10-Q
Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
OR
¨        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-31721
AXIS CAPITAL HOLDINGS LIMITED
(Exact name of registrant as specified in its charter)
BERMUDA
(State or other jurisdiction of incorporation or organization)
98-0395986
(I.R.S. Employer Identification No.)
92 Pitts Bay Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
(441) 496-2600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x  Accelerated filer  ¨   Non-accelerated filer  ¨  Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨  No  x
As of April 20, 2016, there were 92,922,203 Common Shares, $0.0125 par value per share, of the registrant outstanding.


Table of Contents




AXIS CAPITAL HOLDINGS LIMITED
INDEX TO FORM 10-Q


 
 
 
Page
 
PART I
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
PART II
 
 
Item 1.
Item 1A.
Item 2.
Item 6.
 



2
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PART I
FINANCIAL INFORMATION
This quarterly report contains forward-looking statements within the meaning of the U.S. federal securities laws. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the United States securities laws. In some cases, these statements can be identified by the use of forward-looking words such as “may”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”. Forward-looking statements contained in this report may include information regarding our estimates of losses related to catastrophes and other large losses, measurements of potential losses in the fair value of our investment portfolio and derivative contracts, our expectations regarding pricing and other market conditions, our growth prospects, and valuations of the potential impact of movements in interest rates, equity prices, credit spreads and foreign currency rates. Forward-looking statements only reflect our expectations and are not guarantees of performance.
These statements involve risks, uncertainties and assumptions. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. We believe that these factors include, but are not limited to, the following: 
•
the occurrence and magnitude of natural and man-made disasters,
•
actual claims exceeding our loss reserves,
•
general economic, capital and credit market conditions,
•
the failure of any of the loss limitation methods we employ,
•
the effects of emerging claims, coverage and regulatory issues, including uncertainty related to coverage definitions, limits, terms and conditions,
•
the failure of our cedants to adequately evaluate risks,
•
inability to obtain additional capital on favorable terms, or at all,
•
the loss of one or more key executives,
•
a decline in our ratings with rating agencies,
•
loss of business provided to us by our major brokers,
•
changes in accounting policies or practices,
•
the use of industry catastrophe models and changes to these models,
•
changes in governmental regulations,
•
increased competition,
•
changes in the political environment of certain countries in which we operate or underwrite business,
•
fluctuations in interest rates, credit spreads, equity prices and/or currency values,
•
the other matters set forth under Item 1A, ‘Risk Factors’ and Item 7, ‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’ included in our Annual Report on Form 10-K for the year ended December 31, 2015.
We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.




3
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ITEM 1.     CONSOLIDATED FINANCIAL STATEMENTS
 
 
Page  
 
 
Consolidated Balance Sheets at March 31, 2016 (Unaudited) and December 31, 2015
Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015 (Unaudited)
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015 (Unaudited)
Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2016 and 2015 (Unaudited)
Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation and Accounting Policies
Note 2 - Segment Information
Note 3 - Investments
Note 4 - Fair Value Measurements
Note 5 - Derivative Instruments
Note 6 - Reserve for Losses and Loss Expenses
Note 7 - Share-Based Compensation
Note 8 - Earnings Per Common Share
Note 9 - Shareholders' Equity
Note 10 - Commitments and Contingencies
Note 11 - Other Comprehensive Income






4
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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2016 (UNAUDITED) AND DECEMBER 31, 2015
 
 
2016
 
2015
 
(in thousands)
Assets
 
 
 
Investments:
 
 
 
Fixed maturities, available for sale, at fair value
(Amortized cost 2016: $11,812,782; 2015: $11,897,639)
$
11,838,068

 
$
11,719,749

Equity securities, available for sale, at fair value
(Cost 2016: $605,291; 2015: $575,776)
637,325

 
597,998

Mortgage loans, held for investment, at amortized cost and fair value
267,589

 
206,277

Other investments, at fair value
859,639

 
816,756

Short-term investments, at amortized cost and fair value
29,540

 
34,406

Total investments
13,632,161

 
13,375,186

Cash and cash equivalents
777,320

 
988,133

Restricted cash and cash equivalents
174,991

 
186,618

Accrued interest receivable
71,475

 
73,729

Insurance and reinsurance premium balances receivable
2,690,400

 
1,967,535

Reinsurance recoverable on unpaid and paid losses
2,116,090

 
2,096,104

Deferred acquisition costs
646,919

 
471,782

Prepaid reinsurance premiums
436,382

 
396,201

Receivable for investments sold
1,614

 
26,478

Goodwill and intangible assets
86,446

 
86,858

Other assets
344,392

 
313,267

Total assets
$
20,978,190

 
$
19,981,891

 
 
 
 
Liabilities
 
 
 
