Under the terms of the loss portfolio transfer reinsurance agreements, the
reinsurer also assumed responsibility for the management of certain claims. At
the closing date, we recognized income of
expenses associated with this change in claims management responsibility.
We also recognized acquisition costs of
transaction.
In subsequent periods, we will reassess the reserves for losses and loss
expenses subject to the loss portfolio transfer reinsurance agreements.
Any adverse prior year reserve development associated with the subject business will result in the cumulative amounts ceded to the reinsurer exceeding the consideration paid which will result in a gain determined in accordance with retroactive reinsurance accounting. Consistent with our accounting policy, (refer to Item 8, Note 2 to the Consolidated Financial Statements 'Basis of Presentation and Significant Accounting Policies' for further details), gains will be deferred and amortized into net income over the claims settlement period. Although retroactive reinsurance accounting may result in volatility to our results in the short-term, the loss portfolio transfer reinsurance agreements will protect us from prior year reserve development on the subject business over the contract term, provided this remains within the limit of the agreements.
Transition in our senior leadership
OnDecember 16, 2022 , our Board of Directors appointedVincent Tizzio to succeedAlbert Benchimol as Chief Executive Officer, President and as a Class III director, effective at the close of business on the date of the Company's annual general meeting currently scheduled forMay 4, 2023 . 60 --------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS
Year ended December 31, 2022 % Change 2021 % Change 2020
Underwriting revenues:
Gross premiums written $ 8,214,595 7% $ 7,685,984 13% $
6,826,938
Net premiums written 5,263,056 7% 4,926,624 14%
4,336,409
Net premiums earned 5,160,326 10% 4,709,850 8%
4,371,309
Other insurance related income (loss) 13,073 (44%) 23,295 nm
(8,089)
Underwriting expenses:
Net losses and loss expenses (3,242,410)
8% (3,008,783) (8%) (3,281,252)
Acquisition costs (1,022,017) 11% (921,834) (1%) (929,517)
Underwriting-related general and administrative
expenses(1) (550,289) 3% (536,834) 12%
(477,968)
Underwriting income (loss)(2) 358,683
265,694 (325,517)
Net investment income 418,829 (8%) 454,301 30% 349,601
Net investment gains (losses) (456,789) nm 134,279 4%
129,133
Corporate expenses(1) (130,054) 3% (126,470) 24%
(101,822)
Foreign exchange (losses) gains 157,945 nm (315) nm
(81,069)
Interest expense and financing costs (63,146) 1% (62,302) (17%)
(75,049)
Reorganization expenses (31,426) nm - nm
(7,881)
Amortization of value of business acquired - nm (3,854) (25%)
(5,139)
Amortization of intangible assets (10,917) (12%) (12,424) 9%
(11,390)
Income (loss) before income taxes and interest
in income (loss) of equity method investments 243,125 648,909
(129,133)
Income tax (expense) benefit (22,037) (65%) (62,384) nm
12,321
Interest in income (loss) of equity method
investments 1,995 (94%) 32,084 nm (3,612)
Net income (loss) 223,083 618,609 (120,424)
Preferred share dividends (30,250) -% (30,250) -%
(30,250)
Net income (loss) available (attributable) to
common shareholders$ 192,833 $ 588,359 $ (150,674)
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$130 million ,$126 million , and$102 million for 2022, 2021, and 2020, 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 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. 61 --------------------------------------------------------------------------------
Underwriting Revenues
Underwriting revenues by segment were as follows:
Year ended December 31, 2022 % Change 2021 % Change 2020
Gross premiums written:
Insurance $ 5,585,581 15% $ 4,863,232 21% $ 4,018,399
Reinsurance 2,629,014 (7%) 2,822,752 1% 2,808,539
Total gross premiums written $ 8,214,595 7% $ 7,685,984 13% $ 6,826,938
Percent of gross premiums
written ceded:
Insurance 40 % - pt 40 % (1 pt) 41 %
Reinsurance 28 % - pt 28 % (2 pts) 30 %
Total percent of gross 36 % - pt 36 % - pt 36 %
premiums written ceded
Net premiums written:
Insurance $ 3,377,906 17% $ 2,894,885 23% $ 2,357,501
Reinsurance 1,885,150 (7%) 2,031,739 3% 1,978,908
Total net premiums written $ 5,263,056 7% $ 4,926,624 14% $ 4,336,409
Net premiums earned:
Insurance $ 3,134,155 18% $ 2,651,339 15% $ 2,299,038
Reinsurance 2,026,171 (2%) 2,058,511 (1%) 2,072,271
Total net premiums earned $ 5,160,326 10% $ 4,709,850 8% $ 4,371,309
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
Year ended December 31, 2022 Change 2021 Change 2020
Current accident year loss ratio,
excluding catastrophe and
weather-related losses 55.5 % 0.4 55.1 % (2.6) 57.7 %
Catastrophe and weather-related losses
ratio 7.8 % (1.7) 9.5 % (8.2) 17.7 %
Current accident year loss ratio 63.3 % (1.3) 64.6 % (10.8) 75.4 %
Prior year reserve development ratio (0.5 %) 0.2 (0.7 %) (0.4) (0.3 %)
Net losses and loss expenses ratio 62.8 % (1.1) 63.9 % (11.2) 75.1 %
Acquisition cost ratio 19.8 % 0.2 19.6 % (1.7) 21.3 %
General and administrative expense
ratio(1) 13.2 % (0.8) 14.0 % 0.8 13.2 %
Combined ratio 95.8 % (1.7) 97.5 % (12.1) 109.6 %
(1)The general and administration expense ratio included corporate expenses not
allocated to underwriting segments of 2.5%, 2.7% and 2.3% for 2022, 2021 and
2020, 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, 2022 % Change 2021 % Change 2020
Revenues:
Gross premiums written$ 5,585,581 15%$ 4,863,232 21%$ 4,018,399 Net premiums written 3,377,906 17% 2,894,885 23% 2,357,501 Net premiums earned 3,134,155 18% 2,651,339 15% 2,299,038 Other insurance related income 559 (66%) 1,662 (37%) 2,647 Expenses: Current accident year net losses and loss (1,802,204) (1,533,358) (1,705,951) expenses Prior year reserve development 16,350 18,360 8,937 Acquisition costs (577,838) (484,344) (461,533) Underwriting-related general and administrative expenses (443,704) (429,282) (378,839) Underwriting income (loss)$ 327,318 $ 224,377 $ (235,701) % Point % Point Ratios: Change Change
Current accident year loss ratio, excluding
catastrophe and weather-related losses 51.0 % (0.4) 51.4 % (3.7) 55.1 %
Catastrophe and weather-related losses ratio 6.5 % 0.1 6.4 % (12.7) 19.1 %
Current accident year loss ratio 57.5 % (0.3) 57.8 % (16.4) 74.2 %
Prior year reserve development ratio (0.5 %) 0.2 (0.7 %) (0.3) (0.4 %)
Net losses and loss expenses ratio 57.0 % (0.1) 57.1 % (16.7) 73.8 %
Acquisition cost ratio 18.4 % 0.1 18.3 % (1.8) 20.1 %
Underwriting-related general and
administrative expense ratio 14.2 %
(2.0) 16.2 % (0.3) 16.5 %
Combined ratio 89.6 % (2.0) 91.6 % (18.8) 110.4 %
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Gross Premiums Written
Gross premiums written by line of business were as follows:
% Change
2021 to 2020 to
Year ended December 31, 2022 2021 2020 2022 2021
Professional lines $ 1,322,966 24 % $ 1,290,767 26 % $ 944,856 23 % 2 % 37 %
Property 1,357,489 24 % 1,192,981 25 % 1,053,541 26 % 14 % 13 %
Liability 1,138,645 20 % 930,999 19 % 764,407 19 % 22 % 22 %
Cyber 644,746 12 % 525,349 11 % 433,519 11 % 23 % 21 %
Marine and aviation 652,687 12 % 580,635 12 % 507,076 13 % 12 % 15 %
Accident and health 258,399 5 % 178,899 4 % 158,586 4 % 44 % 13 %
Credit and political risk 210,649 3 %
163,602 3 % 156,414 4 % 29 % 5 %
Total $ 5,585,581 100 % $ 4,863,232 100 % $ 4,018,399 100 % 15 % 21 %
Gross premiums written in 2022 increased by $722 million , or 15% ($804 million ,
or 17%, on a constant currency basis(1)), compared to 2021 attributable to all
lines of business.
The increases in liability, property, marine and aviation lines, and
professional lines were due to favorable rate changes and new business. The
increase in cyber lines was due to favorable rate changes. The increases in
accident and health, and credit and political risk were due to new business.
Ceded Premiums Written
Ceded premiums written in 2022 were$2,208 million , or 40% of gross premiums written, compared to$1,968 million , or 40% in 2021. The increase in ceded premiums written of$239 million , or 12% was primarily driven by increases in liability, property, cyber, and credit and political risk lines, partially offset by decreases in professional lines and accident and health lines. The increases in liability, property, cyber, and credit and political risk lines reflected the increase in gross premiums written in 2022, compared to 2021. The increase in property lines was also attributable to a new quota share treaty and to the restructuring of a significant existing quota share treaty. The decrease in professional lines was due to the restructuring of a significant existing quota share treaty. The decrease in accident and health lines was due to new business written in 2022 which was fully retained.
