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☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
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, BermudaHM 08
(Address of principal executive offices and zip code)
(441) 496-2600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common shares, par value $0.0125 per share
AXS
New York Stock Exchange
Depositary shares, each representing a 1/100th interest in a 5.50% Series E preferred share
AXS PRE
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
At July 22, 2022, there were 84,656,509 common shares outstanding, $0.0125 par value per share, of the registrant.
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 ("U.S.") 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", "intend" or similar expressions. These forward-looking statements are not historical facts, and are based on 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 for catastrophes and other weather-related losses including losses related to the COVID-19 pandemic, 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 including our exit from property reinsurance business, our expectations regarding pricing, other market conditions and economic conditions including inflation, our growth prospects, and valuations of the potential impact of movements in interest rates, credit spreads, equity securities' prices, and foreign currency exchange 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 events or results to differ materially from those indicated in such statements. We believe that these factors include, but are not limited to, the following:
•the adverse impact of the ongoing COVID-19 pandemic on our business, results of operations, financial condition, and liquidity;
•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 including losses related to the Russian invasion of Ukraine, terrorism and political unrest, or other unanticipated losses;
•actual claims exceeding loss reserves;
•general economic, capital and credit market conditions, including fluctuations in interest rates, credit spreads, equity securities' prices, and/or foreign currency exchange rates;
•the adverse impact of inflation;
•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 inability to purchase reinsurance or collect amounts due to us from reinsurance we have purchased;
•the loss of business provided to us by major brokers;
•breaches by third parties in our program business of their obligations to us;
•difficulties with technology and/or data security;
•the failure of our policyholders or intermediaries to pay premiums;
•the failure of our cedants to adequately evaluate risks;
•the inability to obtain additional capital on favorable terms, or at all;
•the loss of one or more of our key executives;
•a decline in our ratings with rating agencies;
•changes in accounting policies or practices;
•the use of industry models and changes to these models;
•changes in governmental regulations and potential government intervention in our industry;
•inadvertent failure to comply with certain laws and regulations relating to sanctions and foreign corrupt practices;
•changes in the political environment of certain countries in which we operate or underwrite business, including the United Kingdom's withdrawal from the European Union;
•changes in tax laws; and
•other factors including but not limited to those described under Item 1A, 'Risk Factors' 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. Readers are urged to carefully consider all such factors as the COVID-19 pandemic may have the effect of heightening many of the other risks and uncertainties described.
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 LinkedIn (AXIS Capital) and Twitter (@AXIS_Capital) accounts as channels of distribution of Company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, e-mail alerts and other information about AXIS Capital may be received by those enrolled in our "E-mail Alerts" program, which can be found in the Investor Information section of our website. The contents of our website and social media channels are not part of this Quarterly Report on Form 10-Q.
Supplemental disclosures of cash flow information:
Income taxes paid
$
12,865
$
29,849
Interest paid
$
29,700
$
29,700
Supplemental disclosures of cash flow information: In 2021, the transfer of securities with a fair value of $405 million from fixed maturities, available for sale to fixed maturities, held to maturity was treated as a non-cash activity in the consolidated statement of cash flows (refer to Note 3 'Investments').
See accompanying notes to Consolidated Financial Statements.
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, 2021, 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.
Tabular dollar and share amounts are in thousands, with the exception of per share amounts. All amounts are reported in U.S. dollars.
Significant Accounting Policies
There were no notable changes to the Company's significant accounting policies subsequent to its Annual Report on Form 10-K for the year ended December 31, 2021.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2. SEGMENT INFORMATION
The Company'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.
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, and accident and health.
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, credit and surety, professional lines, motor, liability, engineering, agriculture, marine and aviation, and accident and health.
The following tables present the underwriting results of the Company's reportable segments, as well as the carrying amounts of allocated goodwill and intangible assets:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. INVESTMENTS (CONTINUED)
The following table provides the amortized cost and fair values of the Company's fixed maturities classified as held to maturity:
Amortized
cost
Allowance for expected credit losses
Net carrying value
Gross unrealized gains
Gross
unrealized
losses
Fair
value
At June 30, 2022
Held to maturity
Corporate debt
$
67,200
$
—
$
67,200
$
—
$
(7,519)
$
59,681
ABS(1)
574,228
—
574,228
—
(14,018)
560,210
Total fixed maturities, held to maturity
$
641,428
$
—
$
641,428
$
—
$
(21,537)
$
619,891
At December 31, 2021
Held to maturity
Corporate debt
$
37,700
$
—
$
37,700
$
18
$
(146)
$
37,572
ABS(1)
408,316
—
408,316
81
(936)
407,461
Total fixed maturities, held to maturity
$
446,016
$
—
$
446,016
$
99
$
(1,082)
$
445,033
(1)Asset-backed securities ("ABS") include debt tranched securities collateralized primarily by collateralized loan obligations ("CLOs").
On March 1, 2021, the Company transferred ABS with total fair value of $405 million from fixed maturities, available for sale to fixed maturities, held to maturity. These securities, which the Company has the intent and ability to hold to maturity, were transferred in order to better align the accounting classification with their management strategy. The net unrealized gain at the date of the transfer, March 1, 2021, continues to be reported in the carrying value of the transferred securities and is amortized over the remaining life of the securities using the effective yield method.
At June 30, 2022, fixed maturities, held to maturity of $641 million (2021: $446 million) were presented net of an allowance for expected credit losses of $nil (2021: $nil).
The Company's ABS, held to maturity consist of CLO debt tranched securities. The Company uses a scenario-based approach to review its CLO debt portfolio and reviews subordination levels of these securities to determine their ability to absorb credit losses of the underlying collateral. If losses are forecast to be below the subordination level for a tranche held by the Company, the security is determined not to have a credit loss. At June 30, 2022, the allowance for credit losses expected to be recognized over the life of the Company's ABS, held to maturity was $nil.
To estimate expected credit losses for corporate debt securities, held to maturity, the Company's projected cash flows are primarily driven by assumptions regarding the severity of loss, which is a function of the probability of default and projected recovery rates. The Company's default and recovery rates are based on credit ratings, credit analysis and macroeconomic forecasts. At June 30, 2022, the allowance for credit losses expected to be recognized over the life of the Company's corporate debt, held to maturity was $nil.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. INVESTMENTS (CONTINUED)
Equity Securities
The following table provides the cost and fair values of the Company's equity securities:
Cost
Gross
unrealized
gains
Gross
unrealized
losses
Fair
value
At June 30, 2022
Equity securities
Common stocks
$
2,998
$
434
$
(454)
$
2,978
Preferred stocks
115
—
(19)
96
Exchange-traded funds
242,992
71,393
(8,328)
306,057
Bond mutual funds
277,093
—
(64,063)
213,030
Total equity securities
$
523,198
$
71,827
$
(72,864)
$
522,161
At December 31, 2021
Equity securities
Common stocks
$
1,264
$
585
$
(485)
$
1,364
Preferred stocks
115
64
—
179
Exchange-traded funds
203,455
134,037
(677)
336,815
Bond mutual funds
324,030
544
(7,257)
317,317
Total equity securities
$
528,864
$
135,230
$
(8,419)
$
655,675
Variable Interest Entities
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 which represent 71% of the Company's other investments. The investments in limited partnerships include hedge funds, direct lending funds, private equity funds and real estate funds and CLO equity tranched securities, which are 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 these VIEs therefore the Company is not the primary beneficiary of these VIEs. The maximum exposure to loss on these interests is limited to the amount of commitment made by the Company. The Company has not provided financial or other support to these structured securities other than the original investment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. INVESTMENTS (CONTINUED)
Contractual Maturities of Fixed 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 table below provides the contractual maturities of fixed maturities classified as available for sale:
Amortized
cost
Fair
value
% of Total
fair value
At June 30, 2022
Maturity
Due in one year or less
$
591,635
$
584,080
5.1
%
Due after one year through five years
4,913,936
4,654,847
41.2
%
Due after five years through ten years
2,405,936
2,125,717
18.8
%
Due after ten years
261,956
233,620
2.1
%
8,173,463
7,598,264
67.2
%
Agency RMBS
1,082,381
1,019,124
9.0
%
CMBS
1,143,767
1,083,040
9.6
%
Non-agency RMBS
162,101
148,104
1.3
%
ABS
1,524,417
1,456,150
12.9
%
Total
$
12,086,129
$
11,304,682
100.0
%
At December 31, 2021
Maturity
Due in one year or less
$
503,716
$
505,602
4.1
%
Due after one year through five years
4,878,151
4,908,640
39.9
%
Due after five years through ten years
2,478,542
2,488,478
20.2
%
Due after ten years
277,756
279,056
2.3
%
8,138,165
8,181,776
66.5
%
Agency RMBS
1,065,973
1,074,589
8.7
%
CMBS
1,223,051
1,248,191
10.1
%
Non-agency RMBS
185,854
186,164
1.5
%
ABS
1,628,739
1,622,480
13.2
%
Total
$
12,241,782
$
12,313,200
100.0
%
ABS classified as held to maturity with a net carrying value of $574 million (2021: $408 million) do not have a single maturity date and cannot be allocated over several maturity groupings.
Corporate debt classified as held to maturity with a net carrying value of $63 million (2021: $34 million) is due between 3 years and 10 years and corporate debt classified as held to maturity with a net carrying value of $4 million (2021: $4 million) is due after ten years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. INVESTMENTS (CONTINUED)
Gross Unrealized Losses
The following table summarizes fixed maturities, available for sale in an unrealized loss position and the aggregate fair value and gross unrealized loss by length of time the security has continuously been in an unrealized loss position:
12 months or greater
Less than 12 months
Total
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
At June 30, 2022
Fixed maturities, available for sale
U.S. government and agency
$
122,651
$
(7,887)
$
2,195,005
$
(83,887)
$
2,317,656
$
(91,774)
Non-U.S. government
110,395
(4,730)
518,117
(45,980)
628,512
(50,710)
Corporate debt
292,790
(52,735)
3,811,687
(366,028)
4,104,477
(418,763)
Agency RMBS
83,182
(11,443)
848,929
(52,926)
932,111
(64,369)
CMBS
53,589
(7,560)
1,020,626
(53,212)
1,074,215
(60,772)
Non-agency RMBS
26,816
(3,089)
117,424
(11,253)
144,240
(14,342)
ABS
183,000
(14,795)
1,254,295
(53,783)
1,437,295
(68,578)
Municipals
4,416
(499)
143,714
(9,863)
148,130
(10,362)
Total fixed maturities, available for sale
$
876,839
$
(102,738)
$
9,909,797
$
(676,932)
$
10,786,636
$
(779,670)
At December 31, 2021
Fixed maturities, available for sale
U.S. government and agency
$
101,776
$
(4,852)
$
2,014,880
$
(15,795)
$
2,116,656
$
(20,647)
Non-U.S. government
11,011
(1,830)
463,498
(7,855)
474,509
(9,685)
Corporate debt
152,962
(6,542)
1,681,859
(31,570)
1,834,821
(38,112)
Agency RMBS
41,024
(1,678)
503,988
(7,103)
545,012
(8,781)
CMBS
30,128
(1,001)
347,515
(3,686)
377,643
(4,687)
Non-agency RMBS
4,481
(523)
109,937
(1,500)
114,418
(2,023)
ABS
43,466
(1,152)
1,040,363
(8,513)
1,083,829
(9,665)
Municipals
5,293
(137)
35,649
(509)
40,942
(646)
Total fixed maturities, available for sale
$
390,141
$
(17,715)
$
6,197,689
$
(76,531)
$
6,587,830
$
(94,246)
Fixed Maturities
At June 30, 2022, 4,683 fixed maturities (2021: 2,333) were in an unrealized loss position of $780 million (2021: $94 million), of which $112 million (2021: $8 million) was related to securities below investment grade or not rated.
At June 30, 2022, 596 fixed maturities (2021: 344) had been in a continuous unrealized loss position for twelve months or greater and had a fair value of $877 million (2021: $390 million).
The unrealized losses of $780 million (2021: $94 million) were due to non-credit factors and were expected to be recovered as the related securities approach maturity.