Reserve for losses and loss expenses
$
9,716,487

 
$
9,646,285

Unearned premiums
3,586,307

 
2,760,889

Insurance and reinsurance balances payable
344,181

 
356,417

Senior notes
992,091

 
991,825

Payable for investments purchased
135,647

 
9,356

Other liabilities
253,218

 
350,237

Total liabilities
15,027,931

 
14,115,009

 
 
 
 
Shareholders’ equity
 
 
 
Preferred shares
625,000

 
627,843

Common shares (2016: 176,556; 2015: 176,240 shares issued and
2016: 92,903; 2015: 96,066 shares outstanding)
2,206

 
2,202

Additional paid-in capital
2,296,533

 
2,241,388

Accumulated other comprehensive income (loss)
17,646

 
(188,465
)
Retained earnings
6,198,932

 
6,194,353

Treasury shares, at cost (2016: 83,653; 2015: 80,174 shares)
(3,190,058
)
 
(3,010,439
)
Total shareholders’ equity
5,950,259

 
5,866,882

 
 
 
 
Total liabilities and shareholders’ equity
$
20,978,190

 
$
19,981,891


See accompanying notes to Consolidated Financial Statements.

5
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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015


 
Three months ended
 
2016
 
2015
 
(in thousands, except for per share amounts)
Revenues
 
 
 
Net premiums earned
$
902,340

 
$
904,053

Net investment income
49,164

 
92,107

Other insurance related income (losses)
(203
)
 
7,676

Net realized investment losses:
 
 
 
Other-than-temporary impairment ("OTTI") losses
(9,729
)
 
(17,568
)
Other realized investment losses
(56,779
)
 
(24,985
)
Total net realized investment losses
(66,508
)
 
(42,553
)
Total revenues
884,793

 
961,283

 
 
 
 
Expenses
 
 
 
Net losses and loss expenses
498,962

 
512,328

Acquisition costs
180,635

 
171,542

General and administrative expenses
149,901

 
163,241

Foreign exchange losses (gains)
616

 
(63,220
)
Interest expense and financing costs
12,833

 
12,257

Total expenses
842,947

 
796,148

 
 
 
 
Income before income taxes
41,846

 
165,135

Income tax benefit
(6,540
)
 
(690
)
Net income
48,386

 
165,825

Preferred share dividends
9,969

 
10,022

Net income available to common shareholders
$
38,417

 
$
155,803

 
 
 
 
Per share data
 
 
 
Net income per common share:
 
 
 
Basic net income
$
0.41

 
$
1.56

Diluted net income
$
0.41

 
$
1.54

Weighted average number of common shares outstanding - basic
94,035

 
99,910

Weighted average number of common shares outstanding - diluted
94,853

 
101,139

Cash dividends declared per common share
$
0.35

 
$
0.29




See accompanying notes to Consolidated Financial Statements.

6
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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
 
 
Three months ended
 
 
2016
 
2015
 
 
(in thousands)
Net income
$
48,386

 
$
165,825

 
Other comprehensive income, net of tax:
 
 
 
 
Available for sale investments:
 
 
 
 
Unrealized investment gains (losses) arising during the period
138,634

 
(5,187
)
 
Adjustment for reclassification of net realized investment losses and OTTI losses recognized in net income
59,281

 
45,104

 
Unrealized investment gains arising during the period, net of reclassification adjustment
197,915

 
39,917

 
Foreign currency translation adjustment
8,196

 
(11,413
)
 
Total other comprehensive income, net of tax
206,111

 
28,504

 
Comprehensive income
$
254,497

 
$
194,329

 



See accompanying notes to Consolidated Financial Statements.

7
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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
 
2016
 
2015
 
(in thousands)
Preferred shares
 
 
 
Balance at beginning of period
$
627,843

 
$
627,843

Shares repurchased
(2,843
)
 
—

Balance at end of period
625,000

 
627,843

 
 
 
 
Common shares (par value)
 
 
 
Balance at beginning of period
2,202

 
2,191

Shares issued
4

 
9

Balance at end of period
2,206

 
2,200

 
 
 
 
Additional paid-in capital
 
 
 
Balance at beginning of period
2,241,388

 
2,285,016

Shares issued - common shares
1,779

 
2,294

Cost of treasury shares reissued
(15,007
)
 
(13,517
)
Settlement of accelerated share repurchase
60,000

 
—

Stock options exercised
—

 
560

Share-based compensation expense
8,373

 
12,712

Balance at end of period
2,296,533

 
2,287,065

 
 
 
 
Accumulated other comprehensive income (loss)
 
 
 
Balance at beginning of period
(188,465
)
 
(45,574
)
Unrealized gains (losses) on available for sale investments, net of tax:
 
 
 
Balance at beginning of period
(149,585
)
 
(28,192
)
Unrealized gains arising during the period, net of reclassification adjustment
197,915