(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.
64 --------------------------------------------------------------------------------
Net Premiums Earned
Net premiums earned by line of business were as follows:
% Change
2020 to
Year ended December 31, 2022 2021 2020 2021 to 2022 2021
Professional lines $ 817,924 26 % $ 646,390 23 % $ 509,448 22 % 27 % 27 %
Property 755,986 24 % 711,297 27 % 653,186 28 % 6 % 9 %
Liability 459,775 15 % 354,787 13 % 315,434 14 % 30 % 12 %
Cyber 309,004 10 % 252,077 10 % 206,720 9 % 23 % 22 %
Marine and aviation 479,499 15 % 439,050 17 % 364,656 16 % 9 % 20 %
Accident and health 209,548 7 % 151,133 6 % 143,725 6 % 39 % 5 %
Credit and political risk 102,419 3 %
96,605 4 % 105,869 5 % 6 % (9 %)
Total $ 3,134,155 100 % $ 2,651,339 100 % $ 2,299,038 100 % 18 % 15 %
Net premiums earned in 2022 increased by $483 million , or 18% ($532 million , or
20%, on a constant currency basis), compared to 2021. The increase was primarily
driven by increases in gross premiums earned in liability, professional lines,
cyber, property, accident and health, and marine and aviation lines, partially
offset by increases in ceded premiums earned in liability, property, cyber, and
professional lines.
Loss Ratio
The components of the loss ratio were as follows:
% Point
% Point
Year ended December 31, 2022 Change
2021 Change 2020
Current accident year loss ratio 57.5 % (0.3) 57.8
% (16.4) 74.2 %
Prior year reserve development ratio (0.5 %) 0.2 (0.7
%) (0.3) (0.4 %) Loss ratio 57.0 % (0.1) 57.1 % (16.7) 73.8 %
Current Accident Year Loss Ratio
The current accident year loss ratio decreased to 57.5% in 2022 from 57.8% in
2021.
During 2022, catastrophe and weather-related losses, net of reinstatement premiums, were$207 million , or 6.5 points, including natural catastrophe and weather-related losses of$177 million , or 5.6 points, primarily attributable to Hurricane Ian, Winter Storm Elliot,Eastern Australia floods,South Africa floods, and other weather-related events. The remaining losses of$29 million , or 0.9 points, were attributable to theRussia -Ukraine war.
Comparatively, in 2021, catastrophe and weather-related losses, net of
reinstatement premiums, were
to Hurricane Ida,
After adjusting for the impact of the catastrophe and weather-related losses,
the current accident year loss ratio decreased to 51.0% in 2022 from 51.4% in
2021. The decrease in the current accident year loss ratio, after adjusting for
the impact of the catastrophe and weather-related losses was principally due to
the impact of favorable pricing over loss trends, partially offset by changes in
business mix.
65
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Prior
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for Losses and Loss Expenses' for details on the lines of business, the expected claim tails, and prior year development.
Acquisition Cost Ratio
The acquisition cost ratio increased to 18.4% in 2022 from 18.3% in 2021, respectively, principally related to an increase in profit commission costs and fees associated with the loss portfolio transfer reinsurance agreements (refer to Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview - Recent Developments - Loss Portfolio Transfer Reinsurance Agreements for further details), largely offset by changes in business mix attributable to the decrease in program business in property lines written in recent periods, and an increase in ceding commissions mainly in liability lines.
Underwriting-Related General and Administrative Expense Ratio
The underwriting-related general and administrative expense ratio decreased to 14.2% in 2022 from 16.2% in 2021, mainly driven by an increase in net premiums earned, partially offset by an increase in personnel costs and travel costs. Reinsurance Segment
Results for the reinsurance segment were as follows:
Year ended December 31, 2022 % Change 2021 % Change 2020
Revenues:
Gross premiums written$ 2,629,014 (7%)$ 2,822,752 1%$ 2,808,539 Net premiums written 1,885,150 (7%) 2,031,739 3% 1,978,908 Net premiums earned 2,026,171 (2%) 2,058,511 (1%) 2,072,271 Other insurance related income (loss) 12,514 (42%) 21,633 nm (10,736) Expenses: Current accident year net losses and loss expenses (1,465,739) (1,507,835) (1,591,210) Prior year reserve development 9,183 14,049 6,972 Acquisition costs (444,179) (437,490) (467,984) Underwriting-related general and administrative expenses (106,585) (107,552) (99,129) Underwriting income (loss)$ 31,365 $ 41,317 $ (89,816) % Point % Point Ratios: Change Change
Current accident year loss ratio, excluding
catastrophe and weather-related losses 62.6 % 2.7 59.9 % (0.7) 60.6 %
Catastrophe and weather-related losses ratio 9.7 % (3.6) 13.3 % (2.9) 16.2 %
Current accident year loss ratio 72.3 % (0.9) 73.2 % (3.6) 76.8 %
Prior year reserve development ratio (0.4 %) 0.2 (0.6 %) (0.2) (0.4 %)
Net losses and loss expenses ratio 71.9 % (0.7) 72.6 % (3.8) 76.4 %
Acquisition cost ratio 21.9 % 0.6 21.3 % (1.3) 22.6 %
Underwriting-related general and
administrative expense ratio 5.3 %
0.2 5.1 % 0.3 4.8 %
Combined ratio 99.1 % 0.1 99.0 % (4.8) 103.8 %
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, 2022 2021 2020 2021
to 2022 2020 to 2021
Liability$ 719,831 27 %$ 722,931 26 %$ 619,998 22 % - % 17 % Accident and health 411,891 16 % 398,641 14 % 371,828 13 % 3 % 7 % Professional lines 400,807 15 % 353,671 13 % 312,935 11 % 13 % 13 % Credit and surety 298,565 11 %
208,108 7 % 232,699 8 % 43 % (11 %)
Motor 239,794 9 % 279,966 10 % 304,601 11 % (14 %) (8 %)
Agriculture 128,012 5 % 86,128 3 % 70,500 3 % 49 % 22 %
Marine and aviation 93,371 4 % 73,968 3 % 73,102 3 % 26 % 1 %
Run-off lines
Catastrophe 222,810 9 % 492,397 16 % 551,144 19 % (55 %) (11 %)
Property 103,492 4 % 213,406 8 % 245,846 9 % (52 %) (13 %)
Engineering 10,441 - % (6,464) - % 25,886 1 % nm nm
Total run-off lines 336,743 13 %
699,339 24 % 822,876 29 % (52 %) (15 %)
Total $ 2,629,014 100 % $ 2,822,752 100 % $ 2,808,539 100 % (7 %) 1 %
nm - not meaningful
Gross premiums written in 2022 decreased by $194 million , or 7% ($140 million ,
or 5%, on a constant currency basis), compared to 2021. The decrease was
primarily attributable to catastrophe, property, motor, and liability lines,
partially offset by increases in credit and surety, professional lines,
agriculture, marine and aviation, engineering, and accident and health lines.
The decreases in catastrophe and property lines were largely driven by
non-renewals and decreased line sizes associated with repositioning the
portfolio during the six months ended June 2022 , together with the exit from
these lines of business in June 2022 . The decrease in catastrophe lines was also
due to a lower level of reinstatement premiums related to catastrophe losses in
2022, compared to 2021.
The decrease in motor lines was largely driven by non-renewals and decreased
line sizes associated with repositioning the portfolio. In addition, the
decrease in motor lines was attributable to the impact of foreign exchange rate
movements, and the timing of the renewal of a significant contract, partially
offset by a lower level of negative premium adjustments in 2022, compared to
2021 due to significant adjustments attributable to the COVID-19 pandemic
recognized in 2021.
The decrease in liability lines was due to a lower level of premium adjustments
associated with favorable market conditions in 2022, compared to 2021, largely
offset by an increase in renewals due to favorable market conditions, and new
business.
The increases in credit and surety, agriculture, professional lines, and
accident and health lines were driven by new business.
The increases in credit and surety, and accident and health lines were also due
to premium adjustments related to significant contracts.
The increase in professional lines was also due to a higher level of premium adjustments associated with favorable market conditions in 2022, compared to 2021. In addition, an increase in renewals associated with favorable market conditions and increased line sizes on several contracts contributed to the increase in professional lines in 2022, compared to 2021.
The increase in engineering lines was due to premium adjustments related to a
significant contract.
The increase in marine and aviation lines was attributable to new business and
premium adjustments.
67 --------------------------------------------------------------------------------
Ceded Premiums Written
Ceded premiums written in 2022 were$744 million , or 28%, of gross premiums written, compared to$791 million , or 28%, in 2021. The decrease in ceded premiums written of$47 million , or 6%, was primarily driven by a decrease in catastrophe lines, partially offset by increases in professional lines, motor, and credit and surety lines.