At June 30, 2022, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. INVESTMENTS (CONTINUED)
b) Mortgage Loans
The following table provides details of the Company's mortgage loans, held for investment:
June 30, 2022
December 31, 2021
Carrying value
% of Total
Carrying value
% of Total
Mortgage loans, held for investment:
Commercial
$
656,112
100
%
$
594,088
100
%
Total mortgage loans, held for investment
$
656,112
100
%
$
594,088
100
%
The primary credit quality indicators for commercial mortgage loans are 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 a weighted average debt service coverage ratio of 2.5x (2021: 2.5x) and a weighted average loan-to-value ratio of 59% (2021: 60%). At June 30, 2022, there are no credit losses or past due amounts associated with the commercial mortgage loans held by the Company.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. INVESTMENTS (CONTINUED)
c) Other Investments
The following table provides a summary of the Company's other investments, together with additional information relating to the liquidity of each category:
Fair value
% of Total
Redemption frequency
(if currently eligible)
Redemption
notice period
At June 30, 2022
Long/short equity funds
$
—
—
%
n/a
n/a
Multi-strategy funds
44,653
5
%
Quarterly
60-90 days
Direct lending funds
260,120
26
%
Quarterly(1)
90 days
Private equity funds
266,412
27
%
n/a
n/a
Real estate funds
289,811
30
%
Quarterly(2), Annually(3)
45-90 days
CLO-Equities
4,808
—
%
n/a
n/a
Other privately held investments
115,970
12
%
n/a
n/a
Total other investments
$
981,774
100
%
At December 31, 2021
Long/short equity funds
$
3,476
—
%
Annually
60 days
Multi-strategy funds
56,012
6
%
Quarterly
60-90 days
Direct lending funds
289,867
31
%
Quarterly(1)
90 days
Private equity funds
249,974
26
%
n/a
n/a
Real estate funds
238,222
25
%
Quarterly(2)
45 days
CLO-Equities
5,910
1
%
n/a
n/a
Other privately held investments
104,521
11
%
n/a
n/a
Total other investments
$
947,982
100
%
n/a - not applicable
(1) Applies to one fund with a fair value of $44 million (2021: $47 million).
(2) Applies to one fund with a fair value of $74 million (2021: $73 million).
(3) Applies to one fund with a fair value of $28 million (2021: $nil).
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 six months ended June 30, 2022 and 2021, neither of these restrictions impacted the Company's redemption requests. At June 30, 2022, there were no hedge fund holdings (2021: $3 million) where the Company is still within the lockup period.
At June 30, 2022, the Company had $26 million (2021: $23 million) of unfunded commitments as a limited partner in multi-strategy hedge funds. Once the full amount of committed capital has been called by the General Partner of each of these funds, the assets will not be fully returned until after the completion of the funds' investment term. These funds have investment terms ranging from two years to the dissolution of the underlying fund.
At June 30, 2022, the Company had $198 million (2021: $224 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 four to ten years and the General Partners of certain funds have the option to extend the term by up to three years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. INVESTMENTS (CONTINUED)
At June 30, 2022, the Company had $178 million (2021: $178 million) of unfunded commitments as a limited partner in private equity funds. The life of the funds is subject to the dissolution of the underlying funds. The Company expects the overall holding period to be over five years.
At June 30, 2022, the Company had $155 million (2021: $173 million) of unfunded commitments as a limited partner in real estate funds. These funds include an open-ended fund and funds with investment terms ranging from two years to the dissolution of the underlying fund.
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 which expires in November 2022, and the General Partners have the option to extend the term by up to two years. At June 30, 2022, this commitment remains unfunded. It is not anticipated that the full amount of this fund will be drawn.
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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. INVESTMENTS (CONTINUED)
f) Net Investment Gains (Losses)
The following table provides an analysis of net investment gains (losses):
Three months ended June 30,
Six months ended June 30,
2022
2021
2022
2021
Gross realized investment gains
Fixed maturities and short-term investments
$
1,127
$
55,695
$
11,549
$
105,865
Equity securities
—
4,433
—
5,002
Gross realized investment gains
1,127
60,128
11,549
110,867
Gross realized investment losses
Fixed maturities and short-term investments
(87,601)
(8,868)
(150,747)
(28,237)
Equity securities
—
(27)
(224)
(116)
Gross realized investment losses
(87,601)
(8,895)
(150,971)
(28,353)
Change in allowance for expected credit losses
(6,911)
150
(6,981)
239
Impairment losses(1)
(473)
—
(582)
—
Change in fair value of investment derivatives(2)
4,822
(847)
7,063
901
Net unrealized gains (losses) on equity securities
(84,227)
22,757
(127,849)
19,282
Net investment gains (losses)
$
(173,263)
$
73,293
$
(267,771)
$
102,936
(1) Related to instances where the Company intends to sell securities or it is more likely than not that the Company will be required to sell securities before their anticipated recovery.
(2) Refer to Note 5 'Derivative Instruments'.
The following table provides a reconciliation of the beginning and ending balances of the allowance for expected credit losses on fixed maturities classified as available for sale:
Three months ended June 30,
Six months ended June 30,
2022
2021
2022
2021
Balance at beginning of period
$
383
$
234
$
313
$
323
Expected credit losses on securities where credit losses were not previously recognized
6,899
1
6,908
64
Additions (reductions) for expected credit losses on securities where credit losses were previously recognized
14
(151)
92
(256)
Impairments of securities which the Company intends to sell or more likely than not will be required to sell
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. FAIR VALUE MEASUREMENTS
Fair Value Hierarchy
Fair value is defined as the price to sell an asset or transfer a liability (i.e. the "exit price") in an orderly transaction between market participants. U.S. GAAP prescribes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement. The hierarchy is broken down into three levels as follows:
•Level 1 - Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
•Level 2 - Valuations based on quoted prices in active markets for similar assets or liabilities, quoted prices for identical assets or liabilities in inactive markets, or for which significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities, etc.) or can be corroborated by observable market data.
•Level 3 - Valuations based on inputs that are unobservable and significant to the overall fair value measurement. The unobservable inputs reflect the Company's judgments about assumptions that market participants might use.
The availability of observable inputs can vary from financial instrument to financial instrument and is affected by a wide variety of factors including, for example, the type of financial instrument, whether the financial instrument is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment.
Accordingly, the degree of judgment exercised by management in determining fair value is greatest for financial instruments categorized as Level 3. In periods of market dislocation, the observability of prices and inputs may be reduced for many financial instruments. This may lead the Company to change the selection of valuation technique (from market to cash flow approach) or may cause the Company to use multiple valuation techniques to estimate the fair value of a financial instrument. This circumstance could cause an instrument to be reclassified between levels within the fair value hierarchy.
Valuation Techniques
The valuation techniques, including significant inputs and assumptions generally used to determine the fair values of the Company's financial instruments as well as the classification of the fair values of its financial instruments in the fair value hierarchy are described in detail below.
Fixed Maturities
At each valuation date, the Company uses the market approach valuation technique to estimate the fair value of its fixed maturities portfolio, where possible. The market approach includes, but is not limited to, prices obtained from third-party pricing services for identical or comparable securities and the use of "pricing matrix models" using observable market inputs such as yield curves, credit risks and spreads, measures of volatility, and prepayment speeds. Pricing from third-party pricing services is sourced from multiple vendors, where available, and the Company maintains a vendor hierarchy by asset type based on historical pricing experience and vendor expertise. Where prices are unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers who are active in the corresponding markets. The valuation techniques including significant inputs and assumptions generally used to determine the fair values of the Company's fixed maturities by asset class as well as the classifications of the fair values of these securities in the fair value hierarchy are described in detail below.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. FAIR VALUE MEASUREMENTS (CONTINUED)
U.S. Government and Agency
U.S. government and agency securities consist primarily of bonds issued by the U.S. Treasury and mortgage pass-through agencies such as the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. As the fair values of U.S. Treasury securities are based on unadjusted quoted market prices in active markets, the fair values of these securities are classified as Level 1. The fair values of U.S. government agency securities are determined using the spread above the risk-free yield curve. As the yields for the risk-free yield curve and the spreads are observable market inputs, the fair values of U.S. government agency securities are classified as Level 2.
Non-U.S. Government
Non-U.S. government securities include bonds issued by non-U.S. governments and their agencies along with supranational organizations (collectively also known as sovereign debt securities). The fair values of these securities are based on prices obtained from international indices or valuation models that include inputs such as interest rate yield curves, cross-currency basis index spreads, and country credit spreads for structures similar to the sovereign bond in terms of issuer, maturity and seniority. As the significant inputs used to price these securities are observable market inputs, the fair values of non-U.S. government securities are classified as Level 2.
Corporate Debt
Corporate debt securities consist primarily of investment-grade debt of a wide variety of corporate issuers and industries. The fair values of these securities are generally determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As the yields for the risk-free yield curve and the spreads are observable market inputs, the fair values of corporate debt securities are generally classified as Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, the fair values of these securities are classified as Level 3.
Agency RMBS
Agency RMBS consist of bonds issued by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Government National Mortgage Association. The fair values of these securities are priced using a mortgage pool specific model which uses daily inputs from the active to be announced market and the spread associated with each mortgage pool based on vintage. As the significant inputs used to price these securities are observable market inputs, the fair values of Agency RMBS are classified as Level 2.
CMBS
CMBS mainly include investment-grade bonds originated by non-agencies. The fair values of these securities are determined using a pricing model which uses dealer quotes and other available trade information along with security level characteristics to determine deal specific spreads. As the significant inputs used to price these securities are observable market inputs, the fair values of CMBS are generally classified as Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, the fair values of these securities are classified as Level 3.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. FAIR VALUE MEASUREMENTS (CONTINUED)
Non-agency RMBS
Non-agency RMBS mainly include investment-grade bonds originated by non-agencies. The fair values of these securities are determined using an option adjusted spread model or other relevant models, which use inputs including available trade information or broker quotes, prepayment and default projections based on historical statistics of the underlying collateral and current market data. As the significant inputs used to price these securities are observable market inputs, the fair values of non-agency RMBS are generally classified as Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, the fair values of these securities are classified as Level 3.
ABS
ABS mainly include investment-grade bonds backed by pools of loans with a variety of underlying collateral, including auto loans, student loans, credit card receivables and collateralized loan obligations ("CLOs"), originated by a variety of financial institutions. The fair values of these securities are determined using a model which uses prepayment speeds and spreads sourced primarily from the new issue market. As the significant inputs used to price these securities are observable market inputs, the fair values of ABS are generally classified as Level 2. Where pricing is unavailable from pricing services, the Company obtains non-binding quotes from broker-dealers to estimate fair value. This is generally the case when there is a low volume of trading activity and current transactions are not orderly. In this event, the fair values of these securities are classified as Level 3.
Municipals
Municipals comprise revenue bonds and general obligation bonds issued by U.S. domiciled state and municipal entities. The fair values of these securities are determined using spreads obtained from the new issue market, trade prices and broker-dealers quotes. As the significant inputs used to price these securities are observable market inputs, the fair values of municipals are classified as Level 2.
Equity Securities
Equity securities include common stocks, preferred stocks, exchange-traded funds and bond mutual funds. As the fair values of common stocks, preferred stocks and exchange-traded funds are based on unadjusted quoted market prices in active markets, the fair values of these securities are classified as Level 1. As bond mutual funds have daily liquidity, the fair values of these securities are classified as Level 2.
Other Investments
The fair value of an indirect investment in CLO-Equities is estimated using an income approach valuation technique, specifically an externally developed discounted cash flow model due to the lack of observable and relevant trades in secondary markets. As the significant inputs used to price this security are unobservable, the fair value of the indirect investment in CLO-Equities is classified as Level 3.