 
39,917

Non-credit portion of OTTI losses
—

 
—

Balance at end of period
48,330

 
11,725

Cumulative foreign currency translation adjustments, net of tax:
 
 
 
Balance at beginning of period
(38,880
)
 
(17,382
)
Foreign currency translation adjustments
8,196

 
(11,413
)
Balance at end of period
(30,684
)
 
(28,795
)
Balance at end of period
17,646

 
(17,070
)
 
 
 
 
Retained earnings
 
 
 
Balance at beginning of period
6,194,353

 
5,715,504

Net income
48,386

 
165,825

Preferred share dividends
(9,969
)
 
(10,022
)
Common share dividends
(33,838
)
 
(29,068
)
Balance at end of period
6,198,932

 
5,842,239

 
 
 
 
Treasury shares, at cost
 
 
 
Balance at beginning of period
(3,010,439
)
 
(2,763,859
)
Shares repurchased for treasury
(196,011
)
 
(14,772
)
Cost of treasury shares reissued
16,392

 
13,517

Balance at end of period
(3,190,058
)
 
(2,765,114
)
 
 
 
 
Total shareholders’ equity
$
5,950,259

 
$
5,977,163

 
 
 
 

See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
 
Three months ended
 
2016
 
2015
 
(in thousands)
Cash flows from operating activities:
 
 
 
Net income
$
48,386

 
$
165,825

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Net realized investment losses
66,508

 
42,553

Net realized and unrealized gains (losses) on other investments
27,177

 
(30,935
)
Amortization of fixed maturities
19,100

 
31,372

Other amortization and depreciation
5,294

 
6,581

Share-based compensation expense, net of cash payments
(1,357
)
 
4,834

Changes in:
 
 
 
Accrued interest receivable
2,616

 
3,101

Reinsurance recoverable balances
(6,668
)
 
(10,133
)
Deferred acquisition costs
(175,038
)
 
(149,786
)
Prepaid reinsurance premiums
(37,732
)
 
(6,926
)
Reserve for loss and loss expenses
50,132

 
(122,508
)
Unearned premiums
820,947

 
553,642

Insurance and reinsurance balances, net
(737,185
)
 
(419,218
)
Other items
(96,430
)
 
(96,490
)
Net cash used in operating activities
(14,250
)
 
(28,088
)
 
 
 
 
Cash flows from investing activities:
 
 
 
Purchases of:
 
 
 
Fixed maturities
(2,556,709
)
 
(3,036,497
)
Equity securities
(102,963
)
 
(41,239
)
Mortgage loans
(61,263
)
 
—

Other investments
(117,622
)
 
(21,418
)
Short-term investments
(13,931
)
 
(14,513
)
Proceeds from the sale of:
 
 
 
Fixed maturities
2,473,167

 
2,823,044

Equity securities
85,254

 
522

Other investments
47,562

 
78,812

Short-term investments
16,331

 
79,657

Proceeds from redemption of fixed maturities
246,147

 
280,864

Proceeds from redemption of short-term investments
2,282

 
4,632

Purchase of other assets
(44,721
)
 
(4,647
)
Change in restricted cash and cash equivalents
11,627

 
19,240

Net cash provided by (used in) investing activities
(14,839
)
 
168,457

 
 
 
 
Cash flows from financing activities:
 
 
 
Repurchase of common shares
(136,011
)
 
(22,581
)
Dividends paid - common shares
(36,636
)
 
(30,103
)
Dividends paid - preferred shares
(10,003
)
 
(10,022
)
Proceeds from issuance of common shares
1,783

 
2,863

Repurchase of preferred shares
(2,843
)
 
—

Net cash used in financing activities
(183,710
)
 
(59,843
)
 
 
 
 
Effect of exchange rate changes on foreign currency cash and cash equivalents
1,986

 
(16,122
)
Increase (decrease) in cash and cash equivalents
(210,813
)
 
64,404

Cash and cash equivalents - beginning of period
988,133

 
921,830

Cash and cash equivalents - end of period
$
777,320

 
$
986,234

 
 
 
 

See accompanying notes to Consolidated Financial Statements.

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


1.
BASIS OF PRESENTATION AND ACCOUNTING POLICIES 

Basis of Presentation

These interim consolidated financial statements include the accounts of AXIS Capital Holdings Limited (“AXIS Capital”) and its subsidiaries (herein referred to as “we,” “us,” “our,” or the “Company”).

The consolidated balance sheet at March 31, 2016 and the consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for the periods ended March 31, 2016 and 2015 have not been audited. The balance sheet at December 31, 2015 is derived from our audited financial statements.

These financial statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) for interim financial information and with the Securities and Exchange Commission's (“SEC”) instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of our financial position and results of operations for the periods presented. The results of operations for any interim period are not necessarily indicative of the results for a full year. All inter-company accounts and transactions have been eliminated.