The decrease in catastrophe lines reflected the decrease in gross premiums
written in 2022, compared to 2021.
The increase in professional lines was due to the increase in gross premiums written in 2022, compared to 2021, premiums ceded to new quota share retrocessional treaties with a strategic capital partner and the restructuring of significant quota share retrocessional treaties. The increase in motor lines was associated with the restructuring of significant quota share retrocessional treaties, partially offset by the decrease in gross premiums written in 2022, compared to 2021.
The increase in credit and surety lines was attributable to the increase in
gross premiums written in 2022, compared to 2021, premium adjustments and the
restructuring of a significant quota share retrocessional treaty.
Net Premiums Earned
Net premiums earned by line of business were as follows:
% Change
Year ended December 31, 2022 2021 2020 2021
to 2022 2020 to 2021
Liability$ 484,681 24 %$ 431,596 21 %$ 397,894 19 % 12 % 8 % Accident and health 368,747 18 % 361,196 18 % 333,997 16 % 2 % 8 % Professional lines 250,911 12 % 220,448 11 % 207,605 10 % 14 % 6 % Credit and surety 192,926 10 %
158,549 8 % 187,722 9 % 22 % (16 %)
Motor 205,774 10 % 247,099 12 % 256,064 12 % (17 %) (4 %)
Agriculture 122,289 6 % 82,743 4 % 73,697 4 % 48 % 12 %
Marine and aviation 78,504 4 % 58,775 3 % 53,513 3 % 34 % 10 %
Run-off lines
Catastrophe 156,232 7 % 238,775 11 % 244,934 12 % (35 %) (3 %)
Property 135,480 7 % 231,092 11 % 256,324 12 % (41 %) (10 %)
Engineering 30,627 2 % 28,238 1 % 60,521 3 % 8 % (53 %)
Total run-off lines 322,339 16 %
498,105 23 % 561,779 27 % (35 %) (11 %)
Total $ 2,026,171 100 % $ 2,058,511 100 % $ 2,072,271 100 % (2 %) (1 %)
Net premiums earned in 2022 decreased by $32 million , or 2%, (increased by $54
million , or 3%, on a constant currency basis), compared to 2021. The decrease
was primarily driven by decreases in gross premiums earned in catastrophe,
property, and motor lines, together with increases in ceded premiums earned in
professional lines, motor, and credit and surety lines. These decreases were
partially offset by increases in gross premiums earned in liability,
professional lines, credit and surety, agriculture, and marine and aviation
lines and decreases in ceded premiums earned in catastrophe lines.
Other Insurance Related Income (Loss)
Other insurance related income of
insurance related income of
primarily due to a decrease in fees related to arrangements with strategic
capital partners.
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Loss
The components of the loss ratio were as follows:
% Point % Point
Year ended December 31, 2022 Change
2021 Change 2020
Current accident year loss ratio 72.3 % (0.9)
73.2 % (3.6) 76.8 %
Prior year reserve development ratio (0.4 %) 0.2 (0.6 %) (0.2) (0.4 %) Loss ratio 71.9 % (0.7) 72.6 % (3.8) 76.4 %
Current Accident Year Loss Ratio
The current accident year loss ratio decreased to 72.3% in 2022 from 73.2% in 2021. The decrease in the current accident year loss ratio was impacted by a lower level of catastrophe and weather-related losses. During 2022, catastrophe and weather-related losses, net of reinstatement premiums, were$196 million , or 9.7 points, including natural catastrophe and weather-related losses of$160 million , or 8.0 points, primarily attributable to Hurricane Ian, June European Convective Storms,Eastern Australia floods,South Africa floods, Winter Storm Elliot, and other weather-related events. The remaining losses included$23 million , or 1.1 points, attributable to the COVID-19 pandemic, and$13 million , or 0.6 points, attributable to theRussia -Ukraine war. Comparatively, in 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 that principally impacted theU.S. Southwest and the Upper Midwest, Quad-state tornadoes, and other weather-related events. After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio increased to 62.6% in 2022 from 59.9% in 2021, principally due to changes in business mix associated with the exit from catastrophe and property lines of business inJune 2022 .
Prior
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for Losses and Loss Expenses' for details on the lines of business, the expected claim tails, and prior year development.
Acquisition Cost Ratio
The acquisition cost ratio increased to 21.9% in 2022 from 21.3% in 2021, principally related to changes in business mix driven by the decrease in property catastrophe business written in recent periods and the increase in liability, professional lines, and credit and surety lines of business written in recent periods, together with higher costs associated with professional lines business mainly due to more proportional business being written in the recent periods, partially offset by the impact of retrocessional contracts.
Underwriting-Related General and Administrative Expense Ratio
The underwriting-related general and administrative expense ratio increased to
5.3% in 2022 from 5.1% in 2021, mainly driven by a decrease in net premiums
earned and a decrease in fees related to arrangements with strategic capital
partners, largely offset by a decrease in personnel costs and
performance-related compensation costs.
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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, 2022 % Change 2021 % Change 2020 Fixed maturities$ 329,858 26%$ 262,049 (17%)$ 317,121 Other investments 57,043 (69%) 181,906 nm 16,059 Equity securities 10,390 (19%) 12,752 37% 9,328 Mortgage loans 23,407 34% 17,427 13% 15,432 Cash and cash equivalents 20,273 nm 4,454 (67%) 13,582 Short-term investments 3,535 nm 664 (76%) 2,749 Gross investment income 444,506 (7%) 479,252 28% 374,271 Investment expense (25,677) 3% (24,951) 1% (24,670) Net investment income$ 418,829 (8%)$ 454,301 30%$ 349,601 Pre-tax yield:(1) Fixed maturities 2.6 % 2.2 % 2.6 % nm - not meaningful (1)Pre-tax yield is calculated by dividing net investment income by the average month-end amortized cost balances.
Fixed Maturities
2022 versus 2021: Net investment income in 2022 increased by
compared to 2021 due to an increase in yields.
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, 2022 2021 2020
Hedge, direct lending, private equity and real $ 39,151 $ 133,923 $ 16,267
estate funds
Other privately held investments 14,931 44,482 5,809
CLO-Equities 2,961 3,501 (6,017)
Total net investment income from other $ 57,043 $ 181,906 $ 16,059
investments(1)
Pre-tax return on other investments(2) 5.9 % 21.4 % 2.2 %
(1)Excluded overseas deposits in 2020. Overseas deposits in 2020 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.
2022 versus 2021: Pre-tax return on other investments in 2022 decreased to 5.9%,
compared to 21.4% in 2021. The decrease was primarily attributable to lower
returns from hedge, direct lending and private equity funds and other privately
held investments.
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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 are recorded in net investment gains (losses).
Net investment gains (losses) were as follows:
Year ended December 31, 2022 2021 2020
On sale of investments:
Fixed maturities and short-term investments$ (311,822) $ 95,116 $ 92,119 Equity securities 7,281 4,717 19,808 (304,541) 99,833 111,927
Change in allowance for expected credit losses (11,421) 11 (323) Impairment losses (1) (12,568) (22) (1,486) Change in fair value of investment derivatives 7,656
4,346 (2,434)
Net unrealized gains (losses) on equity securities (135,915) 30,111 21,449
Net investment gains (losses)$ (456,789) $
134,279
(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. 2022 versus 2021: Net investment losses in 2022 were$457 million compared to net investment gains of$134 million in 2021. Net investment losses reported in 2022 mainly reflected net realized losses on the sale of corporate debt,U.S. government and Agency RMBS and net unrealized losses on equity securities. 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. 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 Losses
The impairment losses (refer to 'Critical Accounting Estimates - Impairment
losses' for further details) recognized in net income were as follows:
2022 versus 2021: Impairment losses in 2022 were$13 million compared to impairment losses of $nil in 2021. The impairment losses in 2022 were principally due to impairments of non-investment grade corporate debt securities that we intended to sell or where we determined that it was more likely than not that we were required to sell securities before their anticipated recovery.
Change in Fair Value of Investment Derivatives
From time to time, we economically hedge foreign exchange exposure with
derivative contracts.
During 2022, foreign exchange hedges resulted in$8 million of net gains which primarily related to securities denominated in pound sterling and euro which experienced volatility during 2022. 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. 71 -------------------------------------------------------------------------------- Our derivative instruments are not designated as hedges. Therefore, net unrealized gains (losses) on the hedged securities were recorded in accumulated other comprehensive income (loss) 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, 2022 2021 2020
Net investment income $ 418,829 $ 454,301 $ 349,601
Net investments gains (losses) (456,789) 134,279 129,133
Change in net unrealized gains (losses) on fixed (909,150) (405,378) 269,937
maturities(1)
Interest in income (loss) of equity method 1,995 32,084 (3,612)
investments
Total $ (945,115) $ 215,286 $ 745,059
Average cash and investments(2) $ 15,963,535 $ 16,107,523 $ 15,562,097
Total return on average cash and investments,
pre-tax:
Including investment related foreign exchange (5.9 %) 1.3 % 4.8 %
movements
Excluding investment related foreign exchange (5.2 %) 1.6 % 4.4 %
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 is calculated by taking the average of the
period end fair value balances.