Other privately held investments include convertible preferred shares, common shares, convertible notes, investments in limited partnerships and a variable yield security. These investments are initially valued at cost, which approximates fair value. In subsequent measurement periods, the fair values of these investments is derived from one or a combination of valuation methodologies which consider factors including recent capital raises by the investee companies, comparable precedent transaction multiples, comparable publicly traded multiples, third-party valuations, discounted cash-flow models, and other techniques that account for the industry and development stage of each investee company. The fair value of the variable yield security is determined using an externally developed discounted cash flow model. In order to assess the reasonableness of the information received from investee companies, the Company maintains an understanding of current market conditions, historical results, and emerging trends that may impact the results of operations, financial condition or liquidity of these companies. In addition, the Company engages in regular communication with management at investee companies. As the significant inputs used to price these investments are unobservable, the fair values of other privately held investments are classified as Level 3.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. FAIR VALUE MEASUREMENTS (CONTINUED)
Short-term Investments
Short-term investments primarily comprise highly liquid securities with maturities greater than three months but less than one year from the date of purchase. These securities are typically not actively traded due to their approaching maturity, therefore their amortized cost approximates fair value. The fair values of short-term investments are classified as Level 2.
Derivative Instruments
Derivative instruments include foreign exchange forward contracts that are customized to the Company's economic hedging strategies and trade in the over-the-counter derivative market. The fair values of these derivatives are determined using a market approach valuation technique based on significant observable market inputs from third-party pricing vendors, non-binding broker-dealer quotes and/or recent trading activity. As the significant inputs used to price these derivatives are observable market inputs, the fair values of these derivatives are classified as Level 2.
Other underwriting-related derivatives include insurance and reinsurance contracts that are accounted for as derivatives. These derivative contracts are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these derivatives are determined using internally developed discounted cash flow models. As the significant inputs used to price these derivatives are unobservable, the fair values of these contracts are classified as Level 3.
Cash-Settled Awards
Cash-settled awards comprise restricted stock units that form part of the Company's compensation program. Although the fair values of these awards are determined using observable quoted market prices in active markets, the restricted stock units are not actively traded. As the significant inputs used to price these securities are observable market inputs, the fair values of these liabilities are classified as Level 2.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. FAIR VALUE MEASUREMENTS (CONTINUED)
The following table quantifies the significant unobservable inputs used in estimating fair values at June 30, 2022 of investments classified as Level 3 in the fair value hierarchy:
Asset / Liability - Fair value
Valuation technique
Unobservable input
Amount / Range
Weighted
average
Other investments - CLO-Equities
$
4,808
Discounted cash flow
Default rate
4.5%
4.5%
Loss severity rate
50.0%
50.0%
Collateral spread
3.0%
3.0%
Estimated maturity date
6 years
6 years
Other investments - Other privately held investments
$
17,408
Discounted cash flow
Discount rate
5.4%
5.4%
Default rate
0.5%
0.5%
Loss absorption yield
1.0%
1.0%
Estimated maturity date
2-3 years
3 years
Derivatives - Other underwriting-related derivatives
$
(4,708)
Discounted cash flow
Discount rate
3.0%
3.0%
Note: Fixed maturities of $73 million that are classified as Level 3 are excluded from the above table as these securities are priced using broker-dealer quotes. In addition, other privately held investments of $99 million that are classified as Level 3 are excluded from the above table as these investments are priced using capital statements received from investee companies.
Other Investments - CLO-Equities
The CLO-Equities market continues to be relatively inactive with only a small number of transactions being observed, particularly related to transactions involving CLO-Equities held by the Company. Accordingly, the fair value of the Company's indirect investment in CLO-Equities is determined using a discounted cash flow model prepared by an external investment manager.
The default and loss severity rates are the most judgmental unobservable market inputs to the discounted cash flow model to which the valuation of the Company's indirect investment in CLO-Equities is most sensitive. A significant increase (decrease) in either of these significant inputs in isolation would result in a lower (higher) fair value estimate for the investment in CLO-Equities and, in general, a change in default rate assumptions would be accompanied by a directionally similar change in loss severity rate assumptions. Collateral spreads and estimated maturity dates are less judgmental inputs as they are based on the historical average of actual spreads and the weighted average life of the current underlying portfolios, respectively. A significant increase (decrease) in either of these significant inputs in isolation would result in a higher (lower) fair value estimate for the investment in CLO-Equities. In general, these inputs have no significant interrelationship with each other or with default and loss severity rates.
On a quarterly basis, the Company's valuation process for its indirect investment in CLO-Equities includes a review of the underlying cash flows and key assumptions used in the discounted cash flow model. The above significant unobservable inputs are reviewed and updated based on information obtained from secondary markets, including information received from the managers of the Company's CLO-Equities investment. In order to assess the reasonableness of the inputs the Company uses in the discounted cash flow model, the Company maintains an understanding of current market conditions, historical results, and emerging trends that may impact future cash flows. In addition, the assumptions the Company uses in its models are updated through regular communication with industry participants and ongoing monitoring of the deals in which the Company participates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. FAIR VALUE MEASUREMENTS (CONTINUED)
Other Investments - Other Privately Held Securities
Other privately held securities are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair value of the variable yield security was determined using an externally developed discounted cash flow model. This model includes inputs that are specific to that investment. The inputs used in the fair value measurement include an appropriate discount rate, default rate, loss absorption rate and estimated maturity date. The selection of an appropriate discount rate is judgmental and is the most significant unobservable input used in the valuation of this investment. A significant increase (decrease) in this input in isolation could result in significantly lower (higher) fair value measurement for this investment. In order to assess the reasonableness of the inputs the Company uses in the discounted cash flow model, the Company maintains an understanding of current market conditions, historical results, as well as investee specific information that may impact future cash flows.
Derivatives - Other Underwriting-related Derivatives
Other underwriting-related derivatives are initially valued at cost which approximates fair value. In subsequent measurement periods, the fair values of these derivatives are determined using internally developed discounted cash flow models which use appropriate discount rates. The selection of an appropriate discount rate is judgmental and is the most significant unobservable input used in the valuation of these derivatives. A significant increase (decrease) in this input in isolation could result in a significantly lower (higher) fair value measurement for the derivative contracts. In order to assess the reasonableness of the inputs the Company uses in the discounted cash flow model, the Company maintains an understanding of current market conditions, historical results, as well as contract specific information that may impact future cash flows.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. FAIR VALUE MEASUREMENTS (CONTINUED)
The following table presents changes in Level 3 for financial instruments measured at fair value on a recurring basis:
Opening
balance
Transfers
into
Level 3
Transfers
out of
Level 3
Included
in net income(1)
Included
in OCI (2)
Purchases
Sales
Settlements/
distributions
Closing
balance
Change in
unrealized
gains/(losses) (3)
Three months ended June 30, 2022
Fixed maturities, available for sale
Corporate debt
$
60,890
$
—
$
—
$
—
$
(3,828)
$
15,768
$
—
$
—
$
72,830
$
—
CMBS
—
—
—
—
—
—
—
—
—
—
ABS
—
—
—
—
—
—
—
—
—
—
60,890
—
—
—
(3,828)
15,768
—
—
72,830
—
Other investments
CLO-Equities
4,881
—
—
803
—
—
—
(876)
4,808
803
Other privately held investments
115,474
—
—
(5,110)
—
7,606
—
(2,000)
115,970
(5,110)
120,355
—
—
(4,307)
—
7,606
—
(2,876)
120,778
(4,307)
Total assets
$
181,245
$
—
$
—
$
(4,307)
$
(3,828)
$
23,374
$
—
$
(2,876)
$
193,608
$
(4,307)
Other liabilities
Derivative instruments
$
5,074
$
—
$
—
$
(366)
$
—
$
—
$
—
$
—
$
4,708
$
(366)
Total liabilities
$
5,074
$
—
$
—
$
(366)
$
—
$
—
$
—
$
—
$
4,708
$
(366)
Six months ended June 30, 2022
Fixed maturities, available for sale
Corporate debt
$
42,894
$
—
$
—
$
—
$
(6,623)
$
37,231
$
—
$
(672)
$
72,830
$
—
CMBS
—
—
—
—
—
—
—
—
—
—
ABS
—
—
—
—
—
—
—
—
—
—
42,894
—
—
—
(6,623)
37,231
—
(672)
72,830
—
Other investments
CLO-Equities
5,910
—
—
1,675
—
—
—
(2,777)
4,808
1,675
Other privately held investments
104,521
—
—
(3,491)
—
16,940
—
(2,000)
115,970
(3,491)
110,431
—
—
(1,816)
—
16,940
—
(4,777)
120,778
(1,816)
Total assets
$
153,325
$
—
$
—
$
(1,816)
$
(6,623)
$
54,171
$
—
$
(5,449)
$
193,608
$
(1,816)
Other liabilities
Derivative instruments
$
5,630
$
—
$
—
$
(922)
$
—
$
—
$
—
$
—
$
4,708
$
(922)
Total liabilities
$
5,630
$
—
$
—
$
(922)
$
—
$
—
$
—
$
—
$
4,708
$
(922)
(1) Realized gains (losses) on fixed maturities and realized and unrealized gains (losses) on other assets and other liabilities included in net income are included in net investment gains (losses). Realized and unrealized gains (losses) on other investments included in net income are included in net investment income.
(2) Unrealized gains (losses) on fixed maturities are included in other comprehensive income ("OCI").
(3) Change in unrealized gains (losses) relating to assets and liabilities held at the reporting date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. FAIR VALUE MEASUREMENTS (CONTINUED)
Opening balance
Transfers into Level 3
Transfers out of Level 3
Included
in net income(1)
Included
in OCI(2)
Purchases
Sales
Settlements/ distributions
Closing balance
Change in
unrealized
gains/(losses)(3)
Three months ended June 30, 2021
Fixed maturities, available for sale
Corporate debt
$
2,405
$
7,000
$
—
$
—
$
21
$
13,300
$
—
$
—
$
22,726
$
—
CMBS
905
—
—
—
(2)
—
—
(903)
—
—
ABS
7,175
12,382
(7,004)
—
7
—
—
—
12,560
—
10,485
19,382
(7,004)
—
26
13,300
—
(903)
35,286
—
Other investments
CLO-Equities
6,269
—
—
1,410
—
—
—
(677)
7,002
1,410
Other privately held investments
61,783
—
—
3
—
3,000
—
—
64,786
3
68,052
—
—
1,413
—
3,000
—
(677)
71,788
1,413
Total assets
$
78,537
$
19,382
$
(7,004)
$
1,413
$
26
$
16,300
$
—
$
(1,580)
$
107,074
$
1,413
Other liabilities
Derivative instruments
$
8,462
$
—
$
—
$
(345)
$
—
$
—
$
—
$
—
$
8,117
$
(345)
Total liabilities
$
8,462
$
—
$
—
$
(345)
$
—
$
—
$
—
$
—
$
8,117
$
(345)
Six months ended June 30, 2021
Fixed maturities, available for sale
Corporate debt
$
2,504
$
7,000
$
—
$
—
$
(78)
$
13,300
$
—
$
—
$
22,726
$
—
CMBS
1,740
—
—
—
13
—
—
(1,753)
—
—
ABS
10,665
18,566
(16,207)
—
36
—
—
(500)
12,560
—
14,909
25,566
(16,207)
—
(29)
13,300
—
(2,253)
35,286
—
Other investments
CLO-Equities
6,173
—
—
1,980
—
—
—
(1,151)
7,002
1,980
Other privately held investments
70,011
—
—
18,482
—
3,273
(26,980)
—
64,786
1,101
76,184
—
—
20,462
—
3,273
(26,980)
(1,151)
71,788
3,081
Total assets
$
91,093
$
25,566
$
(16,207)
$
20,462
$
(29)
$
16,573
$
(26,980)
$
(3,404)
$
107,074
$
3,081
Other liabilities
Derivative instruments
$
9,122
$
—
$
—
$
(1,005)
$
—
$
—
$
—
$
—
$
8,117
$
(1,005)
Total liabilities
$
9,122
$
—
$
—
$
(1,005)
$
—
$
—
$
—
$
—
$
8,117
$
(1,005)
(1) Realized gains (losses) on fixed maturities and realized and unrealized gains (losses) on other assets and other liabilities included in net income are included in net investment gains (losses). Realized and unrealized gains (losses) on other investments included in net income are included in net investment income.
(2) Unrealized gains (losses) on fixed maturities are included in other comprehensive income ("OCI").