The following information should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2015. Tabular dollar and share amounts are in thousands, except per share amounts. All amounts are reported in U.S. dollars.

Significant Accounting Policies

There were no notable changes in our significant accounting policies subsequent to our Annual Report on Form 10-K for the year ended December 31, 2015.

New Accounting Standards Adopted in 2016

Share-Based Compensation

Effective January 1, 2016, the Company adopted the Accounting Standards Update ("ASU") 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period" issued by the Financial Accounting Standards Board (the "FASB"). This guidance requires that compensation costs be recognized in the period in which it becomes probable that the performance target will be achieved and to represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. This guidance was issued to clarify treatment where there was a divergence in accounting practice and its adoption did not impact the results of our operations, our financial condition or liquidity.

Debt Issuance Costs

Effective January 1, 2016, the Company adopted ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs" issued by the FASB. This guidance requires the debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset. This guidance was issued to simplify the presentation of debt issuance costs and to resolve conflicting guidance. This guidance did not impact our results of operations, financial condition or liquidity.

Investments Measured Using The Net Asset Value Per Share ("NAV") Practical Expedient

Effective January 1, 2016, the Company adopted ASU 2015-07, "Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent)" issued by the FASB. This guidance eliminated the requirement to categorize investments measured using the NAV practical expedient in the fair value hierarchy table. As this new guidance related solely to disclosures, the adoption did not impact our results of operations, financial condition or liquidity. The updated disclosures have been provided in Note 4 'Fair Value Measurements'.




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

1.
BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)


Recently Issued Accounting Standards Not Yet Adopted

Leases

In February 2016, the FASB issued guidance that provides a new comprehensive model for lease accounting. The guidance will require most leases to be recognized on the balance sheet by recording a right-of-use asset and a corresponding lease liability. This guidance is effective for reporting periods beginning after December 15, 2018, and interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact of this guidance on our results of operations, financial condition and liquidity.

Transition To Equity Method Of Accounting

In March 2016, the FASB issued new guidance eliminating the requirement that an investor retrospectively apply equity method accounting when an existing investment qualifies for equity method accounting. The guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those fiscal years with early adoption permitted. The guidance will be adopted on a prospective basis. The adoption of this guidance is not expected to materially impact our results of operations, financial condition or liquidity.

Share-Based Compensation Accounting

In March 2016, the FASB issued new guidance that will change the accounting for certain aspects of share-based compensation payments to employees. The guidance will require all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. The guidance will also allow employers to increase the amounts withheld to cover income taxes on share-based compensation awards without requiring liability classification. Additionally, companies will be required to elect whether they will account for award forfeitures by recognizing forfeitures only as they occur or by estimating the number of awards expected to be forfeited. This guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact of this guidance on our results of operations, financial condition and liquidity.




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

2.
SEGMENT INFORMATION


Our underwriting operations are organized around our global underwriting platforms, AXIS Insurance and AXIS Re. Therefore we have determined that we have two reportable segments, insurance and reinsurance. We do not allocate our assets by segment, with the exception of goodwill and intangible assets, as we evaluate the underwriting results of each segment separately from the results of our investment portfolio.

The following tables summarize the underwriting results of our reportable segments, as well as the carrying values of allocated goodwill and intangible assets:
 
  
2016
 
2015
 
 
Three months ended and at March 31,
Insurance
 
Reinsurance
 
Total
 
Insurance
 
Reinsurance
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross premiums written
$
653,349

 
$
1,305,812

 
$
1,959,161

 
$
602,724

 
$
1,076,208

 
$
1,678,932

 
 
Net premiums written
473,163

 
1,212,643

 
1,685,806

 
436,740

 
1,018,806

 
1,455,546

 
 
Net premiums earned
438,678

 
463,662

 
902,340

 
447,467

 
456,586

 
904,053

 
 
Other insurance related income (loss)
137

 
(340
)
 
(203
)
 
—

 
7,676

 
7,676

 
 
Net losses and loss expenses
(274,405
)
 
(224,557
)
 
(498,962
)
 
(285,773
)
 
(226,555
)
 
(512,328
)
 
 
Acquisition costs
(61,398
)
 
(119,237
)
 
(180,635
)
 
(64,455
)
 
(107,087
)
 
(171,542
)
 
 
General and administrative expenses
(85,576
)
 
(38,013
)
 
(123,589
)
 
(87,689
)
 
(39,380
)
 
(127,069
)
 
 
Underwriting income
$
17,436

 
$
81,515

 
98,951

 
$
9,550

 
$
91,240

 
100,790

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate expenses
 
 
 
 
(26,312
)
 
 
 
 
 
(36,172
)
 
 
Net investment income
 
 
 
 
49,164

 
 
 
 
 
92,107

 
 