(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 $(110) million , $(40) million and $55 million for the
years ended December 31, 2022 , 2021 and 2020, respectively.
OTHER EXPENSES (REVENUES), NET
The following table provides a summary of other expenses (revenues), net:
Year ended December 31, 2022 % Change 2021 % Change 2020
Corporate expenses $ 130,054 3% $ 126,470 24% $ 101,822
Foreign exchange losses (gains) (157,945) nm 315 nm 81,069
Interest expense and financing costs 63,146 1% 62,302 (17%) 75,049
Income tax expense (benefit) 22,037 (65%) 62,384 nm (12,321)
Total $ 57,292 $ 251,471 $ 245,619
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 decreased to 2.5% in 2022 from 2.7% in 2021.
The increase in corporate expenses in 2022 was mainly driven by executive-related compensation cost of$15 million associated with the transition in our senior leadership and an increase in personnel costs, largely offset by decreases in performance-related compensation costs, business fees, and professional services costs. 72 --------------------------------------------------------------------------------
Foreign Exchange Losses (Gains)
Some of our business is written in currencies other than the
Foreign exchange gains in 2022 were primarily related to the impact of the
strengthening of the
liabilities denominated in pound sterling and euro.
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.
Interest Expense and Financing Costs
Interest expense and financing costs are related to interest due on 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, and the Federal
Home Loan advances ("FHLB advances") received in 2022.
Interest expense and financing costs increased by
to 2021, due to the FHLB advances in 2022.
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 9.0%, 9.2%, and 9.3% in 2022, 2021, and 2020, respectively. This effective rate can vary between years depending on the distribution of net income (loss) among tax jurisdictions, as well as other factors. The tax expense of$22 million in 2022 was principally due to the generation of pre-tax income in ourU.K. ,U.S. and European insurance operations, together with a valuation allowance on certain deferred tax assets, partially offset by the re-estimation of the amount of net deferred tax assets that would be realized at the 25% tax rate in theU.K. that takes effect in 2023. In 2022, the valuation allowance increased by$43 million . The net loss incurred byAXIS Re SE , the Irish reinsurance company, resulted in the recognition of a valuation allowance of$41 million against the net deferred tax assets ofAXIS Re SE and AXIS Re Europe, the Swiss branch of the Irish reinsurance company, of which$22 million was recorded in net income (loss) and$19 million was recorded in other comprehensive income (loss). A partial valuation allowance of$2 million was also recorded againstU.S. foreign tax credits. AtDecember 31, 2022 , theU.S. operations had a deferred tax asset of$71 million for the unrealized losses on its fixed maturity securities that were recorded in other comprehensive income (loss). We examined the need for a valuation allowance and after considering all positive and negative evidence concluded a valuation allowance against its net unrealized investment losses in theU.S. was not required.
The tax expense of
pre-tax income in our
73 --------------------------------------------------------------------------------
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, 2022 2021 2020
Return on average common equity(1) 4.3 % 12.2 % (3.2 %)
Operating return on average common equity(2) 11.1 % 9.1 % (3.7 %)
Book value per diluted common share(3) $ 46.95 $ 55.78 $ 55.09
Cash dividends declared per common share $ 1.73 $ 1.69 $ 1.65
Increase (decrease) in book value per diluted $ (7.10) $ 2.38 $ 0.95
common share 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 decrease in ROACE in 2022, compared to 2021, was primarily driven by net investment losses, a decrease in net investment income, reorganization expenses, and a decrease in interest in income (loss) of equity method investments, partially offset by foreign exchange gains, an increase in underwriting income, and a decrease in income tax expense. In addition, ROACE was impacted by a decrease in average common shareholders' equity. 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 2022, compared to 2021, was primarily driven by an increase in underwriting income and a decrease in income tax expense, partially offset by a decrease in net investment income. In addition, operating ROACE was impacted by a decrease in average common shareholders' equity.
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 2022, book value per diluted common share decreased by 16%, due to the net
unrealized investment losses reported in other comprehensive income (loss) and
common dividends declared, partially offset by net income generated in the year.
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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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 nineteen 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 2022, the decrease in total value of
unrealized investment losses recognized in other comprehensive income (loss),
partially offset by the net income generated in the year.
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 accumulated other comprehensive income.
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NON-GAAP FINANCIAL MEASURES RECONCILIATION
Years ended December 31, 2022 2021 2020
Net income (loss) available (attributable) to common $ 192,833
shareholders
Net investment (gains) losses(1) 456,789 (134,279) (129,133)
Foreign exchange losses (gains)(2) (157,945) 315 81,069
Reorganization expenses(3) 31,426 - 7,881
Interest in (income) loss of equity method (1,995) (32,084) 3,612
investments(4)
Income tax expense (benefit) (23,177) 14,166 13,023
Operating income (loss) $
497,931
Earnings (loss) per diluted common share (5) $ 2.25 $ 6.90 $ (1.79)
Net investment (gains) losses 5.33 (1.57) (1.53)
Foreign exchange losses (gains) (1.84) - 0.96
Reorganization expenses 0.37 - 0.09
Interest in (income) loss of equity method investments (0.02) (0.38) 0.04
Income tax expense (benefit) (0.28) 0.17 0.15
Operating income (loss) per diluted common share(5) $
5.81
Weighted average diluted common shares outstanding(6) 85,669 85,291 84,262
Average common shareholders' equity $
4,475,283
Return on average common equity 4.3% 12.2% (3.2%)
Operating return on average common equity 11.1% 9.1% (3.7%)
(1)Tax expense (benefit) of $(36) million , $11 million and $18 million for the
years ended December 31, 2022 , 2021 and 2020, 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 $16 million , $3 million and $(4) million for the
years ended December 31, 2022 , 2021 and 2020, 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 expense (benefit) of $(4) million , $nil and $(1) million for the years
ended December 31, 2022 , 2021 and 2020, 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, 2022 , 2021 and
2020, 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 14 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, including 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 recognized in net investment gains (losses), and unrealized foreign exchange losses (gains) on our available for sale investments recognized in other comprehensive income (loss), generally offset a large portion of the foreign exchange losses (gains) arising from our underwriting portfolio, 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 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 include compensation-related costs and software asset
impairments mainly attributable to our exit from catastrophe and property
reinsurance lines of business, part of an overall approach to reduce our
exposure to volatile
77 -------------------------------------------------------------------------------- catastrophe risk, announced inJune 2022 . Reorganization expenses are primarily driven by business decisions, the nature and timing of which are not related to the underwriting process. Therefore, these expenses are excluded from consolidated underwriting income (loss). Amortization of intangible assets including 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. However, we manage our investment portfolio in such a way that unrealized and realized foreign exchange losses (gains) on our investment portfolio, including 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 recognized in net investment gains (losses) and unrealized foreign exchange losses (gains) on our available for sale investments in other comprehensive income (loss), generally offset a large portion of the foreign exchange losses (gains) arising from our underwriting portfolio, 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 include compensation-related costs and software asset impairments mainly attributable to our exit from catastrophe and property reinsurance lines of business, part of an overall approach to reduce our exposure to volatile catastrophe risk, announced inJune 2022 . 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 in order 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.
78
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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.
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, 2022 December 31, 2021
Fair value Fair value
Fixed maturities, available for sale $ 11,326,894 $ 12,313,200
Fixed maturities, held to maturity(1) 674,743 445,033
Equity securities 485,253 655,675
Mortgage loans 627,437 594,088
Other investments 996,751 947,982
Equity method investments 148,288 146,293
Short-term investments 70,310 31,063
Total investments $ 14,329,676 $ 15,133,334
Cash and cash equivalents(2) $ 1,174,653 $ 1,317,690
(1)Presented at net carrying value of $698 million (2021: $446 million ) in the
consolidated balance sheets.
(2)Includes restricted cash and cash equivalents of $423 million and $473
million for 2022 and 2021, respectively.
79
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Overview
The fair value of total investments decreased by$804 million in 2022, driven by the decrease in market value of fixed maturities due to the increase in yields and the widening of credit spreads.