(3) Change in unrealized gains (losses) relating to assets and liabilities held at the reporting date.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. FAIR VALUE MEASUREMENTS (CONTINUED)
Transfers into Level 3 from Level 2
There were no transfers into Level 3 from Level 2 during the three and six months ended June 30, 2022. The transfers into Level 3 from Level 2 during the three and six months ended June 30, 2021 were primarily due to the lack of observable market inputs and multiple quotes from pricing vendors and broker-dealers for certain fixed maturities.
Transfers out of Level 3 into Level 2
There were no transfers out of Level 3 into Level 2 during the three and six months ended June 30, 2022. The transfers out of Level 3 into Level 2 during the three and six months ended June 30, 2021 were primarily due to the availability of observable market inputs and multiple quotes from pricing vendors for certain fixed maturities.
Measuring the Fair Value of Other Investments Using Net Asset Valuations
The fair values of hedge funds, direct lending funds, private equity funds and real estate funds are estimated using net asset valuations ("NAVs") as advised by external fund managers or third-party administrators. For these funds, NAVs are based on the manager's or administrator's valuation of the underlying holdings in accordance with the fund's governing documents and in accordance with U.S. GAAP.
For hedge funds, direct lending funds, private equity funds and real estate funds, valuation statements are typically released on a reporting lag, therefore, the Company estimates the fair value of these funds by starting with the most recent fund valuations and adjusting for capital calls, redemptions, drawdowns and distributions. Return estimates are not available from the relevant fund managers for these funds, therefore the Company typically has a reporting lag in its fair value measurements of these funds. At June 30, 2022 and December 31, 2021 all funds measured at fair value using NAVs are reported generally on a one quarter lag.
The Company often does not have access to financial information relating to the underlying securities held within the funds, therefore, management is unable to corroborate the fair values placed on the securities underlying the asset valuations provided by fund managers or fund administrators. In order to assess the reasonableness of the NAVs, the Company performs a number of monitoring procedures on a quarterly basis, to assess the quality of the information provided by fund managers and fund administrators. These procedures include, but are not limited to, regular review and discussion of each fund's performance with its manager, regular evaluation of fund performance against applicable benchmarks and the backtesting of the Company's fair value estimates against subsequently received NAVs. Backtesting involves comparing the Company's previously reported fair values for each fund against NAVs per audited financial statements (for year-end values) and final NAVs from fund managers and fund administrators (for interim values).
The fair values of hedge funds, direct lending funds, private equity funds and real estate funds are measured using the NAV practical expedient, therefore the fair values of these funds have not been categorized within the fair value hierarchy.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4. FAIR VALUE MEASUREMENTS (CONTINUED)
Financial Instruments Disclosed, But Not Carried, at Fair Value
The fair value of financial instruments accounting guidance also applies to financial instruments disclosed, but not carried, at fair value, except for certain financial instruments, including insurance contracts.
At June 30, 2022, the carrying values of cash and cash equivalents including restricted amounts, accrued investment income, receivable for investments sold, certain other assets, payable for investments purchased and certain other liabilities approximated fair values due to their short maturities. As these financial instruments are not actively traded, their fair values are classified as Level 2.
At June 30, 2022, the Company's fixed maturities held to maturity, were recorded at amortized cost with a carrying value of $641 million (2021: $446 million) and a fair value of $620 million (2021: $445 million). The fair values of these securities are determined using a model which uses prepayment speeds and spreads sourced primarily from the new issue market. As the significant inputs used to price these securities are observable market inputs, their fair values are classified as Level 2.
At June 30, 2022, the carrying value of mortgage loans, held for investment, approximated fair value. The fair values of mortgage loans are primarily determined by estimating expected future cash flows and discounting them using current interest rates for similar mortgage loans with similar credit risk or are determined from pricing for similar loans. As mortgage loans are not actively traded, their fair values are classified as Level 3.
At June 30, 2022, the Company's debt was recorded at amortized cost with a carrying value of $1,312 million (2021: $1,311 million) and a fair value of $1,215 million (2021: $1,453 million). The fair value of the Company's debt is based on prices obtained from a third-party pricing service and is determined using the spread above the risk-free yield curve. These spreads are generally obtained from the new issue market, secondary trading and broker-dealer quotes. As the yields for the risk-free yield curve and the spreads are observable market inputs, the fair value of the Company's debt is classified as Level 2.
5. DERIVATIVE INSTRUMENTS
The following table provides the balance sheet classifications of derivatives recorded at fair value:
June 30, 2022
December 31, 2021
Derivative
notional
amount
Derivative
asset
fair
value(1)
Derivative
liability
fair
value(1)
Derivative
notional
amount
Derivative
asset
fair
value(1)
Derivative
liability
fair
value(1)
Relating to investment portfolio:
Foreign exchange forward contracts
$
181,250
$
2,074
$
7
$
184,187
$
13
$
1,463
Relating to underwriting portfolio:
Foreign exchange forward contracts
1,137,892
1,144
19,658
1,258,836
3,103
13,524
Other underwriting-related contracts
50,000
—
4,708
50,000
—
5,630
Total derivatives
$
3,218
$
24,373
$
3,116
$
20,617
(1)Derivative assets and derivative liabilities are classified within other assets and other liabilities in the consolidated balance sheets.
The notional amounts of derivative contracts represent the basis on which amounts paid or received are calculated and are presented in the above table to quantify the volume of the Company's derivative activities. Notional amounts are not reflective of credit risk.
None of the Company's derivative instruments are designated as hedges under current accounting guidance.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. DERIVATIVE INSTRUMENTS (CONTINUED)
Offsetting Assets and Liabilities
The Company's derivative instruments are generally traded under International Swaps and Derivatives Association master netting agreements which establish terms that apply to all transactions. In the event of a bankruptcy or other stipulated event, master netting agreements provide that individual positions be replaced with a new amount, usually referred to as the termination amount, determined by taking into account market prices and converting into a single currency. Effectively, this contractual close-out netting reduces credit exposure from gross to net exposure.
The following table provides a reconciliation of gross derivative assets and liabilities to the net amounts presented in the consolidated balance sheets, with the difference being attributable to the impact of master netting agreements:
June 30, 2022
December 31, 2021
Gross amounts
Gross amounts offset
Net
amounts(1)
Gross amounts
Gross amounts offset
Net
amounts(1)
Derivative assets
$
7,363
$
(4,145)
$
3,218
$
9,047
$
(5,931)
$
3,116
Derivative liabilities
$
28,518
$
(4,145)
$
24,373
$
26,548
$
(5,931)
$
20,617
(1)Net asset and liability derivatives are classified within other assets and other liabilities in the consolidated balance sheets.
Refer to Note 3 'Investments' for information on reverse repurchase agreements.
a) Relating to Investment Portfolio
Foreign Currency Risk
The Company's investment portfolio is exposed to foreign currency risk therefore the fair values of its investments are partially influenced by changes in foreign exchange rates. The Company may enter into foreign exchange forward contracts to manage the effect of this foreign currency risk. These foreign currency hedging activities are not designated as specific hedges for financial reporting purposes.
Interest Rate Risk
The Company's investment portfolio includes a large percentage of fixed maturities which exposes it to significant interest rate risk. As part of overall management of this risk, the Company may use interest rate swaps.
b) Relating to Underwriting Portfolio
Foreign Currency Risk
The Company's insurance and reinsurance subsidiaries and branches operate in various countries. Some of its business is written in currencies other than the U.S. dollar, therefore the underwriting portfolio is exposed to significant foreign currency risk. The Company manages foreign currency risk by seeking to match its foreign-denominated net liabilities under insurance and reinsurance contracts with cash and investments that are denominated in the same currencies. The Company uses derivative instruments, specifically, forward contracts to economically hedge foreign currency exposures.
Other Underwriting-related Risks
The Company enters into insurance and reinsurance contracts that are accounted for as derivatives. These insurance or reinsurance contracts provide indemnification to an insured or cedant as a result of a change in a variable as opposed to an identifiable insurable event. The Company considers these contracts to be part of its underwriting operations.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. DERIVATIVE INSTRUMENTS (CONTINUED)
The following table provides the total unrealized and realized gains (losses) recognized in net income for derivatives not designated as hedges:
Consolidated statement of operations line item that includes gain (loss) recognized in net income
Three months ended June 30,
Six months ended June 30,
2022
2021
2022
2021
Relating to investment portfolio:
Foreign exchange forward contracts
Net investment gains (losses)
$
4,822
$
(537)
$
7,063
$
1,212
Relating to underwriting portfolio:
Foreign exchange forward contracts
Foreign exchange gains (losses)
(31,146)
(604)
(59,122)
(26,660)
Other underwriting-related contracts
Other insurance related income (loss)
367
344
922
1,005
Total
$
(25,957)
$
(797)
$
(51,137)
$
(24,443)
6. RESERVE FOR LOSSES AND LOSS EXPENSES
Reserve Roll-Forward
The following table presents a reconciliation of the Company's beginning and ending gross reserve for losses and loss expenses and net reserve for unpaid losses and loss expenses:
Six months ended June 30,
2022
2021
Gross reserve for losses and loss expenses, beginning of period
$
14,653,094
$
13,926,766
Less reinsurance recoverable on unpaid losses and loss expenses, beginning of period
(5,017,611)
(4,496,641)
Net reserve for unpaid losses and loss expenses, beginning of period
9,635,483
9,430,125
Net incurred losses and loss expenses related to:
Current year
1,515,182
1,393,316
Prior years
(12,897)
(12,126)
1,502,285
1,381,190
Net paid losses and loss expenses related to:
Current year
(120,713)
(109,482)
Prior years
(1,354,605)
(1,239,814)
(1,475,318)
(1,349,296)
Foreign exchange and other
(272,994)
68,880
Net reserve for unpaid losses and loss expenses, end of period
9,389,456
9,530,899
Reinsurance recoverable on unpaid losses and loss expenses, end of period
5,008,583
4,626,454
Gross reserve for losses and loss expenses, end of period
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED)
The Company writes business with loss experience generally characterized as low frequency and high severity in nature, which can result in volatility in its financial results. During the six months ended June 30, 2022, the Company recognized catastrophe and weather-related losses, net of reinstatement premiums, of $127 million (2021: $139 million), including $30 million attributable to the Russia-Ukraine war.
At June 30, 2021, foreign exchange and other included a reduction in reinsurance recoverable on unpaid losses of $49 million related to the Reinsurance to Close of the 2018 year of account of Syndicate 2007.
Estimates for Significant Catastrophe Events
At June 30, 2022, net reserves for losses and loss expenses included estimated amounts for numerous catastrophe events. The magnitude and complexity of losses arising from certain of these events inherently increase the level of uncertainty and, therefore, the level of management judgment involved in arriving at estimated net reserves for losses and loss expenses. These events include the Russia-Ukraine war in 2022, Hurricane Ida, U.S. Winter Storms Uri and Viola and July European Floods in 2021, the COVID-19 pandemic, Hurricanes Laura, Sally, Zeta and Delta, the Midwest derecho and wildfires across the West Coast of the United States in 2020, Japanese Typhoons Hagibis, Faxai and Tapah, Hurricane Dorian and the Australia Wildfires in 2019 and Hurricanes Michael and Florence, California Wildfires and Typhoon Jebi in 2018. As a result, actual losses for these events may ultimately differ materially from current estimates.
