Edgar Filing: AXIS CAPITAL HOLDINGS LTD

Document

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, 2019

¨ 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company ¨
	Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Securities registered pursuant to Section 12(b) of the Exchange Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common shares, par value $0.0125 per share	AXS	New York Stock Exchange
5.50% Series D preferred shares	AXS PRD	New York Stock Exchange
Depositary Shares, each representing a 1/100^th interest in a 5.50% Series E preferred share	AXS PRE	New York Stock Exchange

At April 26 2019, there were 83,935,148 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
	Financial Information	3
Item 1.	Consolidated Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	46
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	84
Item 4.	Controls and Procedures	84
	PART II
	Other Information	85
Item 1.	Legal Proceedings	85
Item 1A.	Risk Factors	85
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	85
Item 5.	Other Information	86
Item 6.	Exhibits	86
	Signatures	87

Table of Contents


PART I	FINANCIAL INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts included in this report, including statements regarding our estimates, beliefs, expectations, intentions, strategies or projections are "forward-looking statements". We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the United States federal securities laws. In some cases, these statements can be identified by the use of forward-looking words such as "may", "should", "could", "anticipate", "estimate", "expect", "plan", "believe", "predict", "potential" and "intend" or similar expressions. These forward-looking statements are not historical facts, and are based upon current expectations, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond management's control.

Forward-looking statements contained in this report may include, but are not limited to, information regarding our estimates of losses related to catastrophes and other large losses, measurements of potential losses in the fair market value of our investment portfolio and derivative contracts, our expectations regarding the performance of our business, our financial results, our liquidity and capital resources, the outcome of our strategic initiatives, our expectations regarding estimated synergies and the success of the integration of acquired entities, our expectations regarding the estimated benefits and synergies related to the Company's transformation program, our expectations regarding pricing and other market conditions, our growth prospects, and valuations of the potential impact of movements in interest rates, equity securities prices, credit spreads and foreign currency rates.

Forward-looking statements only reflect our expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Accordingly, there are or will be important factors that could cause actual results to differ materially from those indicated in such statements. We believe that these factors include, but are not limited to, the following:


•	the cyclical nature of the insurance and reinsurance business leading to periods with excess underwriting capacity and unfavorable premium rates,


•	the occurrence and magnitude of natural and man-made disasters,


•	the impact of global climate change on our business, including the possibility that we do not adequately assess or reserve for the increased frequency and severity of natural catastrophes,


•	losses from war, terrorism and political unrest or other unanticipated losses,


•	actual claims exceeding our loss reserves,


•	general economic, capital and credit market conditions,


•	the failure of any of the loss limitation methods we employ,


•	the effects of emerging claims, coverage and regulatory issues, including uncertainty related to coverage definitions, limits, terms and conditions,


•	our inability to purchase reinsurance or collect amounts due to us,


•	the breach by third parties in our program business of their obligations to us,


•	difficulties with technology and/or data security,


•	the failure of our policyholders and intermediaries to pay premiums,


•	the failure of our cedants to adequately evaluate risks,


•	inability to obtain additional capital on favorable terms, or at all,


•	the loss of one or more key executives,


•	a decline in our ratings with rating agencies,


•	loss of business provided to us by our major brokers and credit risk due to our reliance on brokers,


•	changes in accounting policies or practices,


•	the use of industry catastrophe models and changes to these models,


•	changes in governmental regulations and potential government intervention in our industry,


•	failure to comply with certain laws and regulations relating to sanctions and foreign corrupt practices,


•	increased competition,

Table of Contents


•	changes in the political environment of certain countries in which we operate or underwrite business including the United Kingdom's expected withdrawal from the European Union,


•	fluctuations in interest rates, credit spreads, equity securities' prices and/or currency values,


•	the failure to successfully integrate acquired businesses or realize the expected synergies resulting from such acquisitions,


•	the failure to realize the expected benefits or synergies relating to the Company's transformation initiative,


•	changes in tax laws, and

•

the other factors including but not limited to those described under Item 1A, 'Risk Factors' and Item 7, 'Management’s Discussion and Analysis of Financial Condition and Results of Operations' included in our most recent Annual Report on Form 10-K, filed with the Securities and Exchange Commission ("SEC"), as those factors may be updated from time to time in our periodic and other filings with the SEC, which are accessible on the SEC's website at www.sec.gov.