Net realized investment losses
 
 
 
 
(66,508
)
 
 
 
 
 
(42,553
)
 
 
Foreign exchange (losses) gains
 
 
 
 
(616
)
 
 
 
 
 
63,220

 
 
Interest expense and financing costs
 
 
 
 
(12,833
)
 
 
 
 
 
(12,257
)
 
 
Income before income taxes
 
 
 
 
$
41,846

 
 
 
 
 
$
165,135

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss and loss expense ratio
62.6
%
 
48.4
%
 
55.3
%
 
63.9
%
 
49.6
%
 
56.7
%
 
 
Acquisition cost ratio
14.0
%
 
25.7
%
 
20.0
%
 
14.4
%
 
23.5
%
 
19.0
%
 
 
General and administrative expense ratio
19.5
%
 
8.2
%
 
16.6
%
 
19.6
%
 
8.6
%
 
18.0
%
 
 
Combined ratio
96.1
%
 
82.3
%
 
91.9
%
 
97.9
%
 
81.7
%
 
93.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Goodwill and intangible assets
$
86,446

 
$
—

 
$
86,446

 
$
88,508

 
$
—

 
$
88,508

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
 
 
 
 
 
 
 
 
 
 
 
 




12
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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.
INVESTMENTS

a)     Fixed Maturities and Equities

The amortized cost or cost and fair values of our fixed maturities and equities were as follows:
 
 
Amortized
Cost or
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Non-credit
OTTI
in AOCI(5)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
1,552,689

 
$
20,614

 
$
(3,123
)
 
$
1,570,180

 
$
—

 
 
Non-U.S. government
753,923

 
6,718

 
(39,918
)
 
720,723

 
—

 
 
Corporate debt
4,423,369

 
55,031

 
(53,358
)
 
4,425,042

 
—

 
 
Agency RMBS(1)
2,377,262

 
45,420

 
(1,381
)
 
2,421,301

 
—

 
 
CMBS(2)
1,099,346

 
13,221

 
(5,883
)
 
1,106,684

 
—

 
 
Non-Agency RMBS
94,704

 
1,584

 
(1,266
)
 
95,022

 
(862
)
 
 
ABS(3)
1,359,752

 
1,199

 
(17,801
)
 
1,343,150

 
—

 
 
Municipals(4)
151,737

 
4,758

 
(529
)
 
155,966

 
—

 
 
Total fixed maturities
$
11,812,782

 
$
148,545

 
$
(123,259
)
 
$
11,838,068

 
$
(862
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
Common stocks
$
292

 
$
96

 
$
(210
)
 
$
178

 
 
 
 
Exchange-traded funds
471,879

 
32,339

 
(3,550
)
 
500,668

 
 
 
 
Bond mutual funds
133,120

 
3,359

 
—

 
136,479

 
 
 
 
Total equity securities
$
605,291

 
$
35,794

 
$
(3,760
)
 
$
637,325

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
1,673,617

 
$
1,545

 
$
(23,213
)
 
$
1,651,949

 
$
—

 
 
Non-U.S. government
809,025

 
2,312

 
(72,332
)
 
739,005

 
—

 
 
Corporate debt
4,442,315

 
16,740

 
(96,286
)
 
4,362,769

 
—

 
 
Agency RMBS(1)
2,236,138

 
22,773

 
(9,675
)
 
2,249,236

 
—

 
 
CMBS(2)
1,088,595

 
3,885

 
(9,182
)
 
1,083,298

 
—

 
 
Non-Agency RMBS
99,989

 
1,992

 
(973
)
 
101,008

 
(875
)
 
 
ABS(3)
1,387,919

 
952

 
(17,601
)
 
1,371,270

 
—

 
 
Municipals(4)
160,041

 
2,319

 
(1,146
)
 
161,214

 
—

 
 
Total fixed maturities
$
11,897,639

 
$
52,518

 
$
(230,408
)
 
$
11,719,749

 
$
(875
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
Common stocks
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
Exchange-traded funds
447,524

 
31,211

 
(4,762
)
 
473,973

 
 
 
 
Bond mutual funds
128,252

 
—

 
(4,227
)
 
124,025

 
 
 
 
Total equity securities
$
575,776

 
$
31,211

 
$
(8,989
)
 
$
597,998

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




13
Table of Contents

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

3.
INVESTMENTS (CONTINUED)

In the normal course of investing activities, we actively manage allocations to non-controlling tranches of structured securities (variable interests) issued by VIEs. These structured securities include RMBS, CMBS and ABS and are included in the above table. Additionally, within our other investments portfolio, we also invest in limited partnerships (hedge funds, direct lending funds and private equity funds) and CLO equity tranched securities, which are all variable interests issued by VIEs (see Note 4(c)). For these variable interests, we do not have the power to direct the activities that are most significant to the economic performance of the VIEs and accordingly we are not the primary beneficiary for any of these VIEs. Our maximum exposure to loss on these interests is limited to the amount of our investment. We have not provided financial or other support with respect to these structured securities other than our original investment.