Prior Year Reserve Development
The Company's net favorable prior year reserve development arises from changes to estimates of losses and loss expenses related to loss events that occurred in previous calendar years. The following table presents net prior year reserve development by segment:
Three months ended June 30,
Six months ended June 30,
2022
2021
2022
2021
Favorable (Adverse)
Favorable (Adverse)
Favorable (Adverse)
Favorable (Adverse)
Insurance
$
2,773
$
6,427
$
9,838
$
7,932
Reinsurance
1,167
381
3,059
4,194
Total
$
3,940
$
6,808
$
12,897
$
12,126
The following sections provide further details on net prior year reserve development by segment, reserving class and accident year:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED)
Insurance Segment:
The following table maps lines of business to reserve classes and the expected claim tails:
Insurance segment
Reserve class and tail
Property and other
Marine
Aviation
Credit and political risk
Professional lines
Liability
Short
Short
Short/Medium
Medium
Medium
Long
Reported lines of business
Property
X
Marine
X
Terrorism
X
Aviation
X
Credit and political risk
X
Professional lines
X
Liability
X
Accident and health
X
Prior year reserve development by reserve class was as follows:
Three months ended June 30,
Six months ended June 30,
2022
2021
2022
2021
Favorable (Adverse)
Favorable (Adverse)
Favorable (Adverse)
Favorable (Adverse)
Property and other
$
1,388
$
35,290
$
13,080
$
50,681
Marine
1,221
7,348
12,891
19,221
Aviation
1,705
4,808
4,685
5,844
Credit and political risk
4,287
4,055
5,182
(1,316)
Professional lines
5,433
(33,054)
(1,189)
(47,646)
Liability
(11,261)
(12,020)
(24,811)
(18,852)
Total
$
2,773
$
6,427
$
9,838
$
7,932
For the three months ended June 30, 2022, the Company recognized $3 million of net favorable prior year reserve development, the principal components of which were:
•$5 million of net favorable prior year reserve development on professional lines business primarily due to better than expected loss emergence within the U.S. commercial management solutions and Europe financial institutions books of business mainly related to the 2013 accident year and the U.S. financial institutions book of business mainly related to the 2017 and prior accident years, partially offset by reserve strengthening within the U.S. commercial management solutions and U.S. financial institutions books of business mainly related to the 2018 and 2019 accident years.
•$4 million of net favorable prior year reserve development on credit and political risk business primarily due to better than expected loss emergence mainly related to 2020 and 2021 accident years.
•$11 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the program book of business mainly related to the 2017 through 2021 accident years and reserve strengthening within the U.S. primary casualty book of business mainly related to the 2015 and 2017 accident years.
For the three months ended June 30, 2021, the Company recognized $6 million of net favorable prior year reserve development, the principal components of which were:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED)
•$35 million of net favorable prior year reserve development on property and other business primarily due to decreases in loss estimates attributable to specific claims related to the 2006 through 2012 accident years, better than expected loss emergence attributable to 2018 and 2020 catastrophe events, and the accident and health book of business mainly related to the 2019 and 2020 accident years.
•$7 million of net favorable prior year reserve development on marine business primarily due to better than expected loss emergence attributable to cargo and energy offshore books of business mainly related to the 2020 accident year and decreases in loss estimates attributable to specific claims related to the 2006 through 2012 accident years.
•$5 million of net favorable prior year reserve development on aviation business primarily due to better than expected loss emergence mainly related to the 2014 and 2020 accident years.
•$33 million of net adverse prior year reserve development on professional lines business primarily due to reserve strengthening within the International management liability solutions and financial institutions books of businesses mainly related to the 2018 accident year and the U.S. commercial management solutions book of business mainly related to the 2018 and 2019 accident years.
•$12 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the program book of business mainly related to the 2018 and 2019 accident year.
For the six months ended June 30, 2022, we recognized $10 million of net favorable prior year reserve development, the principal components of which were:
•$13 million of net favorable prior year reserve development on property and other business primarily due to decreases in loss estimates attributable to specific large claims related to the 2017 accident year,and better than expected loss emergence attributable to 2018 catastrophe events, and the accident and health book of business mainly related to the 2021 accident year.
•$13 million of net favorable prior year reserve development on marine business primarily due to better than expected loss emergence attributable to the cargo and offshore energy books of business mainly related to the 2018 and 2021 accident years.
•$5 million of net favorable prior year reserve development on credit and political risk business primarily due to better than expected loss emergence mainly related to the 2017, 2020 and 2021 accident years.
•$5 million of net favorable prior year reserve development on aviation business primarily due to better than expected loss emergence mainly related to the 2021 accident year.
•$25 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the program book of business mainly related to the 2017 through 2021 accident years and an increase in the loss estimate attributable to a specific large claim related to the 2017 accident year.
For the six months ended June 30, 2021, we recognized $8 million of net favorable prior year reserve development, the principal components of which were:
•$51 million of net favorable prior year reserve development on property and other business primarily due to decreases in loss estimates attributable to specific claims related to the 2006 through 2012 accident years and better than expected loss emergence attributable to the accident and health book of business mainly related to the 2019 and 2020 accident years.
•$19 million of net favorable prior year reserve development on marine business primarily due to better than expected loss emergence attributable to cargo and energy offshore books of business mainly related to the 2017 and 2020 accident years and decreases in loss estimates attributable to specific claims related to the 2006 through 2012 accident years.
•$6 million of net favorable prior year reserve development on aviation business primarily due to better than expected loss emergence mainly related to 2020 accident years.
•$48 million of net adverse prior year reserve development on professional lines business primarily due to reserve strengthening within the International management liability solutions and financial institutions books of businesses mainly related to the 2018 accident year and the U.S. commercial management solutions book of business mainly related to the 2018 and 2019 accident years and European program and European management liability solutions books of business mainly related to the 2018 accident year.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED)
•$19 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the program book of business mainly related to the 2018 and 2019 accident year.
Reinsurance Segment:
The following table maps lines of business to reserve classes and the expected claim tails:
Reinsurance segment
Reserve class and tail
Property and other
Credit and surety
Professional lines
Motor
Liability
Short
Medium
Medium
Long
Long
Reported lines of business
Catastrophe
X
Property
X
Credit and surety
X
Professional lines
X
Motor
X
Liability
X
Engineering
X
Agriculture
X
Marine and aviation
X
Accident and health
X
Prior year reserve development by reserve class was as follows:
Three months ended June 30,
Six months ended June 30,
2022
2021
2022
2021
Favorable (Adverse)
Favorable (Adverse)
Favorable (Adverse)
Favorable (Adverse)
Property and other
$
6,547
$
12,310
$
31,333
$
13,278
Credit and surety
3,583
(4,916)
11,046
(9,854)
Professional lines
(6,000)
(8,600)
(30,522)
(10,804)
Motor
3,860
12,946
2,130
30,086
Liability
(6,823)
(11,358)
(10,928)
$
(18,512)
Total
$
1,167
$
381
$
3,059
$
4,194
For the three months ended June 30, 2022, the Company recognized $1 million of net favorable prior year reserve development, the principal components of which were:
•$7 million of net favorable prior year development on property and other business primarily due to better than expected loss emergence attributable to 2019 and 2020 catastrophe events, and the agriculture book of business mainly related to the 2021 accident year, partially offset by reserve strengthening attributable to 2021 catastrophe events.
•$4 million of net favorable prior year reserve development on credit and surety business primarily due to better than expected loss emergence mainly related to 2018 and 2020 accidents years.
•$4 million of net favorable prior year reserve development on motor business primarily due to better than expected loss emergence mainly related to 2018 and 2019 accidents years.
•$7 million of net adverse prior year development on liability business primarily due to an increase in the loss estimate attributable to a specific large claim related to the 2021 accident year.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6. RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED)
•$6 million of net adverse prior year development on professional lines business primarily due to reserve strengthening within the U.S. public D&O book of business related to 2015 through 2018 accident years, partially offset by better than expected loss emergence attributable to the U.S. and Europe non-proportional books of business related to several accident years.
For the three months ended June 30, 2021, the Company recognized $0.4 million of net favorable prior year reserve development, the principal components of which were:
•$13 million of net favorable prior year reserve development on motor business primarily due to proportional and non-proportional treaty business related to older accident years.
•$12 million of net favorable prior year development on property and other business primarily due to decreases in loss estimates attributable to specific claims related to the 2009, 2019 and 2020 accident years and better than expected loss emergence attributable to 2017, 2018 and 2019 catastrophe events.
•$11 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the commercial auto liability book of business mainly related to the 2018 accident year.
•$9 million of net adverse prior year reserve development on professional lines business primarily due to reserve strengthening within the North America book of business mainly related to the 2018 and 2019 accident years
•$5 million of net adverse prior year reserve development on credit and surety business primarily due to reserve strengthening within the Europe and Latin America surety books of business mainly related to the 2015 through 2018 accident years.
For the six months ended June 30, 2022, we recognized $3 million of net favorable prior year reserve development, the principal components of which were:
•$31 million of net favorable prior year development on property and other business primarily due to better than expected loss emergence attributable to 2018 through 2021 catastrophe events, the agriculture book of business mainly related to the 2021 accident year, and a 2017 aggregate excess of loss treaty.
•$11 million of net favorable prior year reserve development on credit and surety business primarily due to better than expected loss emergence mainly related the 2016, 2018 and 2020 accidents years.
•$31 million of net adverse prior year development on professional lines business primarily due to increases in loss estimates attributable to one cedant related to the 2016 to 2018 accident years, and a specific large claim related to the 2017 accident year, and reserve strengthening within the U.S. public D&O book of business related to several accident years.
•$11 million of net adverse prior year development on liability business primarily due to increases in loss estimates attributable to specific large claims related to the 2018 and 2021 accident years.
For the six months ended June 30, 2021, we recognized $4 million of net favorable prior year reserve development, the principal components of which were:
•$30 million of net favorable prior year reserve development on motor business primarily due to proportional and non- proportional treaty business related to older accident years and the 2016 accident year.
•$13 million of net favorable prior year development on property and other business primarily due to decreases in the loss estimates attributable to specific claims related to the 2009, 2019 and 2020 accident years and better than expected loss emergence attributable to 2017, 2018 and 2019 catastrophe events.
•$19 million of net adverse prior year reserve development on liability business primarily due to an increase in the loss estimate attributable to a specific large claim related to the 2017 accident year and reserve strengthening within the commercial auto liability book of business related to the 2018 accident year.
•$11 million of net adverse prior year reserve development on professional lines business primarily due to reserve strengthening within the North America books of business mainly related to the 2017 and 2019 accident years.
•$10 million of net adverse prior year reserve development on credit and surety business primarily due to reserve strengthening within the Europe and Latin America surety books of business mainly related to the 2015 through 2018 accident years and an increase in the loss estimate attributable to a specific large claim mainly related to the 2020 accident year.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
7. EARNINGS PER COMMON SHARE
The following table presents a comparison of earnings per common share and earnings per diluted common share:
Three months ended June 30,
Six months ended June 30,
2022
2021
2022
2021
Earnings per common share
Net income
$
34,778
$
235,473
$
183,982
$
358,770
Less: Preferred share dividends
7,563
7,563
15,125
15,125
Net income available to common shareholders
27,215
227,910
168,857
343,645
Weighted average common shares outstanding
85,173
84,764
85,068
84,640
Earnings per common share
$
0.32
$
2.69
$
1.98
$
4.06
Earnings per diluted common share
Net income available to common shareholders
$
27,215
$
227,910
$
168,857
$
343,645
Weighted average common shares outstanding
85,173
84,764
85,068
84,640
Share-based compensation plans
670
503
758
477
Weighted average diluted common shares outstanding
85,843
85,267
85,826
85,117
Earnings per diluted common share
$
0.32
$
2.67
$
1.97
$
4.04
Weighted average anti-dilutive shares excluded from the dilutive computation
146
445
567
1,071
8. SHARE-BASED COMPENSATION
Performance Restricted Stock Units
Performance Restricted Stock Units granted in 2022
Performance restricted stock units granted in 2022 include a market condition which is the Company’s total shareholder return relative to its peer group ("Relative TSR") over the performance period. Relative TSR is calculated in accordance with the terms of the applicable award agreement. If performance goals are achieved, these awards will cliff vest at the end of a three-year performance period within a range of 0% to 200% of target. Performance restricted stock units granted in 2022 were share-settled awards.
Valuation assumptions
The fair value of performance restricted stock units granted in 2022 was measured on the grant date using a Monte Carlo simulation model.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
8. SHARE-BASED COMPENSATION (CONTINUED)
The following table provides details of the significant inputs used in the Monte Carlo simulation model:
Six months ended June 30,
2022
2021
Expected volatility
33.44%
32.99%
Expected term (in years)
3.0
3.0
Expected dividend yield
n/a
n/a
Risk-free interest rate
1.26%
0.17%
Beginning share price: The beginning share price was based on the average closing share price over the 10 trading days preceding and including the start of the performance period.