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

Website and Social Media Disclosure

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

Table of Contents

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS



	Page

Consolidated Balance Sheets at March 31, 2019 (Unaudited) and December 31, 2018	6
Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 (Unaudited)	7
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018 (Unaudited)	8
Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2019 and 2018 (Unaudited)	9
Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (Unaudited)	9
Notes to Consolidated Financial Statements (Unaudited)	10
Note 1 - Basis of Presentation and Significant Accounting Policies	10
Note 2 - Segment Information	12
Note 3 - Investments	14
Note 4 - Fair Value Measurements	23
Note 5 - Derivative Instruments	33
Note 6 - Reserve for Losses and Loss Expenses	36
Note 7 - Earnings Per Common Share	39
Note 8 - Share-Based Compensation	40
Note 9 - Shareholders' Equity	41
Note 10 - Debt and Financing Arrangements	42
Note 11 - Commitments and Contingencies	42
Note 12 - Leases	42
Note 13 - Transaction and Reorganization Expenses	44
Note 14 - Other Comprehensive Income (Loss)	44
Note 15 - Subsequent Events	45

Table of Contents

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2019 (UNAUDITED) AND DECEMBER 31, 2018



	2019			2018
	(in thousands)
Assets
Investments:
Fixed maturities, available for sale, at fair value (Amortized cost 2019: $11,834,207; 2018: $11,616,312)	$	11,874,518		$	11,435,347
Equity securities, at fair value (Cost 2019: $376,493; 2018: $365,905)	418,863			381,633
Mortgage loans, held for investment, at fair value	313,421			298,650
Other investments, at fair value	795,331			787,787
Equity method investments	110,322			108,103
Short-term investments, at fair value	41,853			144,040
Total investments	13,554,308			13,155,560
Cash and cash equivalents	1,151,182			1,232,814
Restricted cash and cash equivalents	455,076			597,206
Accrued interest receivable	78,594			80,335
Insurance and reinsurance premium balances receivable	3,667,923			3,007,296
Reinsurance recoverable on unpaid losses	3,555,341			3,501,669
Reinsurance recoverable on paid losses	321,798			280,233
Deferred acquisition costs	703,028			566,622
Prepaid reinsurance premiums	1,271,303			1,013,573
Receivable for investments sold	10,888			32,627
Goodwill	102,003			102,003
Intangible assets	238,763			241,568
Value of business acquired	22,610			35,714
Operating lease right-of-use assets	143,887			—
Other assets	280,878			285,346
Total assets	$	25,557,582		$	24,132,566
Liabilities
Reserve for losses and loss expenses	$	12,275,771		$	12,280,769
Unearned premiums	4,535,163			3,635,758
Insurance and reinsurance balances payable	1,440,942			1,338,991
Senior notes	1,342,345			1,341,961
Payable for investments purchased	159,544			111,838
Operating lease liabilities	144,298			—
Other liabilities	359,363			393,178
Total liabilities	20,257,426			19,102,495
Shareholders’ equity
Preferred shares	775,000			775,000
Common shares (shares issued 2019: 176,580; 2018: 176,580 shares outstanding 2019: 83,934; 2018: 83,586)	2,206			2,206
Additional paid-in capital	2,296,639			2,308,583
Accumulated other comprehensive income (loss)	29,096			(177,110		)
Retained earnings	5,976,603			5,912,812
Treasury shares, at cost (2019: 92,646; 2018: 92,994 shares)	(3,779,388		)	(3,791,420		)
Total shareholders’ equity	5,300,156			5,030,071
Total liabilities and shareholders’ equity	$	25,557,582		$	24,132,566

See accompanying notes to Consolidated Financial Statements.