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, 2022 December 31, 2021
Fair value % of total Fair value % of total
Fixed maturities:
U.S. government and agency $ 2,639,330 22 % $ 2,682,448 21 %
Non-U.S. government 562,029 5 % 795,178 6 %
Corporate debt 4,329,328 36 % 4,532,884 36 %
Agency RMBS 1,202,785 10 % 1,074,589 8 %
CMBS 947,778 8 % 1,248,191 10 %
Non-agency RMBS 133,534 1 % 186,164 1 %
ABS 2,030,498 17 % 2,029,941 16 %
Municipals(1) 156,355 1 % 208,838 2 %
Total $ 12,001,637 100 % $ 12,758,233 100 %
Credit ratings:
U.S. government and agency $ 2,639,330 22 % $ 2,682,448 21 %
AAA(2) 4,189,661 36 % 4,491,643 34 %
AA 871,966 7 % 981,837 8 %
A 1,835,746 15 % 1,917,006 15 %
BBB 1,377,638 11 % 1,595,285 13 %
Below BBB(3) 1,087,296 9 % 1,090,014 9 %
Total $ 12,001,637 100 % $ 12,758,233 100 %
(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, 2022 , fixed maturities had a weighted average credit rating of AA- (2021: AA-), a book yield of 3.5% (2021: 1.9%), and an average duration of 3.0 years (2021: 3.0 years). AtDecember 31, 2022 , fixed maturities together with short-term investments and cash and cash equivalents (i.e., total investments of$13.2 billion ) had a weighted average credit rating of AA- (2021: AA-) and an average duration of 2.8 years (2021: 2.8 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, 2022 , the fair value of fixed maturities not rated was$31 million (2021:$18 million ). 80 -------------------------------------------------------------------------------- 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. Country risk 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, 2022 December 31, 2021
Weighted Weighted
average average
Country Fair value % of total credit rating Fair value % of total credit rating
Eurozone countries:
Supranationals(1) $ 16,867 3 % AAA $ 16,799 2 % AAA
Netherlands 9,512 2 % AA+ 10,065 1 % AA+
Germany 5,037 1 % AAA 5,083 1 % AAA
Austria 2,346 - % AA+ 2,317 - % AA+
France 1,061 - % AA 1,303 - % AA
Total eurozone 34,823 6 % AA+ 35,567 4 % AA+
Other concentrations:
Canada 300,674 53 % AA+ 372,333 47 % AAA
United Kingdom 168,068 30 % AA- 248,601 31 % AA-
Mexico 10,151 2 % BBB 19,839 2 % BBB
Other 48,313 9 % AA 118,838 16 % AA+
Total other concentrations 527,206 94 % AA 759,611 96 % AAA
Total non-U.S. government $ 562,029 100 % AA $ 795,178 100 % AA
(1)Includes supranationals only in the eurozone.
AtDecember 31, 2022 , net unrealized losses on non-U.S. government securities were$51 million (2021: net unrealized gains of$0.5 million ) which included gross unrealized foreign exchange losses of$24 million (2021:$5 million ), mainly related toU.K. government bonds. 81 --------------------------------------------------------------------------------
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, 2022 December 31, 2021
Weighted Weighted
average average
Fair value % of total credit rating Fair value % of total credit rating
Financial institutions:
U.S. banks $ 786,541 18 % A $ 821,650 18 % A
Corporate/commercial finance 445,524 10 % BBB 380,558 8 % BBB-
Non-U.S. banks 346,176 8 % A- 383,360 8 % A
Insurance 162,107 4 % A 155,735 3 % A+
Investment brokerage 117,706 3 % A 87,923 2 % A-
Total financial institutions 1,858,054 43 % A- 1,829,226 39 % A-
Consumer non-cyclicals 533,543 12 % BBB- 597,163 13 % BBB-
Consumer cyclical 411,559 10 % BB 435,314 10 % BB
Communications 369,295 9 % BB+ 406,700 9 % BB+
Industrials 407,318 9 % BB 390,674 9 % BB-
Technology 211,740 5 % BBB- 288,754 6 % BB+
Utilities 166,481 4 % BBB+ 198,387 4 % BBB+
Energy 164,770 4 % BBB- 173,606 4 % BBB
Other 206,568 4 % A 213,060 6 % A
Total $ 4,329,328 100 % BBB $ 4,532,884 100 % BBB
Credit quality summary:
Investment grade $ 3,308,131 76 % A- $ 3,501,370 77 % A-
Non-investment grade 1,021,197 24 % B+ 1,031,514 23 % B
Total $ 4,329,328 100 % BBB $ 4,532,884 100 % BBB
At December 31, 2022 , our non-investment grade portfolio had a fair value of
$1,021 million (2021: $1,032 million ), a weighted average credit rating of B+
(2021: B) and duration of 2.9 years (2021: 1.7 years). At December 31, 2022 , our
corporate debt portfolio, including non-investment grade securities, had a
duration of 3.6 years (2021: 3.7 years).
Details of the fair values of our RMBS and CMBS portfolios by credit rating are
as follows:
December 31, 2022 December 31, 2021
RMBS CMBS RMBS CMBS
Government agency $ 1,202,785 $ 48,805 $ 1,074,589 $ 83,936
AAA 121,188 833,850 166,553 1,069,276
AA 4,192 60,207 3,601 89,813
A 3,682 4,916 9,936 5,166
BBB 122 - 621 -
Below BBB(1) 4,350 - 5,453 -
Total $ 1,336,319 $ 947,778 $ 1,260,753 $ 1,248,191
(1)Non-investment grade securities.
82 --------------------------------------------------------------------------------
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, 2022 , agency RMBS had an average duration of 5.7 years (2021: 4.4 years). Non-agency RMBS mainly include investment grade bonds originated by non-agencies. AtDecember 31, 2022 , 94% (2021: 91%) of our non-agency RMBS were rated AA or better. AtDecember 31, 2022 , non-agency RMBS had an average duration of 4.6 years (2021: 2.1 years) and weighted average life of 6.7 years (2021: 4.8 years). Commercial MBS CMBS mainly include investment grade bonds originated by non-agencies. AtDecember 31, 2022 , 99% (2021: 99%) of our CMBS were rated AA or better. AtDecember 31, 2022 , the weighted average estimated subordination percentage of the portfolio was 38% (2021: 37%), 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, 2022 , CMBS had an average duration of 2.4 years (2021: 3.1 years) and weighted average life of 3.3 years (2021: 4.0 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, 2022
CLO - debt tranches $ 994,961 $ 306,934 $ 72,319 $ 26,257 $ 25,650 $ 1,426,121
Auto loans 237,884 4,728 - - - 242,612
Student loans 104,023 4,401 - - - 108,424
Credit card receivables 38,848 534 - - - 39,382
Other 178,447 12,351 16,803 6,017 341 213,959
Total $ 1,554,163 $ 328,948 $ 89,122 $ 32,274 $ 25,991 $ 2,030,498
% of total 77% 16% 4% 2% 1% 100%
At December 31, 2021
CLO - debt tranches $ 953,731 $ 251,204 $ 73,595 $ 33,343 $ 31,707 $ 1,343,580
Auto loans 245,653 4,938 - - - 250,591
Student loans 149,801 5,166 2,476 - - 157,443
Credit card receivables 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
(2021: 0.7 years) and the weighted average life was 3.7 years (2021: 4.1 years).
83 --------------------------------------------------------------------------------
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, 2022
New York $ 3,199 $ 17,098 $ 20,297 13% $ - $ (1,234) AA+
California 2,049 39,143 41,192 26% 93 (5,418) AA-
Texas 7,387 11,151 18,538 12% 5 (2,464) AA
Louisiana - 11,082 11,082 7% - (628) AAA
Massachusetts 5,635 1,836 7,471 5% - (559) AA
Other 10,200 47,575 57,775 37% 41 (5,902) A+
$ 28,470 $ 127,885 $ 156,355 100% $ 139 $ (16,205) AA-
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-
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. At December 31, 2022 , all municipals held
(2021: 97%) are taxable.
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Gross Unrealized Losses
At
available for sale portfolio were
Investment grade fixed maturities, available for sale
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, 2022 December 31, 2021
% 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% $ 6,176,828 $ (265,175) 33 % $ 6,172,912 $ (83,380) 96 %
10-20% 2,315,291 (372,213) 47 % 10,127 (1,639) 2 %
20-30% 520,482 (147,575) 19 % 3,576 (1,138) 1 %
30-40% 15,622 (6,948) 1 % 1,188 (539) 1 %
40-50% 1,002 (735) - % - - - %
> 50% 4 (27) - % 6 (25) - %
Total $ 9,029,229 $ (792,673) 100 % $ 6,187,809 $ (86,721) 100 %
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.
Non-investment grade fixed maturities, available for sale
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, 2022 December 31, 2021
% 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% $ 644,995 $ (28,536) 44 % $ 396,033 $ (6,493) 85 %
10-20% 179,291 (26,642) 42 % 3,085 (448) 6 %
20-30% 28,414 (6,649) 10 % 209 (38) 1 %
30-40% 1,393 (495) 1 % - - - %
40-50% 738 (410) 1 % 267 (194) 3 %
> 50% 652 (1,183) 2 % 427 (352) 5 %
Total $ 855,483 $ (63,915) 100 % $ 400,021 $ (7,525) 100 %
The increase in gross unrealized losses on non-investment grade fixed maturities
reflected the impact of the widening of credit spreads on non-investment grade
high yield corporate debt securities.