Ending share price: The ending share price was based on the average projected closing share price over the 10 trading days preceding and including the end of the performance period.
Expected volatility: The expected volatility is estimated based on the Company's historical share price volatility.
Expected term: Performance for awards granted in 2022 is measured from January 1, 2022 to December 31, 2024, and performance for awards granted in 2021 is measured from January 1, 2021 to December 31, 2023.
Expected dividend yield: The expected dividend yield is not applicable to the performance restricted stock units as dividends are paid at the end of the vesting period and do not affect the value of the performance restricted stock units.
Risk-free interest rate: The risk free rate is estimated based on the yield on a U.S. treasury zero-coupon bond issued with a remaining term equal to the vesting period of the performance restricted stock units.
Compensation expense associated with performance restricted stock units granted in 2022 and 2021 is determined on the grant date based on the fair value calculated by the Monte Carlo simulation model, and is recognized on a straight-line basis over the requisite service period.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
9. SHAREHOLDERS' EQUITY
The following table presents changes in common shares issued and outstanding:
Three months ended June 30,
Six months ended June 30,
2022
2021
2022
2021
Shares issued, balance at beginning of period
176,580
176,580
176,580
176,580
Shares issued
—
—
—
—
Total shares issued at end of period
176,580
176,580
176,580
176,580
Treasury shares, balance at beginning of period
(91,304)
(91,827)
(91,806)
(92,227)
Shares repurchased
(640)
(8)
(885)
(197)
Shares reissued
19
22
766
611
Total treasury shares at end of period
(91,925)
(91,813)
(91,925)
(91,813)
Total shares outstanding
84,655
84,767
84,655
84,767
Treasury Shares
The following table presents common shares repurchased from shares held in Treasury:
Three months ended June 30,
Six months ended June 30,
2022
2021
2022
2021
In the open market:(1)
Total shares
634
—
634
—
Total cost
$
34,987
$
—
$
34,987
$
—
Average price per share(2)
$
55.22
$
—
$
55.22
$
—
From employees:(3)
Total shares
6
8
251
197
Total cost
$
369
$
439
$
13,346
$
9,819
Average price per share(2)
$
60.02
$
53.08
$
53.10
$
49.87
Total shares repurchased:
Total shares
640
8
885
197
Total cost
$
35,356
$
439
$
48,333
$
9,819
Average price per share(2)
$
55.27
$
53.08
$
54.62
$
49.87
(1) Shares are repurchased pursuant to the Company's Board-authorized share repurchase program announced in December 2021, effective January 1, 2022 through
to December 31, 2022.
(2) Calculated using whole numbers.
(3) Shares are repurchased from employees to facilitate the satisfaction of their personal withholding tax liabilities that arise on the vesting of share-settled restricted stock units.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
9. SHAREHOLDERS' EQUITY (CONTINUED)
Dividends
The following table presents dividends declared and paid related to the Company's common and preferred shares:
Per share data
Dividends declared
Dividends paid in period of declaration
Dividends paid in period following declaration
Three months ended June 30, 2022
Common shares
$
0.43
$
—
$
0.43
Series E preferred shares
$
34.38
$
—
$
34.38
Three months ended June 30, 2021
Common shares
$
0.42
$
—
$
0.42
Series E preferred shares
$
34.38
$
—
$
34.38
Six months ended June 30, 2022
Common shares
$
0.86
$
0.43
$
0.43
Series E preferred shares
$
68.75
$
34.38
$
34.38
Six months ended June 30, 2021
Common shares
$
0.84
$
0.42
$
0.42
Series E preferred shares
$
68.75
$
34.38
$
34.38
10. DEBT AND FINANCING ARRANGEMENTS
a)Letters of Credit
Effective March 31, 2022, certain of AXIS Capital’s operating subsidiaries (the "Participating Subsidiaries") amended their existing $650 million secured letter of credit facility to extend the expiration date of the $150 million secured letter of credit facility to March 31, 2023, with each letter of credit provided pursuant to such credit facility having a tenor not to extend beyond March 31, 2024. The terms and conditions of the $500 million secured letter of credit facility remain unchanged.
11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time, the Company is subject to routine legal proceedings, including arbitrations, arising in the ordinary course of business. These legal proceedings generally relate to claims asserted by or against the Company in the ordinary course of insurance or reinsurance operations. Estimated amounts payable under such proceedings are included in the reserve for losses and loss expenses in the consolidated balance sheets.
The Company is not party to any material legal proceedings arising outside the ordinary course of business.
Investments
Refer to Note 3 - 'Investments' for information on the Company's unfunded investment commitments related to the Company's other investment portfolio.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
13. RELATED PARTY TRANSACTIONS
At June 30, 2022, the Company has invested $12 million in a Stone Point Credit Corporation bond.
At June 30, 2022, the Company has invested $9 million in co-investments with Gordon Brothers, an affiliate of Stone Point.
14. REORGANIZATION EXPENSES
For the three and six months ended June 30, 2022, reorganization expenses were $16 million (2021: $nil), related to the Company's exit from property reinsurance business, part of an overall approach to reduce its exposure to volatile catastrophe risk.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion and analysis of our results of operations for the three and six months ended June 30, 2022 and 2021 and our financial condition at June 30, 2022 and December 31, 2021. This should be read in conjunction with Item 1 'Consolidated Financial Statements' of this report and our Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2021. Tabular dollars are in thousands, except per share amounts. Amounts in tables may not reconcile due to rounding differences.
Second Quarter 2022 Consolidated Results of Operations
•Net income available to common shareholders of $27 million, or $0.32 per common share, and $0.32 per diluted common share
•Operating income(1) of $149 million, or $1.74 per diluted common share(1)
•Gross premiums written of $2.1 billion
•Net premiums written of $1.3 billion
•Net premiums earned of $1.3 billion
•Pre-tax catastrophe and weather-related losses, net of reinsurance and reinstatement premiums, of $67 million (Insurance: $28 million and Reinsurance: $39 million), or 5.3 points, primarily attributable to South Africa floods, and the high frequency of small to mid-sized other weather-related events that occurred worldwide.
•Net favorable prior year reserve development of $4 million
•Underwriting income(2) of $117 million and combined ratio of 93.4%
•Net investment income of $92 million
•Net investment losses of $173 million
•Foreign exchange gains of $57 million
Second Quarter 2022 Consolidated Financial Condition
•Total cash and investments of $15.7 billion; fixed maturities, short-term investments, and cash and cash equivalents comprise 86% of total cash and investments and have an average credit rating of AA-
•Total assets of $27.6 billion
•Reserve for losses and loss expenses of $14.4 billion and reinsurance recoverable on unpaid and paid losses and loss expenses of $5.5 billion
•Debt of $1.3 billion and debt to total capital ratio(3) of 21.8%
•Total common shares repurchased were 0.6 million shares for $35 million.
•Common shareholders’ equity of $4.2 billion; book value per diluted common share of $47.62
(1)Operating income (loss) and operating income (loss) per diluted common share are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. The reconciliations to the most comparable GAAP financial measures, net income (loss) available (attributable) to common shareholders and earnings (loss) per diluted common share, respectively, and a discussion of the rationale for the presentation of these items are provided in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures Reconciliation'.
(2)Consolidated underwriting income (loss) is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to, the most comparable GAAP financial measure, net income (loss), is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Results of Operations', and a discussion of the rationale for its presentation is provided in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures Reconciliation'.
(3)The debt to total capital ratio is calculated by dividing debt by total capital. Total capital represents the sum of total shareholders’ equity and debt.
AXIS Capital Holdings Limited ("AXIS Capital"), through its operating subsidiaries, is a global specialty underwriter and provider of insurance and reinsurance solutions with operations in Bermuda, the U.S., Europe, Singapore and Canada. Our underwriting operations are organized around our global underwriting platforms, AXIS Insurance and AXIS Re.
We provide our clients and distribution partners with a broad range of risk transfer products and services, and meaningful capacity, backed by excellent financial strength. We manage our portfolio holistically, aiming to construct the optimum portfolio of risks, consistent with our risk appetite and the development of our franchise. We nurture an ethical, entrepreneurial, disciplined and diverse culture that promotes outstanding client service, intelligent risk taking and the achievement of superior risk-adjusted returns for our shareholders. We believe that the achievement of our objectives will position us as a global leader in specialty risks. The execution of our business strategy for the first six months of 2022 included the following:
•increasing our relevance in a select number of attractive specialty lines insurance and treaty reinsurance markets including U.S. excess and surplus lines, North America professional lines and Lloyd's specialty insurance business;
•re-balancing our portfolio towards less volatile lines of business that carry attractive returns while deploying capital with risk limits, diversification and risk management;
•continuing the implementation of a focused distribution strategy while building mutually beneficial relationships with clients and partners;
•improving the effectiveness and efficiency of our operating platforms and processes;
•investing in data and technology capabilities, and tools to empower our underwriters and enhance the service that we provide to our customers;
•utilizing reinsurance markets and third party capital relationships;
•fostering a positive workplace environment that enables us to attract, retain and develop top talent; and
•growing our corporate citizenship program to give back to our communities and help contribute to a more sustainable future.
We are committed to leadership in specialty underwriting, where we have depth of talent and expertise. We believe our market positioning, underwriting expertise, best-in-class claims management capabilities and strong relationships with our distributors and clients will provide opportunities for increased profitability, with differences among our lines of business driven by our tactical response to market conditions.
Strong market conditions persist across virtually all insurance lines and geographies, even as we see rate deceleration in certain markets. The industry has observed rising loss cost trends and we expect rate improvement to continue as carriers assess pricing adequacy, portfolio construction, inflationary pressure and account preferences. In this market environment, we continue to focus on growth in lines of business and market segments that are adequately priced.
The reinsurance market is also experiencing improvements in rates, and terms and conditions. In light of 2021 marking the fifth consecutive year of challenging market loss events, carriers are aiming to reduce net volatility and increase profitability, and we anticipate the strongest market opportunities to be in specialty and casualty reinsurance lines.
We are encouraged by the pricing improvements we are seeing across most markets, that we expect will carry into 2023. Where prices deliver adequate profitability, we will look to grow within our risk and volatility guidelines. With a strengthened book of business, and growing footprint in attractive specialty markets that are seeing the most favorable conditions, we believe AXIS is well positioned to drive profitable growth within the current environment.
Response to Russia-Ukraine War
Following the Russian invasion of Ukraine and the triggering of sanctions against the countries involved, organizations and named individuals, we established a task-force to coordinate our response to this situation.
The Russia-Ukraine war, and its related impacts, are an emerging and evolving risk to which we are exposed from an underwriting and reserving perspective.
Our team is tracking the situation closely, including stress and scenario testing on existing underwriting exposures. A range of economic impacts and external pressures across individual product lines are being considered.
Underwriting
We are monitoring international sanctions which impact our global operations and were effective March 27, 2022. The impact on gross premiums written for the six months ended June 30, 2022 of the cancellation of policies with exposures to the Russia-Ukraine war was immaterial. We continue to evaluate opportunities to write business in the region, not including Russia or Ukraine risks, with terms as short as seven days.
We are also closely monitoring cash due from our customers and reinsurers, giving due consideration to the Russia-Ukraine war and associated international sanctions. At June 30, 2022, we considered the potential financial impact of Russia-Ukraine war when determining allowances for expected credit losses for insurance and reinsurance premium balances receivable and reinsurance recoverable balances on unpaid losses and loss expenses. Based on facts and circumstances at that time, we did not adjust allowances for expected credit losses at June 30, 2022. We will continue to monitor the appropriateness of allowances for expected credit losses as new information comes to light. Adjustments to allowances for expected credit losses in subsequent periods could be material.
Reserving
At June 30, 2022, estimated pre-tax catastrophe and weather-related losses attributable the Russia-Ukraine war remained unchanged from the March 31, 2022 at $30 million.