Table of Contents

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018



	Three months ended
	2019			2018
	(in thousands, except for per share amounts)
Revenues
Net premiums earned	$	1,134,212		$	1,167,402
Net investment income	107,303			100,999
Other insurance related income	6,929			6,606
Net investment gains (losses):
Other-than-temporary impairment ("OTTI") losses	(4,036		)	(414		)
Other realized and unrealized investment gains (losses)	16,803			(14,416		)
Total net investment gains (losses)	12,767			(14,830		)
Total revenues	1,261,211			1,260,177

Expenses
Net losses and loss expenses	664,028			661,345
Acquisition costs	260,418			229,260
General and administrative expenses	175,091			169,837
Foreign exchange losses	7,056			37,860
Interest expense and financing costs	15,895			16,763
Transaction and reorganization expenses	14,820			13,054
Amortization of value of business acquired	13,104			57,110
Amortization of intangible assets	3,003			2,782
Total expenses	1,153,415			1,188,011

Income before income taxes and interest in income of equity method investments	107,796			72,166
Income tax (expense) benefit	(1,234		)	1,036
Interest in income of equity method investments	2,219			—
Net income	108,781			73,202
Preferred share dividends	10,656			10,656
Net income available to common shareholders	$	98,125		$	62,546

Per share data
Earnings per common share:
Earnings per common share	$	1.17		$	0.75
Earnings per diluted common share	$	1.16		$	0.75
Weighted average common shares outstanding	83,725			83,322
Weighted average diluted common shares outstanding	84,272			83,721

See accompanying notes to Consolidated Financial Statements.

Table of Contents

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018



	Three months ended
	2019		2018
	(in thousands)
Net income	$	108,781	$	73,202
Other comprehensive income (loss), net of tax:
Available for sale investments:
Unrealized investment gains (losses) arising during the period	190,173		(112,191		)
Adjustment for reclassification of net realized investment (gains) losses and OTTI losses recognized in net income	13,370		785
Unrealized investment gains (losses) arising during the period, net of reclassification adjustment	203,543		(111,406		)
Foreign currency translation adjustment	2,662		1,270
Total other comprehensive income (loss), net of tax	206,205		(110,136		)
Comprehensive income (loss)	$	314,986	$	(36,934	)

See accompanying notes to Consolidated Financial Statements.

Table of Contents

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018



	2019			2018
	(in thousands)
Preferred shares
Balance at beginning and end of period	$	775,000		$	775,000

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

Additional paid-in capital
Balance at beginning of period	2,308,583			2,299,166
Treasury shares reissued	(19,302		)	(19,272		)
Share-based compensation expense	7,358			9,603
Balance at end of period	2,296,639			2,289,497

Accumulated other comprehensive income (loss)
Balance at beginning of period	(177,110		)	92,382
Unrealized gains (losses) on available for sale investments, net of tax:
Balance at beginning of period	(168,365		)	89,962
Cumulative effect of adoption of ASU No. 2018-02	—			2,142
Cumulative effect of adoption of ASU No. 2016-01, net of taxes	—			(69,604		)
Unrealized gains (losses) arising during the period, net of reclassification adjustment	203,543			(111,406		)
Balance at end of period	35,178			(88,906		)
Cumulative foreign currency translation adjustments, net of tax:
Balance at beginning of period	(8,745		)	2,420
Foreign currency translation adjustment	2,663			1,270
Balance at end of period	(6,082		)	3,690
Balance at end of period	29,096			(85,216		)

Retained earnings
Balance at beginning of period	5,912,812			5,979,666
Cumulative effect of adoption of ASU No. 2018-02	—			(2,142		)
Cumulative effect of adoption of ASU No. 2016-01, net of taxes	—			69,604
Net income	108,781			73,202
Preferred share dividends	(10,656		)	(10,656		)
Common share dividends	(34,334		)	(33,380		)
Balance at end of period	5,976,603			6,076,294

Treasury shares, at cost
Balance at beginning of period	(3,791,420		)	(3,807,156		)
Shares repurchased	(9,003		)	(7,163		)
Shares reissued	21,035			20,933
Balance at end of period	(3,779,388		)	(3,793,386		)

Total shareholders’ equity	$	5,300,156		$	5,264,395

AXIS CAPITAL HOLDINGS LIMITED

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018



	Three months ended
	2019			2018
	(in thousands)
Cash flows from operating activities:
Net income	$	108,781		$	73,202
Adjustments to reconcile net income to net cash used in operating activities:
Net investment (gains) losses	(12,767		)	8,909
Net realized and unrealized gains on other investments	(6,528		)	(12,950		)
Amortization of fixed maturities	5,832			9,895
Interest in income of equity method investments	(2,219		)	—
Amortization of value of business acquired	13,104			57,110
Other amortization and depreciation	23,742			11,287
Share-based compensation expense, net of cash payments	(3,679		)	(1,481		)
Changes in:
Accrued interest receivable	1,544			3,350
Reinsurance recoverable balances on unpaid and paid losses	(98,425		)	(113,656		)
Deferred acquisition costs	(136,906		)	(253,369		)
Prepaid reinsurance premiums	(260,567		)	(218,772		)
Reserve for losses and loss expenses	4,829			184,511
Unearned premiums	903,253			1,056,045
Insurance and reinsurance balances, net	(559,150		)	(854,993		)
Other items	(38,536		)	(36,973		)
Net cash used in operating activities	(57,692		)	(87,885		)