AtDecember 31, 2022 , net unrealized losses on equity securities were$9 million (2021: net unrealized gains of$127 million ). The decrease was driven by the decline in market value of bond mutual funds and the decline in global equity markets. 85 --------------------------------------------------------------------------------
Mortgage Loans
During 2022, investment in commercial mortgage loans increased to$627 million from$594 million , an increase of$33 million . The commercial mortgage loans are high quality, and collateralized by a variety of commercial properties and diversified geographically throughout theU.S. and by property type to reduce the risk of concentration. AtDecember 31, 2022 and 2021, 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, 2022 December 31, 2021
Hedge funds
Long/short equity funds $ - - % $ 3,476 - %
Multi-strategy funds 32,616 3 % 56,012 6 %
Total hedge funds 32,616 3 % 59,488 6 %
Direct lending funds 258,626 26 % 289,867 31 %
Private equity funds 265,836 27 % 249,974 26 %
Real estate funds 298,499 30 % 238,222 25 %
Total hedge, direct lending, private equity and real 855,577 86 % 837,551 88 %
estate funds
CLO-Equities 5,016 - % 5,910 1 %
Other privately held investments 136,158 14 % 104,521 11 %
Total other investments $ 996,751 100 % $ 947,982 100 %
Refer to Item 8, Note 5(e) to the Consolidated Financial Statements
'Investments'.
Equity Method Investments
Our ownership interest in
is reported in interest in income (loss) of equity method investments.
Interest in income (loss) of equity method investments was
compared to
investment gains realized by Harrington.
Restricted Assets
Refer to Item 8, Note 5(j) 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 22 to the Consolidated Financial Statements 'Statutory Financial Information' for 86 -------------------------------------------------------------------------------- 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 2022,AXIS Capital received$225 million (2021:$300 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$0.9 billion atDecember 31, 2022 , will provideAXIS Capital with sufficient liquidity for the foreseeable future.
Operating Subsidiaries
AXIS Capital's operating subsidiaries primarily derive cash from the net inflow of premiums less claim payments related to underwriting activities and from net investment income. Historically, these cash receipts have been sufficient to fund the operating expenses of these subsidiaries, as well as to fund dividend payments toAXIS Capital . The subsidiaries' remaining cash flows are generally invested in our investment portfolio and have also been used to fund common share repurchases in recent years. The insurance and reinsurance business of our operating subsidiaries inherently provide liquidity, as premiums are received in advance (sometimes substantially in advance) of the time losses are paid. However, the amount of cash required to fund loss payments can fluctuate significantly from period to period, due to the low frequency/high severity nature of certain types of business we write.
Consolidated cash flows from operating, investing and financing activities in
the last three years were as follows:
Total cash provided by (used in)(1) 2022 2021 2020 Operating activities$ 692,216 $ 1,114,822 $ 343,503 Investing activities (655,798) (1,114,195) 489,921 Financing activities (149,622) (186,095) (908,803) Effect of exchange rate changes on cash (29,833) (74) 2,154 Decrease in cash and cash equivalents$ (143,037) $ (185,542) $ (73,225)
(1) Refer to Item 8, 'Consolidated Statements of Cash Flows' for further
details.
•Net cash provided by operating activities was$692 million in 2022 compared to$1,115 million in 2021. 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 decreased in 2022 compared to 2021, primarily attributable to an increase in payments of premiums to reinsurers, and an increase in payments of losses and loss expenses, partially offset by an increase in premiums received, an increase in reinsurance recoverables received, and an increase in interest and dividends received from our fixed maturity securities portfolio. •Investing cash outflows in 2022 principally related to the net purchases of fixed maturities of$599 million , short-term investments of$40 million , and mortgage loans of$33 million , and purchases of other assets of$37 million , partially offset by the net proceeds from the sale of equity securities of$44 million , and other investments of$9 million . 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 . •Financing cash outflows in 2022 were principally due to dividends paid to common and preferred shareholders of$180 million , and the repurchase of common shares of$49 million , partially offset by the receipt of theFederal Home Loan Bank advances of$79 million . Financing cash outflows in 2021 were principally due to dividends paid to common and preferred shareholders of$176 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, 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). 87 -------------------------------------------------------------------------------- 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$404 million in 2022,$450 million in 2021 and$773 million in 2020. 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$12.3 billion of cash and invested assets atDecember 31, 2022 could be available in one to three business days under normal market conditions. Of this amount,$5.2 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(j) to the Consolidated Financial Statements 'Investments' for further details). For context, atJanuary 1, 2023 , our largest 1-in-250 year return period, single occurrence, single-zone modeled probable maximum loss (Japan Earthquake) was approximately$195 million , net of reinsurance. Claim payments pertaining to such an event would be paid out over a period spanning many months. Our internal risk tolerance framework aims to limit the loss of capital due to a single event and the loss of capital that would occur from multiple but perhaps smaller events, in any year (refer to Item 1 'Risk and Capital Management' for further details). We expect that cash flows generated from operations, combined with the liquidity provided by our investment portfolio, to be sufficient to cover required cash outflows and other contractual commitments through the foreseeable future (refer to 'Contractual Obligations and Commitments' below for further details).
Capital Resources
In addition to common equity, we have utilized other external sources of financing, including debt, preferred shares, and letter of credit facilities to support our business operations. We believe that we hold sufficient capital to allow us to take advantage of market opportunities and to maintain our financial strength ratings, as well as to comply with various local statutory regulations. We monitor capital adequacy on a regular basis and will seek to adjust our capital base according to the needs of our business (refer to Item 1 'Risk and Capital Management' for further details).
The following table summarizes consolidated capital:
At December 31, 2022 2021 Debt$ 1,312,314 $ 1,310,975 Preferred shares 550,000 550,000 Common equity 4,089,910 4,860,656 Shareholders' equity 4,639,910 5,410,656 Total capital$ 5,952,224 $ 6,721,631 Ratio of debt to total capital 22.0 % 19.5 % We finance our operations with a combination of debt and equity capital. The debt to total capital ratio provides an indication of our capital structure, along with some insight into our financial strength.
While the impact of unrealized investment losses recognized in other
comprehensive income (loss), following a decrease in market value of our fixed
maturities, has 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.
88 --------------------------------------------------------------------------------
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).
Federal Home Loan Bank Advances
The Company's subsidiaries,
Company
Members may borrow from the FHLB at competitive rates subject to certain conditions. AtDecember 31, 2022 , the companies had admitted assets of approximately$3 billion which provides borrowing capacity of up to approximately$750 million . Conditions of membership include maintaining sufficient collateral deposits for funding, a requirement to maintain member stock at 0.4% of mortgage-related assets atDecember 31st of the prior year, and a requirement to purchase additional member stock of 2.0% or 4.5% of any amount borrowed (refer to Item 8, Note 11 to the Consolidated Financial Statements 'Federal Home Loan Bank Advances' 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. OnJanuary 17, 2020 , we redeemed all outstanding Series D preferred shares, for an aggregate liquidation preference of$225 million (refer to Item 8, Note 15 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) (refer to Item 8, Note 15 to the Consolidated Financial Statements 'Shareholders' Equity' for further details).
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 89 -------------------------------------------------------------------------------- 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 , reducing the maximum aggregate utilization capacity of the credit facility from$750 million to$650 million , and to make administrative changes to the remaining$500 million Facility. OnMarch 31, 2022 , the Participating Subsidiaries amended their existing$650 million secured letter of credit facility to extend the expiration date of the$150 million secured letter of credit facility toMarch 31, 2023 , with each letter of credit provided pursuant to such credit facility having a tenor not to extend beyondMarch 31, 2024 . The terms and conditions of the$500 million secured letter of credit facility remain unchanged. AtDecember 31, 2022 , letters of credit outstanding were$362 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, 2022 2021
Common equity - opening $
4,860,656
Share-based compensation expense 51,249 40,780
Change in unrealized gains (losses) on available for (805,850) (358,480)
sale investments, net of tax
Foreign currency translation adjustment (10,986) 621
Net income (loss) 223,083 618,609
Preferred share dividends (30,250) (30,250)
Common share dividends (150,556) (147,221)
Treasury shares repurchased (48,981) (10,242)
Treasury shares reissued 1,545 1,145
Common equity - closing $ 4,089,910 $ 4,860,656
Share Repurchases
During 2022, we repurchased 897,000 common shares for a total of $49 million ,
including $35 million repurchased pursuant to our Board-authorized share
repurchase program and $14 million 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.
As part of our capital management strategy, our Board of Directors authorizes
common share repurchase programs. On December 8, 2022 , our Board of Directors
authorized a new share repurchase program for up to $100 million of our common
shares through December 31, 2023 . The new share repurchase authorization,
effective January 1, 2023 , replaced the previous program which had $65 million
available until December 31, 2022 (refer to Item 5 'Market for Registrant's
Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities' ). Share repurchases may be effected from time to time in the open
market or privately negotiated transactions, depending on market conditions.
Shelf Registrations
OnNovember 9, 2022 , 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. 90 --------------------------------------------------------------------------------
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 (Stable) (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 (Stable) (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 July 20, 2022 , Standard and Poor's revised its outlook from negative to
stable due to improved underwriting performance and reduced prospective earnings
volatility as a result of our exit from property and catastrophe reinsurance
lines of business.
(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) On May 31, 2022 , Moody's Investors Service revised its outlook from
negative to stable due to improved core underwriting profitability and reduced
catastrophe risk exposure.