The estimate of net reserves for losses and loss expenses related to the Russia-Ukraine war is subject to significant uncertainty. This uncertainty is driven by the inherent difficulty in making assumptions around the impact of the Russia-Ukraine war due to the lack of comparable events, the ongoing nature of the event, and its far-reaching impacts.
While we believe the overall estimate of net reserves for losses and loss expenses is adequate for losses and loss adjustment expenses that have been incurred at June 30, 2022, based on current facts and circumstances, we will continue to monitor the appropriateness of
our assumptions as new information comes to light and will adjust the estimate of net reserves for losses and loss adjustment expenses, as appropriate.
Actual losses for this event may ultimately differ materially from current estimates.
Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results by Segment' for further information
Investments
At June 30, 2022, we had no direct exposures to Russia or Ukraine within our investments portfolio.
Refer to Item 1A, 'Risk Factors' in our most recent Annual Report on Form 10-K for further information.
Recent Developments
On June 7, 2022, we announced the decision to exit property reinsurance business. This strategic initiative is part of an overall approach to reduce our exposure to volatile catastrophe risk. Reorganization expenses related to this strategic initiative for the three months ended June 30, 2022 of $16 million were mainly attributable to compensation-related costs associated with the termination of certain employees.
Underwriting-related general and administrative expenses(1)
(135,403)
5%
(128,961)
(280,499)
7%
(261,629)
Underwriting income(2)
116,693
148,254
255,487
188,501
Net investment income
92,214
(12%)
104,672
183,569
(16%)
218,836
Net investment gains (losses)
(173,263)
nm
73,293
(267,771)
nm
102,936
Corporate expenses(1)
(30,183)
(10%)
(33,491)
(54,128)
(9%)
(59,231)
Foreign exchange (losses) gains
57,000
nm
(19,602)
101,274
nm
(23,716)
Interest expense and financing costs
(15,241)
—%
(15,235)
(30,805)
—%
(30,806)
Reorganization expenses
(15,728)
nm
—
(15,728)
nm
—
Amortization of value of business acquired
—
nm
(1,028)
—
nm
(2,056)
Amortization of intangible assets
(2,729)
(18%)
(3,324)
(5,458)
(9%)
(6,013)
Income before income taxes and interest in income of equity method investments
28,763
253,539
166,440
388,451
Income tax (expense) benefit
4,965
nm
(27,865)
4,942
nm
(48,641)
Interest in income of equity method investments
1,050
(89%)
9,799
12,600
(34%)
18,960
Net income
34,778
235,473
183,982
358,770
Preferred share dividends
(7,563)
—%
(7,563)
(15,125)
—%
(15,125)
Net income available to common shareholders
$
27,215
$
227,910
$
168,857
$
343,645
nm – not meaningful is defined as a variance greater than +/-100%
(1)Underwriting-related general and administrative expenses is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to general and administrative expenses, the most comparable GAAP financial measure, also included corporate expenses of $30,183 and $33,491 for the three months endedJune 30, 2022 and 2021, respectively, and $54,128 and $59,231 for the six months ended June 30, 2022 and 2021, respectively. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Expenses (Revenues), Net' for further details on corporate expenses. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures Reconciliation' for further details.
(2)Consolidated underwriting income (loss) is a non-GAAP financial measure as defined in in Item 10(e) of SEC Regulation S-K. The reconciliation to net income (loss), the most comparable GAAP financial measure, is presented in the table above. Refer also to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures Reconciliation' for further details.
Refer to 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Results by Segment' for further details on underwriting revenues.
Combined Ratio
The components of the combined ratio were as follows:
Three months ended June 30,
Six months ended June 30,
2022
% Point
Change
2021
2022
% Point
Change
2021
Current accident year loss ratio, excluding catastrophe and weather-related losses
55.3
%
(0.4)
55.7
%
54.7
%
(0.7)
55.4
%
Catastrophe and weather-related losses ratio
5.3
%
2.8
2.5
%
5.1
%
(1.1)
6.2
%
Current accident year loss ratio
60.6
%
2.4
58.2
%
59.8
%
(1.8)
61.6
%
Prior year reserve development ratio
(0.3
%)
0.3
(0.6
%)
(0.5
%)
—
(0.5
%)
Net losses and loss expenses ratio
60.3
%
2.7
57.6
%
59.3
%
(1.8)
61.1
%
Acquisition cost ratio
20.2
%
1.3
18.9
%
20.0
%
0.6
19.4
%
General and administrative expense ratio(1)
12.9
%
(1.2)
14.1
%
13.1
%
(1.1)
14.2
%
Combined ratio
93.4
%
2.8
90.6
%
92.4
%
(2.3)
94.7
%
(1) The general and administrative expense ratio included corporate expenses not allocated to underwriting segments of 2.4% and 2.9% for the three months ended June 30, 2022 and 2021, respectively, and 2.1% and 2.6% for the six months ended June 30, 2022 and 2021, respectively. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Expenses (Revenues), Net' for further details.
Refer to 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Results by Segment' for further details on underwriting expenses.
Gross premiums written by line of business were as follows:
Three months ended June 30,
Six months ended June 30,
2022
2021
% Change
2022
2021
%
Change
Property
$
386,350
26
%
$
320,424
26
%
21%
$
671,287
25
%
$
582,210
25
%
15%
Marine
126,952
9
%
114,061
9
%
11%
325,503
12
%
302,009
13
%
8%
Terrorism
14,179
1
%
12,339
1
%
15%
37,161
1
%
32,083
1
%
16%
Aviation
26,844
2
%
29,742
2
%
(10%)
52,811
2
%
50,143
2
%
5%
Credit and political risk
47,085
3
%
43,140
3
%
9%
94,584
3
%
80,592
3
%
17%
Professional lines
496,275
34
%
463,763
37
%
7%
932,141
33
%
801,528
34
%
16%
Liability
306,541
21
%
241,522
19
%
27%
559,703
20
%
434,777
18
%
29%
Accident and health
65,396
4
%
43,481
3
%
50%
123,696
4
%
88,328
4
%
40%
Total
$
1,469,622
100
%
$
1,268,472
100
%
16%
$
2,796,886
100
%
$
2,371,670
100
%
18%
Gross premiums written for the three months ended June 30, 2022 increased by $201 million, or 16% ($216 million, or 17%, on a constant currency basis(1)), compared to the three months ended June 30, 2021. The increase was primarily attributable to property, liability, professional lines, accident and health, and marine lines.
The increases in property, and liability lines were driven by new business and favorable rate changes. The increase in accident and health lines was due to new business and the timing of the receipt of monthly statements from managing general agents ("MGAs"). The increases in professional lines and marine lines were associated with favorable rate changes.
Gross premiums written for the six months ended June 30, 2022 increased by $425 million, or 18% ($446 million, or 19%, on a constant currency basis), compared to the six months ended June 30, 2021. The increase was primarily attributable to professional lines, liability, property, marine, accident and health, and credit and political risk lines driven by new business and favorable rate changes. The increase in accident and health was also due to the timing of the receipt of monthly statements from MGAs.
Ceded Premiums Written
Ceded premiums written for the three months ended June 30, 2022, was $600 million, or 41%, of gross premiums written, compared to $556 million, or 44%, of gross premiums written for the three months ended June 30, 2021. The increase in ceded premiums written of $45 million, or 8%, was primarily driven by increases in liability, and property lines.
The increases in liability, and property lines reflected the increase in gross premiums written for the three months ended June 30, 2022, compared to the three months ended June 30, 2021. The increase in property lines was also attributable to a new quota share treaty and to the restructuring of a significant existing quota share treaty.
Ceded premiums written for the six months ended June 30, 2022, was $1,084 million, or 39%, of gross premiums written, compared to $951 million, or 40%, of gross premiums written for the six months endedJune 30, 2021.The increase in ceded premiums written of $133 million, or 14%, was primarily driven by increases in liability, property, and professional lines.
The increases in liability, property, and professional lines reflected the increase in gross premiums written for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The increase in property lines was also attributable to a new quota share treaty and to the restructuring of a significant existing quota share treaty.
(1) Amounts presented on a constant currency basis are non-GAAP financial measures as defined in Item 10 (e) of SEC Regulation S-K. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to the prior year balance.
Net premiums earned by line of business were as follows:
Three months ended June 30,
Six months ended June 30,
2022
2021
%
Change
2022
2021
%
Change
Property
$
180,290
23
%
$
155,803
24
%
16%
$
347,966
23
%
$
316,903
25
%
10%
Marine
92,720
12
%
86,483
13
%
7%
187,632
12
%
171,873
14
%
9%
Terrorism
10,429
1
%
10,972
2
%
(5%)
22,906
2
%
24,752
2
%
(7%)
Aviation
21,007
3
%
23,407
4
%
(10%)
43,787
3
%
41,128
3
%
6%
Credit and political risk
24,069
3
%
22,770
4
%
6%
49,491
3
%
43,770
4
%
13%
Professional lines
275,661
36
%
212,000
33
%
30%
558,499
37
%
415,275
33
%
34%
Liability
113,730
15
%
85,414
14
%
33%
218,907
14
%
163,241
13
%
34%
Accident and health
50,818
7
%
34,826
6
%
46%
92,351
6
%
71,020
6
%
30%
Total
$
768,724
100
%
$
631,675
100
%
22%
$
1,521,539
100
%
$
1,247,962
100
%
22%
Net premiums earned for the three months ended June 30, 2022 increased by $137 million, or 22%, compared to the three months ended June 30, 2021. The increase was primarily driven by increases in gross premiums earned in professional lines, liability, property, and accident and health lines, partially offset by increases in ceded premiums earned in liability, professional lines, and property lines.
Net premiums earned for the six months ended June 30, 2022 increased by $274 million, or 22%, compared to the six months ended June 30, 2021. The increase was primarily driven by increases in gross premiums earned in professional lines, liability, property, marine, and accident and health lines, partially offset by increases in ceded premiums earned in professional lines, liability, and property lines.
Loss Ratio
The components of the loss ratio were as follows:
Three months ended June 30,
Six months ended June 30,
2022
% Point
Change
2021
2022
% Point
Change
2021
Current accident year loss ratio
55.2
%
1.6
53.6
%
55.0
%
(0.9)
55.9
%
Prior year reserve development ratio
(0.3
%)
0.7
(1.0
%)
(0.6
%)
0.1
(0.7
%)
Loss ratio
54.9
%
2.3
52.6
%
54.4
%
(0.8)
55.2
%
Current Accident Year Loss Ratio
The current accident year loss ratio increased to 55.2% for the three months ended June 30, 2022, from 53.6% for the three months ended June 30, 2021. The increase in current accident year loss ratio for three months ended June 30, 2022, compared to the same period in 2021, was impacted by a higher level of catastrophe and weather-related losses. During the three months ended June 30, 2022, catastrophe and weather-related losses, were $28 million, or 3.6 points, primarily attributable to South Africa floods, and the high frequency of small to mid-sized other weather-related events that occurredworldwide. Comparatively, during the three months ended June 30, 2021, catastrophe and weather-related losses were $11 million, or 1.8 points.
The current accident year loss ratio decreased to 55.0% for the six months ended June 30, 2022, from 55.9% for the six months ended June 30, 2021. During the six months ended June 30, 2022, catastrophe and weather-related losses were $61 million, or 4.0 points, including $16 million attributable to the Russia-Ukraine war. The remaining losses of $44 million for the six months ended June 30, 2022, were primarily attributable to Eastern Australia floods, South Africa floods, and the high frequency of small to mid-sized other weather-related events that occurred worldwide. Comparatively, during the six months ended June 30, 2021, catastrophe and weather-related losses were $47 million or 3.8 points.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 51.6% for the three months ended June 30, 2022, from 51.8% for the three months ended June 30, 2021. The decrease in the current accident year loss ratio, after adjusting for the impact of the catastrophe and weather-related losses was principally due to the impact of favorable pricing over loss trends in most lines of business, partially offset by changes in business mix associated with the increase in professional lines and liability business written in recent periods.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 51.0% for the six months ended June 30, 2022, from 52.1% for the six months ended June 30, 2021. The decrease in the current accident year loss ratio, after adjusting for the impact of the catastrophe and weather-related losses was principally due to the impact of favorable pricing over loss trends in most lines of business, partially offset by changes in business mix associated with the increase in professional lines and liability business written in recent periods.