Cash flows from investing activities:
Purchases of:
Fixed maturities	(2,425,086		)	(2,474,418		)
Equity securities	(23,503		)	(42,522		)
Mortgage loans	(14,965		)	(59,838		)
Other investments	(70,039		)	(31,755		)
Short-term investments	(85,045		)	(57,688		)
Proceeds from the sale of:
Fixed maturities	1,978,928			2,442,673
Equity securities	14,875			194,970
Other investments	67,865			44,493
Short-term investments	185,445			46,719
Proceeds from redemption of fixed maturities	278,150			319,526
Proceeds from redemption of short-term investments	2,413			16,022
Proceeds from the repayment of mortgage loans	243			20,237
Purchase of other assets	(12,051		)	—
Net cash provided by (used in) investing activities	(102,770		)	418,419

Cash flows from financing activities:
Taxes paid on withholding shares	(9,003		)	(7,163		)
Dividends paid - common shares	(36,260		)	(35,273		)
Dividends paid - preferred shares	(10,656		)	(10,656		)
Net cash used in financing activities	(55,919		)	(53,092		)

Effect of exchange rate changes on foreign currency cash, cash equivalents, and restricted cash	(7,381		)	3,354
Increase (decrease) in cash, cash equivalents, and restricted cash	(223,762		)	280,796
Cash, cash equivalents, and restricted cash - beginning of period	1,830,020			1,363,786
Cash, cash equivalents, and restricted cash - end of period	$	1,606,258		$	1,644,582

Supplemental disclosures of cash flow information:
Income taxes paid	$	1,321		$	4,412
Interest paid	$	—		$	10,306

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

See accompanying notes to Consolidated Financial Statements.

Table of Contents

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


1.	BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the Company's financial position and results of operations for the periods presented.

The results of operations for any interim period are not necessarily indicative of the results for a full year. All inter-company accounts and transactions have been eliminated.

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

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

Significant Accounting Policies

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

New Accounting Standards Adopted in 2019

Leases

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

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

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


1.	whether any expired or existing contracts are or contain leases;


2.	the lease classification for any expired or existing leases; and


3.	initial direct costs for any existing leases.

In addition to electing the package of practical expedients, the Company made an accounting policy election to account for non-lease components separately from lease components. As a result, the non-lease components associated with the Company's leases are not included in the lease liabilities and right-of-use assets in the Company's consolidated balance at March 31, 2019.

Table of Contents

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


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

Further, the Company made an accounting policy election not to record office property and equipment leases with an initial term of 12 months or less (short-term) in the Company's consolidated balance sheets. For the three months ended March 31, 2019, the Company recognized expense for short-term leases of $0.6 million in the Company's consolidated statements of operations. The adoption of this guidance did not impact the Company's retained earnings, results of operations, or liquidity.

Premium Amortization on Purchased Callable Debt Securities

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

Changes to Disclosures on Fair Value Measurement

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

Recently Issued Accounting Standards Not Yet Adopted

Measurement of Credit Losses on Financial Instrument

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments" which replaces the "incurred loss" impairment methodology with an approach based on "expected losses" to estimate credit losses on certain types of financial instruments and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The guidance requires financial assets to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the cost of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses relating to available-for-sale debt securities will be recorded through an allowance for credit losses. The guidance also provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. This guidance is effective for interim and annual periods beginning after December 15, 2019. Early adoption is permitted for interim and annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of this guidance on its results of operations, financial condition and liquidity.

Table of Contents

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


2.	SEGMENT INFORMATION

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

Insurance

The Company's insurance segment offers specialty insurance products to a variety of niche markets on a worldwide basis. The product lines in this segment are property, marine, terrorism, aviation, credit and political risk, professional lines, liability, accident and health, and discontinued lines - Novae.