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Contractual Obligations and Commitments
AtDecember 31, 2022 , 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) 102,577 15,930 20,684 15,477 50,486
Investing activities
Unfunded investment commitments(3) 551,835 188,295 210,504 50,803 102,233
Financing activities
Debt (principal payments)(4) 1,325,000 - - 350,000 975,000
Debt (interest payments)(4)(5) 591,311 60,800 121,796 121,115 287,600
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 13 to the Consolidated Financial Statements 'Leases' for further details). (3)We have$508 million of unfunded investment commitments related to our other investments portfolio, which are callable by our investment managers (refer to Item 8, Note 5(e) to the Consolidated Financial Statements 'Investments' for further details). In addition, we have$25 million of unfunded commitments related to our commercial mortgage loans portfolio and$20 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$13 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 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 line of business are shown below:
2022 2021
At December 31, Case reserves IBNR Total Case reserves IBNR Total
Insurance segment:
Property $ 565,954 $ 487,681 $ 1,053,635 $ 596,704 $ 487,478 $ 1,084,181
Accident and health 22,770 60,795 83,565 15,906 42,891 58,797
Marine and aviation 490,895 419,712 910,606 386,303 403,700 790,003
Cyber 158,449 559,561 718,010 203,327 486,591 689,918
Professional lines 681,053 2,325,695 3,006,748 800,333 2,090,430 2,890,763
Credit and political risk(1) (38,293) 181,538 143,246 (105,469) 146,175 40,708
Liability 466,527 1,999,256 2,465,783 408,444 1,840,716 2,249,159
Total Insurance 2,347,355 6,034,238 8,381,593 2,305,548 5,497,981 7,803,529
Reinsurance segment:
Accident and health 64,949 207,953 272,902 70,078 202,518 272,596
Agriculture 40,598 95,645 136,243 37,577 70,430 108,007
Marine and aviation 99,019 115,582 214,601 112,680 85,256 197,936
Professional lines 550,786 761,575 1,312,361 559,204 670,305 1,229,509
Credit and surety 133,710 169,759 303,469 134,615 170,024 304,640
Motor 753,053 367,504 1,120,556 737,097 486,978 1,224,075
Liability 696,220 1,353,846 2,050,067 611,597 1,245,103 1,856,700
Run-off lines
Catastrophe 498,604 328,723 827,327 510,865 423,401 934,266
Property 273,607 124,253 397,860 334,390 202,541 536,930
Engineering 97,964 53,920 151,884 126,320 58,586 184,906
Total run-off lines 870,175 506,896 1,377,071 971,575 684,528 1,656,102
Total Reinsurance 3,208,510 3,578,760 6,787,270 3,234,423 3,615,142 6,849,565
Total $ 5,555,865 $ 9,612,998 $ 15,168,863 $ 5,539,971 $ 9,113,123 $ 14,653,094
(1) During 2022 and 2021, significant gross claims associated with certain
credit and political risk contracts were paid in advance of recoveries being
received from the corresponding security which resulted in negative case
reserves of $(55) million (2021: $(128) million ) and related negative
reinsurance recoverable on unpaid losses and loss expenses of $(15) million
(2021: $(56) 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' for the mapping of our lines of business to expected
claim tails.
In order to capture the key dynamics of loss reserve development and potential
volatility, lines of business 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.
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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 lines of business 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.
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 lines of business 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 lines of business 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:
•potential volatility of actuarial estimates, given the number of years of development it takes to produce a significant 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 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 this line of business and the associated key actuarial assumptions.
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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 2022 and 2021, significant gross claims associated with certain credit
and political risk contracts were paid in advance of recoveries being received
from the corresponding security which resulted in negative case reserves of
$(55) million (2021: $(128) million ) and related negative reinsurance
recoverable on unpaid losses and loss expenses of $(15) million (2021: $(56)
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.
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. 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 - Prior Year
Reserve Development ' for further details.
Reserving for Catastrophic Events
Refer to Item 8, Note 8 to the Consolidated Financial Statements 'Reserve for Losses and Loss Expenses - Reserving Methodology - Reserving for 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 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 2022 were impacted by natural and man-made catastrophe activity (refer to 'Underwriting Results - Insurance segment - Current Accident Year Loss Ratio' 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.
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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.
Sensitivity Analysis
While we believe that loss reserves atDecember 31, 2022 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.
97 -------------------------------------------------------------------------------- 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, 2022 was as follows: INSURANCE Development pattern Expected loss ratio Higher Loss Reserves (Lower Loss Reserves) Professional lines 10% lower Unchanged 10% higher 6 months shorter$ (238,760) $ (52,645) $ 135,299 Unchanged (182,792) - 192,068 6 months longer (106,514) 80,650 273,585 Property 5% lower Unchanged 5% higher 3 months shorter$ (84,008) $ (50,836) $ (45,192) Unchanged (6,777) - 7,536 3 months longer 81,362 90,306 100,449 Liability 10% lower Unchanged 10% higher 6 months shorter$ (215,696) $ (54,796) $ 106,950 Unchanged (156,873) - 162,311 6 months longer (82,737) 73,033 233,329 Cyber 10% lower Unchanged 10% higher 6 months shorter$ (55,759) $ (19,580) $ 16,598 Unchanged (37,799) - 40,784 6 months longer 25,710 50,288 90,806 Marine and aviation 5% lower Unchanged 5% higher 3 months shorter$ (39,610) $ (22,408) $ (5,018) Unchanged (18,183) - 18,180 3 months longer 27,454 46,040 64,626 Accident and health 5% lower Unchanged 5% higher 3 months shorter$ (11,854) $ (8,792) $ (5,730) Unchanged (2,831) - 2,831 3 months longer 10,303 13,311 16,319 Credit and political risk 10% lower Unchanged 10% higher 6 months shorter$ (22,538) $ -$ 22,538 Unchanged (22,538) - 22,538 6 months longer (22,538) - 22,538 98
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REINSURANCE
Development pattern Expected loss ratio
Higher Loss Reserves (Lower Loss Reserves)
Liability 10% lower Unchanged 10% higher
6 months shorter $ (218,785) $ (63,722) $ 98,869
Unchanged (151,428) - 161,708
6 months longer (67,782) 87,120 246,522
Accident and health 5% lower Unchanged 5% higher
3 months shorter $ (9,109) $ (6,490) $ (3,870)
Unchanged (2,349) - 2,349
3 months longer 6,282 8,732 11,182
Professional lines 10% lower Unchanged 10% higher
6 months shorter $ (124,894) $ (48,882) $ 27,970
Unchanged (78,217) - 79,941
6 months longer (18,849) 60,811 144,679
Credit and surety 10% lower Unchanged 10% higher
6 months shorter $ (25,617) $ (9,531) $ 6,889
Unchanged (16,549) - 16,423
6 months longer (3,930) 13,328 30,095
Motor 10% lower Unchanged 10% higher
6 months shorter $ (64,670) $ (17,823) $ 33,737
Unchanged (34,827) - 46,351
6 months longer 16,728 55,864 97,964
Agriculture 5% lower Unchanged 5% higher
3 months shorter $ (9,904) $ - $ 9,904
Unchanged (9,904) - 9,904
3 months longer (9,904) - 9,904
Marine and aviation 5% lower Unchanged 5% higher
3 months shorter $ (9,395) $ (7,155) $ (4,915)
Unchanged (2,526) - 2,526
3 months longer 4,891 7,685 10,493
Catastrophe 5% lower Unchanged 5% higher
3 months shorter $ (1,872) $ (1,235) $ (599)
Unchanged (278) - 298
3 months longer 1,581 1,957 2,333
Property 5% lower Unchanged 5% higher
3 months shorter $ (11,695) $ (10,082) $ (8,468)
Unchanged (2,017) - 1,990
3 months longer 11,066 13,534 16,025
Engineering 5% lower Unchanged 5% higher
3 months shorter $ (5,636) $ (3,098) $ (559)
Unchanged (2,693) - 2,693
3 months longer 575 3,441 6,306
The results show the cumulative increase (decrease) in loss reserves across all
accident years.
For example, if assumed loss development pattern for insurance property business was three months shorter with no accompanying change in ELR assumption, loss reserves may decrease by approximately$51 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 99 -------------------------------------------------------------------------------- estimate total volatility. Additionally, it is noted that in some instances, for example the projection of catastrophe estimates or credit and political risks estimates, 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.