Contractual Maturities

The contractual maturities of fixed maturities are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
Amortized
Cost
 
Fair
Value
 
% of Total
Fair Value
 
 
 
 
 
 
 
 
 
 
At March 31, 2016
 
 
 
 
 
 
 
Maturity
 
 
 
 
 
 
 
Due in one year or less
$
295,599

 
$
291,510

 
2.5
%
 
 
Due after one year through five years
3,994,127

 
3,985,100

 
33.7
%
 
 
Due after five years through ten years
2,263,573

 
2,264,238

 
19.1
%
 
 
Due after ten years
328,419

 
331,063

 
2.8
%
 
 
 
6,881,718

 
6,871,911

 
58.1
%
 
 
Agency RMBS
2,377,262

 
2,421,301

 
20.5
%
 
 
CMBS
1,099,346

 
1,106,684

 
9.3
%
 
 
Non-Agency RMBS
94,704

 
95,022

 
0.8
%
 
 
ABS
1,359,752

 
1,343,150

 
11.3
%
 
 
Total
$
11,812,782

 
$
11,838,068

 
100.0
%
 
 
 
 
 
 
 
 
 
 
At December 31, 2015
 
 
 
 
 
 
 
Maturity
 
 
 
 
 
 
 
Due in one year or less
$
291,368

 
$
289,571

 
2.5
%
 
 
Due after one year through five years
4,217,515

 
4,142,802

 
35.3
%
 
 
Due after five years through ten years
2,263,684

 
2,181,525

 
18.6
%
 
 
Due after ten years
312,431

 
301,039

 
2.6
%
 
 
 
7,084,998

 
6,914,937

 
59.0
%
 
 
Agency RMBS
2,236,138

 
2,249,236

 
19.2
%
 
 
CMBS
1,088,595

 
1,083,298

 
9.2
%
 
 
Non-Agency RMBS
99,989

 
101,008

 
0.9
%
 
 
ABS
1,387,919

 
1,371,270

 
11.7
%
 
 
Total
$
11,897,639

 
$
11,719,749

 
100.0
%
 
 
 
 
 
 
 
 
 




14
Table of Contents

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

3.
INVESTMENTS (CONTINUED)

 Gross Unrealized Losses

The following table summarizes fixed maturities and equities in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
 
  
12 months or greater
 
Less than 12 months
 
Total
 
 
  
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
84,342

 
$
(3,030
)
 
$
146,502

 
$
(93
)
 
$
230,844

 
$
(3,123
)
 
 
Non-U.S. government
135,920

 
(30,440
)
 
220,140

 
(9,478
)
 
356,060

 
(39,918
)
 
 
Corporate debt
388,621

 
(24,425
)
 
1,019,187

 
(28,933
)
 
1,407,808

 
(53,358
)
 
 
Agency RMBS
179,155

 
(850
)
 
143,472

 
(531
)
 
322,627

 
(1,381
)
 
 
CMBS
102,506

 
(1,775
)
 
392,674

 
(4,108
)
 
495,180

 
(5,883
)
 
 
Non-Agency RMBS
5,419

 
(275
)
 
58,771

 
(991
)
 
64,190

 
(1,266
)
 
 
ABS
579,638

 
(11,397
)
 
536,264

 
(6,404
)
 
1,115,902

 
(17,801
)
 
 
Municipals
14,966

 
(509
)
 
2,635

 
(20
)
 
17,601

 
(529
)
 
 
Total fixed maturities
$
1,490,567

 
$
(72,701
)
 
$
2,519,645

 
$
(50,558
)
 
$
4,010,212

 
$
(123,259
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
$
—

 
$
—

 
$
—

 
$
(210
)
 
$
—

 
$
(210
)
 
 
Exchange-traded funds
—

 
—

 
72,146

 
(3,550
)
 
72,146

 
(3,550
)
 
 
Bond mutual funds
—

 
—

 
—

 
—

 
—

 
—

 
 
Total equity securities
$
—

 
$
—

 
$
72,146

 
$
(3,760
)
 
$
72,146

 
$
(3,760
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government and agency
$
84,179

 
$
(7,622
)
 
$
1,474,202

 
$
(15,591
)
 
$
1,558,381

 
$
(23,213
)
 
 
Non-U.S. government
170,269

 
(50,841
)
 
317,693

 
(21,491
)
 
487,962

 
(72,332
)
 
 
Corporate debt
340,831

 
(33,441
)
 
2,845,375

 
(62,845
)
 
3,186,206

 
(96,286
)
 
 
Agency RMBS
64,792

 
(1,609
)
 