Reinsurance

The Company's reinsurance segment provides treaty reinsurance to insurance companies on a worldwide basis. The product lines in this segment are catastrophe, property, professional lines, credit and surety, motor, liability, agriculture, engineering, marine and other, accident and health, and discontinued lines - Novae.

Table of Contents

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


2.	SEGMENT INFORMATION (CONTINUED)

The following tables present the underwriting results of the Company's reportable segments, as well as the carrying values of allocated goodwill and intangible assets:



	2019									2018
Three months ended and at March 31,	Insurance			Reinsurance			Total			Insurance			Reinsurance			Total

Gross premiums written	$	851,096		$	1,732,130		$	2,583,226		$	880,848		$	1,781,947		$	2,662,795
Net premiums written	529,239			1,247,820			1,777,059			547,893			1,437,978			1,985,871
Net premiums earned	556,762			577,450			1,134,212			580,059			587,343			1,167,402
Other insurance related income	1,742			5,187			6,929			620			5,986			6,606
Net losses and loss expenses	(313,776		)	(350,252		)	(664,028		)	(321,538		)	(339,807		)	(661,345		)
Acquisition costs	(117,775		)	(142,643		)	(260,418		)	(87,329		)	(141,931		)	(229,260		)
General and administrative expenses	(106,034		)	(32,839		)	(138,873		)	(102,370		)	(37,296		)	(139,666		)
Underwriting income	$	20,919		$	56,903		77,822			$	69,442		$	74,295		143,737

Net investment income							107,303									100,999
Net investment gains (losses)							12,767									(14,830		)
Corporate expenses							(36,218		)							(30,171		)
Foreign exchange losses							(7,056		)							(37,860		)
Interest expense and financing costs							(15,895		)							(16,763		)
Transaction and reorganization expenses							(14,820		)							(13,054		)
Amortization of value of business acquired							(13,104		)							(57,110		)
Amortization of intangible assets							(3,003		)							(2,782		)
Income before income taxes and interest in income of equity method investments							$	107,796								$	72,166

Net loss and loss expense ratio	56.4		%	60.7		%	58.5		%	55.4		%	57.9		%	56.7		%
Acquisition cost ratio	21.2		%	24.7		%	23.0		%	15.1		%	24.2		%	19.6		%
General and administrative expense ratio	19.0		%	5.6		%	15.4		%	17.6		%	6.3		%	14.5		%
Combined ratio	96.6		%	91.0		%	96.9		%	88.1		%	88.4		%	90.8		%

Total intangible assets	$	363,376		$	—		$	363,376		$	506,747		$	—		$	506,747

Table of Contents

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


3.	INVESTMENTS

a) Fixed Maturities and Equity securities

Fixed maturities

The amortized cost and fair values of the Company's fixed maturities classified as available for sale were as follows:



	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value		Non-credit OTTI in AOCI⁽⁵⁾

At March 31, 2019
Fixed maturities
U.S. government and agency	$	1,965,801	$	12,365	$	(4,512	)	$	1,973,654	$	—
Non-U.S. government	488,056		6,448		(6,841		)	487,663		—
Corporate debt	4,809,079		62,910		(33,724		)	4,838,265		—
Agency RMBS⁽¹⁾	1,708,610		14,430		(17,078		)	1,705,962		—
CMBS⁽²⁾	1,040,474		13,491		(1,825		)	1,052,140		—
Non-Agency RMBS	47,125		1,307		(1,021		)	47,411		(819		)
ABS⁽³⁾	1,619,648		2,710		(9,348		)	1,613,010		—
Municipals⁽⁴⁾	155,414		1,481		(482		)	156,413		—
Total fixed maturities	$	11,834,207	$	115,142	$	(74,831	)	$	11,874,518	$	(819	)

At December 31, 2018
Fixed maturities
U.S. government and agency	$	1,520,142	$	4,232	$	(8,677	)	$	1,515,697	$	—
Non-U.S. government	507,550		1,586		(16,120		)	493,016		—
Corporate debt	4,990,279		15,086		(128,444		)	4,876,921		—
Agency RMBS⁽¹⁾	1,666,684		6,508		(29,884		)	1,643,308		—
CMBS⁽²⁾	1,103,507		2,818		(13,795		)	1,092,530		—
Non-Agency RMBS	40,732		1,237		(1,282		)	40,687		(857		)
ABS⁽³⁾	1,651,350		1,493		(15,240		)	1,637,603		—
Municipals⁽⁴⁾	136,068		914		(1,397		)	135,585		—
Total fixed maturities	$	11,616,312	$	33,874	$	(214,839	)	$	11,435,347	$	(857	)


(1)	Residential mortgage-backed securities ("RMBS") originated by U.S. government-sponsored agencies.