Reinsurance Recoverable on Unpaid Losses and Loss Expenses
In the normal course of business, we purchase facultative and treaty 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 line of business are shown below:
2022 2021
Case Case
At December 31, reserves IBNR Total reserves IBNR Total
Insurance segment:
Property $ 221,616 $ 177,210 $ 398,826 $ 200,190 $ 211,657 $ 411,847
Accident and health 820 5,698 6,518 1,088 4,879 5,967
Marine and aviation 195,845 83,131 278,976 149,586 91,065 240,651
Cyber 92,219 301,217 393,436 134,235 250,102 384,338
Professional lines 403,078 1,071,461 1,474,539 302,668 807,483 1,110,150
Credit and political risk (1) (18,990) 53,382
34,391 (53,763) 30,382 (23,381)
Liability 258,072 1,288,447 1,546,520 188,705 1,132,764 1,321,469
Total Insurance 1,152,660 2,980,546 4,133,206 922,709 2,528,332 3,451,041
Reinsurance segment:
Accident and health 7,303 31,344 38,647 7,675 24,558 32,232
Agriculture 8,600 1,418 10,018 9,952 1,977 11,929
Marine and aviation 27,209 30,484 57,692 34,753 26,155 60,908
Professional lines 81,413 222,436 303,849 67,453 183,888 251,341
Credit and surety 27,097 52,212 79,309 22,022 44,943 66,965
Motor 131,630 126,853 258,483 104,500 124,695 229,195
Liability 136,016 391,496 527,513 104,914 329,954 434,868
Run-off lines
Catastrophe 245,250 163,925 409,175 243,049 216,269 459,317
Property 12,942 72 13,014 19,670 (212) 19,458
Engineering 131 135 266 137 218 357
Total run-off lines 258,323 164,132 422,455 262,856 216,275 479,132
Total Reinsurance 677,591 1,020,375 1,697,966 614,125 952,445 1,566,570
Total $ 1,830,251 $ 4,000,921 $ 5,831,172 $ 1,536,834 $ 3,480,777 $ 5,017,611
(1) During 2022 and 2021, significant gross claims associated with certain
credit and political risk contracts were paid in advance of recoveries being
received from the corresponding security which resulted in negative case
reserves of $(55) million (2021: $(128) million ) and related negative
reinsurance recoverables related to case reserves of $(15) million (2021: $(56)
million ). Refer to Critical Accounting Estimates - Reserve for Losses and Loss
Expenses - Reserving for Credit and Political Risk Business for further details.
100
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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 expected
claim tails.
At December 31, 2022 , reinsurance recoverables as a percentage of loss reserves
was 38% (2021: 34%). At December 31, 2022 , reinsurance recoverables that were
collectible from reinsurers rated A- or better by A.M Best were 81.8% (2021:
85.7%). Refer to Item 8, Note 12 to the Consolidated Financial Statements
'Commitments and Contingencies' for an analysis of the credit risk associated
with reinsurance recoverables at December 31, 2022 .
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.
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
(2021:
recoverable balances in the last three years.
AtDecember 31, 2022 , 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 that 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 85% and 87% of the segment's gross premiums written for the years endedDecember 31, 2022 and 2021, 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 of 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 15% and 13% of the segment's gross premiums written for the years endedDecember 31, 2022 and 2021, 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 101 --------------------------------------------------------------------------------
assumptions relating to prepayments/refinancing. At
average duration of unearned premiums for credit and political risk line of
business was 5.4 years (2021: 5.2 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 43% and 49% of the reinsurance segment's gross premiums written for the years endedDecember 31, 2022 and 2021, 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. For proportional reinsurance contracts, premiums are recognized at the inception of the contract based on estimates to be 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 57% and 51% of the reinsurance segment's gross premiums written for the years endedDecember 31, 2022 and 2021, respectively. 102 -------------------------------------------------------------------------------- Gross premiums written for proportional reinsurance contracts incepting during the year were as follows: Year ended December 31, 2022 2021 2020 Liability$ 376,462
Accident and health 307,082 302,520 300,646
Professional lines 236,454 205,305 156,643
Credit and surety 133,853
93,638 91,940
Motor 135,954 187,569 228,754
Agriculture 112,452 72,897 52,682
Marine and aviation 22,081
23,912 19,065
Run-off lines
Catastrophe 3,463 12,733 13,863
Property 60,204 117,397 135,312
Engineering - - 15,472
Total run-off lines 63,667 130,130 164,647
Total estimated premiums $ 1,388,005
Gross premiums written (reinsurance segment)
As a % of total gross premiums written 53 % 50 % 46 % Historical experience has shown that cumulative adjustments to initial premium estimates for proportional reinsurance contracts have ranged from 0% to 7% over the last 5 years. We believe that a reasonably likely change to 2022 initial premium estimates for proportional reinsurance contracts would be 4% in either direction. A change in initial premium estimates of this magnitude would result in a change in gross premiums written of approximately$56 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 together with acquisition cost 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.
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, 2022 , the fair values of 93% (2021: 94%) 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. 103 -------------------------------------------------------------------------------- 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 independent 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, 2022 , the estimated fair value of our investments in these funds was$856 million (2021:$838 million ). Refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value Measurements' for further details.
The fair values ofCLO-Equities are estimated using a discounted cash flow model prepared by an external investment manager. AtDecember 31, 2022 , the estimated fair value of our indirect investment inCLO-Equities was$5 million (2021:$6 million ). Refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value Measurements' for further details.
Other Privately Held Investments
Other privately held investments include convertible preferred shares, 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 derived from one or a combination of valuation methodologies, which consider factors including recent capital raises by the investee companies, comparable precedent transaction multiples, comparable publicly traded multiples, third-party valuations, discounted cash-flow models, and other techniques that consider the industry and development stage of each investee company. The fair value of the variable yield security was determined using an externally developed discounted cash flow model. AtDecember 31, 2022 , the estimated fair value of these investments was$136 million (2021:$105 million ). Refer to Item 8, Note 6 to the Consolidated Financial Statements 'Fair Value Measurements' for further details. 104 --------------------------------------------------------------------------------
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.
A fixed maturity, available for sale security is 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 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 (i) to the
Consolidated Financial Statements 'Investments'.
AtDecember 31, 2022 , we recorded an allowance for expected credit losses of$11.7 million (2021:$0.3 million ) and for the year endedDecember 31, 2022 , we recorded impairment losses of$12.6 million (2021: $nil) (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. 105 --------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS
AtDecember 31, 2022 , 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 interest
rates, credit spreads, equity securities' prices, 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, 2022 , 94% (2021: 97%) of 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 (loss), total shareholders' equity and book value per common share but do not have an immediate impact on net income (loss). Changes in these market risks impact net income (loss) 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 (loss).
AtDecember 31, 2022 and 2021, we also invested in alternative investments including hedge funds, direct lending funds, private equity funds, real estate funds,CLO-Equities and other privately held investments. These investments are also exposed to market risks, with the changes in fair values immediately reported in net income (loss).
Sensitivity Analysis
The following is a sensitivity analysis of our primary market risk exposures at
Our policies to address these risks in 2022 were not materially different from 2021. 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.
106
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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 MBS 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$ 2,639,330 $
(78,870) $ -$ (78,870) Non-U.S. government 562,029 (15,428) - (15,428) Agency RMBS 1,202,785 (68,760) - (68,760)
Securities exposed to credit spreads:
Corporate debt 4,255,556 (149,860) (160,439) (310,299)
CMBS 947,778 (23,016) (29,792) (52,808)
Non-agency RMBS 133,534 (6,086) (5,779) (11,865)
ABS 1,429,527 (9,673) (47,191) (56,864)
Municipals 156,355 (6,814) (7,197) (14,011)
$ 11,326,894 $ (358,507) $ (250,398) $ (608,905)
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)
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 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, 2022 , the fair value of equity securities was 107 --------------------------------------------------------------------------------
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, 2022 , the fair value of hedge funds was$33 million (2021:$59 million ). AtDecember 31, 2022 , the impact of an instantaneous 15% decline in the fair value of our investment in hedge funds would be$5 million (2021:$9 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, 2022
Net managed assets
(liabilities), excluding
derivatives $ 11,331 $ 4,776 $ 302,679 $ (538,845) $ (411,773) $ (36,346) $ 44,183 $ (623,995)
Foreign currency derivatives, 7,160 - (312,269) 505,623 271,022 32,097 (74,438) 429,195
net
Net managed foreign currency 18,491 4,776 (9,590) (33,222) (140,751) (4,249) (30,255) (194,800)
exposure
Other net foreign currency - - 102 (1,199) (924) - 995 (1,026)
exposure
Total net foreign currency $ 18,491 $ 4,776 $
(9,488)
$ (29,260) $ (195,826) exposure Net foreign currency exposure as a percentage of total shareholders' equity 0.4 % 0.1 % (0.2 %) (0.7 %) (3.1 %) (0.1 %) (0.6 %) (4.2 %) Pre-tax impact of net foreign currency exposure on shareholders' equity given a hypothetical 10% rate movement(1)$ 1,849 $ 478 $ (949) $ (3,442) $ (14,168) $ (425) $ (2,926) $ (19,583) AtDecember 31, 2021 Net managed assets (liabilities), excluding derivatives$ 34,315 $ 8,565 $ 270,300 $ (528,430) $ (333,144) $ (72,230)
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
(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$46 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
During 2022, our emerging market debt securities portfolio which was included in
other net foreign currency exposure, was liquidated.
In 2021, other net foreign currency exposure primarily consisted of our emerging
market debt securities portfolio, which included those assets managed by
specific investment managers who have the discretion to hold foreign currency
exposures as part of their total return strategy.
108
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CIGNA GROUP FILES (8-K) Disclosing Regulation FD Disclosure
Press Release (
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