1,073,566

 
(8,066
)
 
1,138,358

 
(9,675
)
 
 
CMBS
75,627

 
(1,579
)
 
659,480

 
(7,603
)
 
735,107

 
(9,182
)
 
 
Non-Agency RMBS
5,283

 
(210
)
 
43,199

 
(763
)
 
48,482

 
(973
)
 
 
ABS
562,599

 
(11,158
)
 
667,448

 
(6,443
)
 
1,230,047

 
(17,601
)
 
 
Municipals
14,214

 
(310
)
 
64,104

 
(836
)
 
78,318

 
(1,146
)
 
 
Total fixed maturities
$
1,317,794

 
$
(106,770
)
 
$
7,145,067

 
$
(123,638
)
 
$
8,462,861

 
$
(230,408
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stocks
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
 
Exchange-traded funds
2,331

 
(313
)
 
110,972

 
(4,449
)
 
113,303

 
(4,762
)
 
 
Bond mutual funds
—

 
—

 
124,025

 
(4,227
)
 
124,025

 
(4,227
)
 
 
Total equity securities
$
2,331

 
$
(313
)
 
$
234,997

 
$
(8,676
)
 
$
237,328

 
$
(8,989
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




15
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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.
INVESTMENTS (CONTINUED)

Fixed Maturities

At March 31, 2016, 1,382 fixed maturities (2015: 2,314) were in an unrealized loss position of $123 million (2015: $230 million), of which $26 million (2015: $39 million) was related to securities below investment grade or not rated.

At March 31, 2016, 438 (2015: 383) securities had been in a continuous unrealized loss position for 12 months or greater and had a fair value of $1,491 million (2015: $1,318 million). Following our credit impairment review, we concluded that these securities as well as the remaining securities in an unrealized loss position in the above table were temporarily impaired at March 31, 2016, and were expected to recover in value as the securities approach maturity. Further, at March 31, 2016, we did not intend to sell these securities in an unrealized loss position and it is more likely than not that we will not be required to sell these securities before the anticipated recovery of their amortized costs.

Equity Securities

At March 31, 2016, 29 securities (2015: 35) were in an unrealized loss position of $4 million (2015: $9 million).

At March 31, 2016, there were no securities (2015: 1) in a continuous unrealized loss position for 12 months or greater. Based on our impairment review process and our ability and intent to hold these securities for a reasonable period of time sufficient for a full recovery, we concluded that the above equities in an unrealized loss position were temporarily impaired at March 31, 2016.

b) Mortgage Loans

The following table provides a breakdown of our mortgage loans held-for-investment:
 
  
March 31, 2016
 
December 31, 2015
 
 
  
Carrying Value
 
% of Total
 
Carrying Value
 
% of Total
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage Loans held-for-investment:
 
 
 
 
 
 
 
 
 
Commercial
$
267,589

 
100
%
 
$
206,277

 
100
%
 
 
 
267,589

 
100
%
 
206,277

 
100
%
 
 
Valuation allowances
—

 
—
%
 
—

 
—
%
 
 
Total Mortgage Loans held-for-investment
$
267,589

 
100
%
 
$
206,277

 
100
%
 
 
 
 
 
 
 
 
 
 
 

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

We have a high quality mortgage portfolio with debt service coverage ratios in excess of 1.3x and loan-to-value ratios of less than 65%; there are no credit losses associated with the commercial mortgage loans that we hold at March 31, 2016.

There are no past due amounts at March 31, 2016.
 



16
Table of Contents

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

3.
INVESTMENTS (CONTINUED)

c) Other Investments

The following table provides a breakdown of our investments in hedge funds, direct lending funds, private equity funds, real estate funds and CLO Equities, together with additional information relating to the liquidity of each category:
 
 
Fair Value
 
Redemption Frequency
(if currently eligible)
 
  Redemption  
  Notice Period  
 
 
 
 
 
 
 
 
 
 
 
 
At March 31, 2016
 

 
 

 
 
 
 
 
 
Long/short equity funds
$
128,502

 
15
%
 
Quarterly, Semi-annually, Annually
 
45-60 days
 
 
Multi-strategy funds
312,211

 
36
%
 
Quarterly, Semi-annually
 
60-95 days
 
 
Event-driven funds
146,428

 
17
%
 
Quarterly, Annually
 
45-60 days
 
 
Leveraged bank loan funds
65

 
—
%
 
n/a
 
n/a
 
 
Direct lending funds
112,889

 
13
%
 
n/a
 
n/a
 
 
Private equity funds
93,783

 
11
%
 
n/a
 
n/a
 
 
Real estate funds
5,390

 
1
%
 
n/a
 
n/a
 
 
CLO - Equities
60,371

 
7
%
 
n/a
 
n/a
 
 
Total other investments
$
859,639

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2015
 

 
 