(2)	Commercial mortgage-backed securities ("CMBS").


(3)	Asset-backed securities ("ABS") include debt tranched securities collateralized primarily by auto loans, student loans, credit card receivables, collateralized debt obligations ("CDOs") and collateralized loan obligations ("CLOs").


(4)	Municipals include bonds issued by states, municipalities and political subdivisions.


(5)	Represents the non-credit component of the other-than-temporary impairment ("OTTI") losses, adjusted for subsequent sales, maturities and redemptions. It does not include the change in fair value subsequent to the impairment measurement date.

Table of Contents

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


3.	INVESTMENTS (CONTINUED)

Equity Securities

The cost and fair values of the Company's equity securities were as follows:



	Cost		Gross unrealized gains		Gross unrealized losses			Fair value
At March 31, 2019
Equity securities
Common stocks	$	693	$	207	$	(315	)	$	585
Exchange-traded funds	221,337		54,511		(4,240		)	271,608
Bond mutual funds	154,463		—		(7,793		)	146,670
Total equity securities	$	376,493	$	54,718	$	(12,348	)	$	418,863

At December 31, 2018
Equity securities
Common stocks	$	790	$	112	$	(375	)	$	527
Exchange-traded funds	213,420		33,498		(10,079		)	236,839
Bond mutual funds	151,695		—		(7,428		)	144,267
Total equity securities	$	365,905	$	33,610	$	(17,882	)	$	381,633

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

Table of Contents

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


3.	INVESTMENTS (CONTINUED)

Contractual Maturities

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The contractual maturities of fixed maturities are shown below:



	Amortized cost		Fair value		% of Total fair value

At March 31, 2019
Maturity
Due in one year or less	$	408,537	$	407,667	3.4	%
Due after one year through five years	4,952,184		4,978,429		41.9	%
Due after five years through ten years	1,710,102		1,719,806		14.5	%
Due after ten years	347,527		350,093		2.9	%
	7,418,350		7,455,995		62.7	%
Agency RMBS	1,708,610		1,705,962		14.4	%
CMBS	1,040,474		1,052,140		8.9	%
Non-Agency RMBS	47,125		47,411		0.4	%
ABS	1,619,648		1,613,010		13.6	%
Total	$	11,834,207	$	11,874,518	100.0	%

At December 31, 2018
Maturity
Due in one year or less	$	430,390	$	426,142	3.7	%
Due after one year through five years	4,751,064		4,691,263		41.0	%
Due after five years through ten years	1,762,452		1,697,737		14.8	%
Due after ten years	210,133		206,077		1.8	%
	7,154,039		7,021,219		61.3	%
Agency RMBS	1,666,684		1,643,308		14.4	%
CMBS	1,103,507		1,092,530		9.6	%
Non-Agency RMBS	40,732		40,687		0.4	%
ABS	1,651,350		1,637,603		14.3	%
Total	$	11,616,312	$	11,435,347	100.0	%

Table of Contents

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


3.	INVESTMENTS (CONTINUED)

Gross Unrealized Losses

The following table summarizes fixed maturities and equity securities in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:



	12 months or greater					Less than 12 months					Total
	Fair value		Unrealized losses			Fair value		Unrealized losses			Fair value		Unrealized losses

At March 31, 2019⁽¹⁾
Fixed maturities
U.S. government and agency	$	371,995	$	(4,194	)	$	220,718	$	(318	)	$	592,713	$	(4,512	)
Non-U.S. government	95,715		(3,368		)	136,310		(3,473		)	232,025		(6,841		)
Corporate debt	1,134,227		(20,122		)	727,267		(13,602		)	1,861,494		(33,724		)
Agency RMBS	849,681		(16,949		)	26,971		(129		)	876,652		(17,078		)
CMBS	244,188		(1,500		)	85,473		(325		)	329,661		(1,825		)
Non-Agency RMBS	9,360		(905		)	12,111		(116		)	21,471		(1,021		)
ABS	273,759		(2,757		)	846,715		(6,591		)	1,120,474		(9,348		)
Municipals	42,745		(452		)	15,779		(30		)	58,524		(482		)
Total fixed maturities	$	3,021,670	$	(50,247	)	$	2,071,344	$	(24,584	)	$	5,093,014	$	(74,831	)

At December 31, 2018
Fixed maturities
U.S. government and agency	$	374,030	$	(7,659	)	$	424,439	$	(1,018	)	$	798,469	$	(8,677	)
Non-U.S. government	44,339		(2,004		)	303,376		(14,116		)	347,715		(16,120		)
Corporate debt	1,439,378		(58,915		)	2,547,135		(69,529		)	3,986,513		(128,444		)
Agency RMBS	940,645		(29,255		)	117,181		(629		)	1,057,826		(29,884		)
CMBS	455,582		(11,430		)	353,802		(2,365		)	809,384		(13,795		)
Non-Agency RMBS	9,494		(1,170		)	11,432		(112		)	20,926		(1,282		)
ABS	237,237		(2,755		)	1,150,692		(12,485		)	1,387,929		(15,240		)
Municipals	68,814		(1,373		)	9,894		(24		)	78,708		(1,397		)
Total fixed maturities	$	3,569,519	$	(114,561	)	$	4,917,951	$	(100,278	)	$	8,487,470	$	(214,839	)

Fixed Maturities

At March 31, 2019, 2,521 fixed maturities (2018: 3,599) were in an unrealized loss position of $75 million (2018: $215 million), of which $15 million (2018: $49 million) was related to securities below investment grade or not rated.

At March 31, 2019, 1,553 fixed maturities (2018: 1,656) had been in a continuous unrealized loss position for twelve months or greater and had a fair value of $3,022 million (2018: $3,570 million). Following a credit impairment review, it was concluded that these securities as well as the remaining securities in an unrealized loss position were temporarily impaired at March 31, 2019, and were expected to recover in value as the securities approach maturity. At March 31, 2019, the Company did not intend to sell the securities in an unrealized loss position and it is more likely than not that the Company will not be required to sell these securities before the anticipated recovery of their amortized costs.

Table of Contents

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


3.	INVESTMENTS (CONTINUED)

b) Mortgage Loans

The following table provides details of the Company's mortgage loans held-for-investment:



	March 31, 2019				December 31, 2018
	Carrying value		% of Total		Carrying value		% of Total

Mortgage Loans held-for-investment:
Commercial	$	313,421	100	%	$	298,650	100	%
Total Mortgage Loans held-for-investment	$	313,421	100	%	$	298,650	100	%

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

The Company has a high quality mortgage loan portfolio with weighted average debt service coverage ratios in excess of 2.2x and weighted average loan-to-value ratios of less than 60%. At March 31, 2019, there are no credit losses or past due amounts associated with the commercial mortgage loans held by the Company.

Table of Contents

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


3.	INVESTMENTS (CONTINUED)

c) Other Investments

The following tables provide a summary of the Company's other investments, together with additional information relating to the liquidity of each category:



	Fair value				Redemption frequency (if currently eligible)	Redemption notice period

At March 31, 2019
Long/short equity funds	$	29,324	4	%	Annually	60 days
Multi-strategy funds	149,509		19	%	Quarterly, Semi-annually	60-90 days
Event-driven funds	5,914		1	%	n/a	n/a
Direct lending funds	272,752		34	%	n/a	n/a
Private equity funds	61,526		8	%	n/a	n/a
Real estate funds	111,169		14	%	n/a	n/a
CLO-Equities	18,022		1	%	n/a	n/a
Other privately held investments	47,685		6	%	n/a	n/a
Overseas deposits	99,430		13	%	n/a	n/a
Total other investments	$	795,331	100	%

At December 31, 2018
Long/short equity funds	$	26,779	3	%	Annually	60 days
Multi-strategy funds	153,883		20	%	Quarterly, Semi-annually	60-95 days
Event-driven funds	13,936		2	%	Annually	45 days
Direct lending funds	274,478		35	%	n/a	n/a
Private equity funds	64,566		8	%	n/a	n/a
Real estate funds	84,202		11	%	n/a	n/a
CLO-Equities	21,271		2	%	n/a	n/a
Other privately held investments	44,518		6	%	n/a	n/a
Overseas deposits	104,154		13	%	n/a	n/a
Total other investments	$	787,787	100	%

n/a - not applicable

The investment strategies for the above funds are as follows:


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


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


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


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


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

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.