 
 
 
 
 
 
Long/short equity funds
$
154,348

 
19
%
 
Quarterly, Semi-annually, Annually
 
45-60 days
 
 
Multi-strategy funds
355,073

 
43
%
 
Quarterly, Semi-annually
 
60-95 days
 
 
Event-driven funds
147,287

 
18
%
 
Quarterly, Annually
 
45-60 days
 
 
Leveraged bank loan funds
65

 
—
%
 
n/a
 
n/a
 
 
Direct lending funds
90,120

 
11
%
 
n/a
 
n/a
 
 
Private equity funds
—

 
—
%
 
n/a
 
n/a
 
 
Real estate funds
4,929

 
1
%
 
n/a
 
n/a
 
 
CLO - Equities
64,934

 
8
%
 
n/a
 
n/a
 
 
Total other investments
$
816,756

 
100
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
n/a - not applicable

The investment strategies for the above funds are as follows:

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

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

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

•
Leveraged bank loan funds: Seek to achieve attractive returns by investing primarily in bank loan collateral that has limited interest rate risk exposure.

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




17
Table of Contents

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

3.
INVESTMENTS (CONTINUED)

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

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

Two common redemption restrictions which may impact our ability to redeem our hedge funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the fund's net assets which may otherwise hinder the general partner or investment manager's ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. During 2016 and 2015, neither of these restrictions impacted our redemption requests. At March 31, 2016, $59 million (2015: $66 million), representing 10% (2015: 10%) of our total hedge funds, relate to holdings where we are still within the lockup period. The expiration of these lockup periods range from March 2016 to April 2018. 

At March 31, 2016, we have $198 million (2015: $222 million) of unfunded commitments within our other investments portfolio relating to our future investments in direct lending funds. Once the full amount of committed capital has been called by the General Partner of each of these funds, the assets will not be fully returned until the completion of the fund's investment term. These funds have investment terms ranging from 5-10 years and the General Partners of certain funds have the option to extend the term by up to three years.
At March 31, 2016, we have $12 million (2015: $12 million) of unfunded commitments as a limited partner in a multi-strategy hedge fund. Once the full amount of committed capital has been called by the General Partner, the assets will not be fully returned until the completion of the fund's investment term which ends in March, 2019. The General Partner then has the option to extend the term by up to three years.
At March 31, 2016, we have $95 million (2015: $95 million) of unfunded commitments as a limited partner in a fund which invests in real estate and real estate securities and businesses. The fund is subject to a three year commitment period and a total fund life of eight years during which time we are not eligible to redeem our investment.

During 2016, we made a $135 million commitment as a limited partner in a private equity fund. At March 31, 2016, $41 million of our commitment remains unfunded and the current fair value of the funds called to date are included in the private equity funds line of the table above. The fund invests in underlying private equity funds and the life of the fund is subject to the dissolution of the underlying funds. We expect the overall holding period to be over ten years.

During 2015, we made a $50 million commitment as a limited partner of a bank revolver opportunity fund. The fund is subject to an investment term of seven years and the General Partners have the option to extend the term by up to two years. At March 31, 2016, this commitment remains unfunded. It is not anticipated that the full amount of this fund will be drawn.




18
Table of Contents

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

3.
INVESTMENTS (CONTINUED)

d) Net Investment Income

Net investment income was derived from the following sources:
 
  
Three months ended March 31,
 
 
  
2016
 
2015
 
 
 
 
 
 
 
 
Fixed maturities
$
75,975

 
$
66,088

 
 
Other investments
(26,878
)
 
30,935

 
 
Equity securities
5,145

 
1,676

 
 
Mortgage loans
1,684

 
13

 
 
Cash and cash equivalents
1,434

 
1,099

 
 
Short-term investments
206

 
69

 
 
Gross investment income
57,566

 
99,880

 
 
Investment expenses
(8,402
)
 
(7,773
)
 
 
Net investment income
$
49,164

 
$
92,107

 
 
 
 
 
 
 

e) Net Realized Investment Losses

The following table provides an analysis of net realized investment losses:
 
  
Three months ended March 31,
 
 
  
2016
 
2015
 
 
 
 
 
 
 
 
Gross realized gains
 
 
 
 
 
Fixed maturities and short-term investments
$
16,164

 
$
15,661

 
 
Equities
3,541

 
38

 
 
Gross realized gains
19,705

 
15,699

 
 
Gross realized losses
 
 
 
 
 
Fixed maturities and short-term investments
(59,177
)
 
(43,091
)
 
 
Equities
(14,787
)
 
(124
)
 
 
Gross realized losses
(73,964
)
 
(43,215
)
 
 
Net OTTI recognized in earnings
(9,729
)
 
(17,568
)
 
 
Change in fair value of investment derivatives(1)
(2,520
)
 
2,531