Two common redemption restrictions which may impact the Company's ability to redeem hedge funds are gates and lockups. A gate is a suspension of redemptions which may be implemented by the general partner or investment manager of the fund in order to defer, in whole or in part, the redemption request in the event the aggregate amount of redemption requests exceeds a predetermined percentage of the fund's net assets which may otherwise hinder the general partner or investment manager's ability to liquidate holdings in an orderly fashion in order to generate the cash necessary to fund extraordinarily large redemption payouts. A lockup period is the initial amount of time an investor is contractually required to hold the security before having the ability to redeem. During the three months ended March 31, 2019 and 2018, neither of these restrictions impacted the Company's redemption requests. At March 31, 2019, $42 million (2018: $27 million), representing 23% (2018: 14%) of total hedge funds, relate to holdings where the Company is still within the lockup period. The expiration of these lockup periods range from October 2020 to March 2022.

At March 31, 2019, the Company had $200 million (2018: $210 million) of unfunded commitments as a limited partner in direct lending funds. Once the full amount of committed capital has been called by the General Partner of each of these funds, the assets will not be fully returned until the completion of the fund's investment term. These funds have investment terms ranging from five to ten years and the General Partners of certain funds have the option to extend the term by up to three years.

At March 31, 2019, the Company had $53 million (2018: $84 million) of unfunded commitments as a limited partner in multi-strategy hedge funds. Once the full amount of committed capital has been called by the General Partner of each of these funds, the assets will not be fully returned until after the completion of the funds' investment term. These funds have investment terms ranging from two years to the dissolution of the underlying fund.

At March 31, 2019, the Company had $115 million (2018: $147 million) of unfunded commitments as a limited partner in funds which invest in real estate and real estate securities and businesses. These funds include an open-ended fund and funds with investment terms ranging from seven years to the dissolution of the underlying fund.

At March 31, 2019, the Company had $16 million (2018: $16 million) of unfunded commitments as a limited partner in a private equity fund. The life of the fund is subject to the dissolution of the underlying funds. The Company expects the overall holding period to be over ten years.

During 2015, the Company made a $50 million commitment as a limited partner of a bank revolver opportunity fund. The fund has an investment term of seven years and the General Partners have the option to extend the term by up to two years. At March 31, 2019, this commitment remains unfunded. It is not anticipated that the full amount of this fund will be drawn.

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

Table of Contents

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


3.	INVESTMENTS (CONTINUED)

d) Equity Method Investments

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

e) Net Investment Income

Net investment income was derived from the following sources:



	Three months ended March 31,
	2019			2018

Fixed maturities	$	91,382		$	83,958
Other investments	6,895			13,704
Equity securities	2,328			1,758
Mortgage loans	3,063			3,125
Cash and cash equivalents	5,801			4,153
Short-term investments	3,894			875
Gross investment income	113,363			107,573
Investment expenses	(6,060		)	(6,574		)
Net investment income	$	107,303		$	100,999

f) Net Investment Gains (Losses)

The following table provides an analysis of net investment gains (losses):



	Three months ended March 31,
	2019			2018

Gross realized investment gains
Fixed maturities and short-term investments	$	10,437		$	31,628
Equity securities	1,445			17,557
Gross realized investment gains	11,882			49,185
Gross realized investment losses
Fixed maturities and short-term investments	(20,279		)	(43,535		)
Equity securities	(93		)	(1,276		)
Gross realized investment losses	(20,372		)	(44,811		)
Net OTTI recognized in net income	(4,036		)	(414		)
Change in fair value of investment derivatives⁽¹⁾	(2,102		)	2,023
Net unrealized gains (losses) on equity securities	27,395			(20,813		)
Net investment gains (losses)	$	12,767		$	(14,830	)

(1) Refer to Note 5 'Derivative Instruments'.

Table of Contents

AXIS CAPITAL HOLDINGS LIMITED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


3.	INVESTMENTS (CONTINUED)

The following table summarizes the OTTI recognized in net income by asset class:



	Three months ended March 31,
	2019		2018

Fixed maturities:
Non-U.S. government	$	60	$	—
Corporate debt	3,976