Prior Year Reserve Development
Refer to Item 1, Note 6 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for details on the reserve classes, the expected claims tails and prior year development.
Acquisition Cost Ratio
The acquisition cost ratio increased to 18.8% for the three months ended June 30, 2022, from 16.9% for the three months ended June 30, 2021, primarily related to prior year premium and acquisition cost adjustments.
The acquisition cost ratio increased to 18.6% for the six months ended June 30, 2022, from 18.0% for the six months ended June 30, 2021, primarily related to prior year premium and acquisition cost adjustments.
Underwriting-Related General and Administrative Expense Ratio
The underwriting-related general and administrative expense ratio decreased to 14.1% and 14.7% for the three and six months ended June 30, 2022, respectively, from 15.8% and 16.3% for the three and six months ended June 30, 2021, respectively, mainly driven by an increase in net premiums earned, partially offset by an increase in personnel costs, and travel costs.
Gross premiums written by line of business were as follows:
Three months ended June 30,
Six months ended June 30,
2022
2021
%
Change
2022
2021
%
Change
Catastrophe
$
62,077
8
%
$
133,089
18
%
(53%)
$
200,473
10
%
$
384,045
18
%
(48%)
Property
20,386
3
%
44,325
7
%
(54%)
96,709
5
%
170,780
8
%
(43%)
Credit and surety
76,872
12
%
37,413
6
%
nm
180,748
9
%
120,634
6
%
50%
Professional lines
173,056
27
%
148,398
22
%
17%
306,635
16
%
279,653
13
%
10%
Motor
35,814
6
%
39,781
6
%
(10%)
187,528
10
%
263,304
13
%
(29%)
Liability
190,072
30
%
182,688
27
%
4%
474,420
24
%
451,889
21
%
5%
Engineering
444
—
%
(2,502)
—
%
nm
10,509
1
%
(4,930)
—
%
nm
Agriculture
49,971
8
%
46,874
7
%
7%
77,796
4
%
63,314
3
%
23%
Marine and aviation
25,198
4
%
25,714
4
%
(2%)
75,684
4
%
58,056
3
%
30%
Accident and health
9,971
2
%
16,934
3
%
(41%)
340,703
17
%
318,252
15
%
7%
Total
$
643,861
100
%
$
672,714
100
%
(4%)
$
1,951,205
100
%
$
2,104,997
100
%
(7%)
nm – not meaningful
Gross premiums written for the three months ended June 30, 2022, decreased by $29 million, or 4% ($17 million, or 3%, on a constant currency basis), compared to the three months ended June 30, 2021. The decrease was primarily attributable to catastrophe, property, and accident and health lines, partially offset by increases in credit and surety, professional lines and liability lines.
The decreases in catastrophe and property lines were largely driven by non-renewals and decreased line sizes on several contracts associated with repositioning the portfolio. The decrease in accident and health lines was due to prior year premium adjustments and the timing of the renewal of a significant contract.
The increases in credit and surety, and liability lines were driven by new business. In addition, the increase in liability lines was due to favorable market conditions. The increase in professional lines was attributable to favorable market conditions, increased line sizes on several contracts and the timing of the renewal of several contracts.
Gross premiums written for the six months ended June 30, 2022, decreased by $154 million or 7% ($112 million, or 5%, on a constant currency basis), compared to the six months ended June 30, 2021. The decrease was primarily attributable to catastrophe, motor and property lines, partially offset by increases in credit and surety, professional lines, liability and accident and health lines.
The decreases in catastrophe, motor and property lines were largely driven by non-renewals and decreased line sizes on several contracts associated with repositioning the portfolio. The decrease in motor lines was also due to the timing of the renewals of significant contracts.
The increases in credit and surety, professional lines, accident and health, liability, and agriculture lines were driven by new business. The increase in credit and surety lines was also due to prior year premium adjustments related to significant contracts. The increases in professional lines and liability lines were also due to favorable market conditions. In addition, the increase in professional lines was attributable to increased line sizes on several contracts. The increase in engineering lines was associated with premium adjustments related to significant contracts. The increase in marine and aviation lines was attributable to new marine business.
Ceded Premiums Written
Ceded premiums written for the three months ended June 30, 2022, was $196 million, or 31%, of gross premiums written, compared to $182 million, or 27%, of gross premiums written for the three months ended June 30, 2021.
The increase in ceded premiums written of $15 million, or 8%, was primarily driven by increases in professional lines, and credit and surety lines, partially offset by a decrease in catastrophe lines.
The increase in professional lines was attributable to premiums ceded to new quota share retrocessional treaties and the restructuring of a significant quota share retrocessional treaty with a strategic capital partner. The increase in credit and surety lines reflected the increase in gross premiums written for the three months ended June 30, 2022, compared to the three months ended June 30, 2021.
The decrease in catastrophe lines reflected the decrease in gross premiums written for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, partially offset by an increase in premiums ceded to strategic capital partners due to the restructuring of several quota share retrocessional treaties.
Ceded premiums written for the six months ended June 30, 2022, was $535 million, or 27%, of gross premiums written, compared to $543 million, or 26%, of gross premiums written for the six months ended June 30, 2021.
The decrease in ceded premiums written of $8 million, or 2%, was primarily driven by decreases in catastrophe, and marine and aviation lines, partially offset by increases in professional lines, credit and surety, motor and liability lines.
The decrease in catastrophe lines reflected the decrease in gross premiums written for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, partially offset by an increase in premiums ceded to strategic capital partners due to the restructuring of several quota share retrocessional treaties. The decrease in marine and aviation lines was attributable to the timing of the renewal of a significant excess of loss retrocessional treaty.
The increase in professional lines was due to premiums ceded to new quota share retrocessional treaties with a strategic capital partner and the restructuring of significant quota share retrocessional treaties. The increase in credit and surety lines was attributable to premium adjustments and the restructuring of an existing significant quota share retrocessional treaty. The increases in motor and liability lines were associated with the restructuring of several significant quota share retrocessional treaties.
Net Premiums Earned
Net premiums earned by line of business were as follows:
Three months ended June 30,
Six months ended June 30,
2022
2021
% Change
2022
2021
% Change
Catastrophe
$
44,071
9
%
$
60,738
12
%
(27%)
$
99,180
9
%
$
141,520
14
%
(30%)
Property
36,736
7
%
63,252
12
%
(42%)
76,641
8
%
118,588
12
%
(35%)
Credit and surety
48,750
10
%
37,539
7
%
30%
93,200
9
%
72,972
7
%
28%
Professional lines
62,702
12
%
61,506
12
%
2%
119,069
12
%
112,353
11
%
6%
Motor
50,611
10
%
68,050
13
%
(26%)
100,628
10
%
123,002
12
%
(18%)
Liability
124,909
25
%
107,080
20
%
17%
234,680
23
%
199,119
20
%
18%
Engineering
6,400
1
%
6,297
1
%
2%
20,414
2
%
13,440
1
%
52%
Agriculture
21,825
4
%
16,985
3
%
28%
43,952
4
%
32,299
3
%
36%
Marine and aviation
19,959
4
%
14,399
3
%
39%
38,065
4
%
25,631
3
%
49%
Accident and health
92,365
18
%
89,420
17
%
3%
187,929
19
%
173,777
17
%
8%
Total
$
508,328
100
%
$
525,266
100
%
(3%)
$
1,013,758
100
%
$
1,012,701
100
%
—%
Net premiums earned for the three months ended June 30, 2022, decreased by $17 million, or 3% ($33 million, or 6%, on a constant currency basis), compared to the three months ended June 30, 2021. The decrease was primarily driven by decreases in gross premiums earned in catastrophe, property, and motor lines, partially offset by a decrease in ceded premiums earned in catastrophe lines and increases in gross premiums earned in liability, and credit and surety lines.
Net premiums earned for the six months ended June 30, 2022, increased by $1 million (decreased by $22 million, or 2%, on a constant currency basis), compared to the six months ended June 30, 2021. The increase was primarily driven by increases in gross premiums earned in liability, credit and surety, and accident and health lines, and a decrease in ceded premiums earned in catastrophe lines, partially offset by decreases in gross premiums earned in catastrophe, property, and motor lines.
Other insurance related income of $2 million and $9 million for the three and six months ended June 30, 2022, respectively, compared to $5 million and $8 million for the three and six months ended June 30, 2021, respectively, was primarily associated with fees related to arrangements with strategic capital partners.
Loss Ratio
The components of the loss ratio were as follows:
Three months ended June 30,
Six months ended June 30,
2022
% Point Change
2021
2022
% Point Change
2021
Current accident year loss ratio
68.6
%
4.9
63.7
%
66.9
%
(1.9)
68.8
%
Prior year reserve development ratio
(0.2
%)
(0.1)
(0.1
%)
(0.3
%)
0.2
(0.5
%)
Loss ratio
68.4
%
4.8
63.6
%
66.6
%
(1.7)
68.3
%
Current Accident Year Loss Ratio
The current accident year loss ratio increased to 68.6% for the three months ended June 30, 2022 from 63.7% for the three months ended June 30, 2021. The current accident year loss ratio for three months ended June 30, 2022, compared to the same period in 2021, was impacted by a higher level of catastrophe and weather-related losses. During the three months ended June 30, 2022, catastrophe and weather-related losses, were $39 million, or 7.7 points, primarily attributable to South Africa floods and the high frequency of small to mid-sized other weather-related events that occurred worldwide. Comparatively, during the three months ended June 30, 2021, catastrophe and weather-related losses, were $17 million, or 3.3 points.
The current accident year loss ratio decreased to 66.9% for the six months ended June 30, 2022 from 68.8% for the six months ended June 30, 2021. The current accident year loss ratio for six months ended June 30, 2022, compared to the same period in 2021, was impacted by a lower level of catastrophe and weather-related losses. During the six months ended June 30, 2022, catastrophe and weather-related losses, were $66 million, or 6.6 points, including $13 million attributable to the Russia-Ukraine war. The remaining losses of $53 million for the six months ended June 30, 2022,were primarily attributable South Africa floods and the high frequency of small to mid-sized other weather-related events that occurred worldwide. Comparatively, during the six months ended June 30, 2021, catastrophe and weather-related losses, were $92 million or 9.3 points.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio increased to 60.9% for the three months ended June 30, 2022, from 60.4% for the three months ended June 30, 2021. The increase in the current accident year loss ratio after adjusting for the impact of catastrophe and weather-related losses was due changes in business mix driven by the decrease in catastrophe business written in recent periods, partially offset by the impact of favorable pricing over loss trends.
After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio increased to 60.3% for the six months ended June 30, 2022, from 59.5% for the six months ended June 30, 2021. The increase in the current accident year loss ratio after adjusting for the impact of catastrophe and weather-related losses was due changes in business mix driven by the decrease in catastrophe business written in recent periods, partially offset by the impact of favorable pricing over loss trends.
Refer to Item 1, Note 6 to the Consolidated Financial Statements 'Reserve for losses and loss expenses' for details on the reserve classes, the expected claims tails and prior year development.
Acquisition Cost Ratio
The acquisition cost ratio increased to 22.2% for the three months ended June 30, 2022, from 21.3% for the three months ended June 30, 2021, primarily related to changes in business mix driven by the decrease in property catastrophe business written in recent periods and adjustments attributable to loss-sensitive features driven by improved loss performance mainly in motor lines, partially offset by the impact of retrocessional contracts.
The acquisition cost ratio increased to 21.9% for the six months ended June 30, 2022, from 21.1% for the six months ended June 30, 2021, primarily related to changes in business mix driven by the decrease in property catastrophe business written in recent periods, higher costs associated with certain lines of business largely due to more proportional business being written in the current year and adjustments attributable to loss-sensitive features driven by improved loss performance mainly in accident and health lines, partially offset by the impact of retrocessional contracts.
Underwriting-Related General and Administrative Expense Ratio
The underwriting-related general and administrative expense decreased to 5.3% for the three months ended June 30, 2022, from 5.7% for the three months ended June 30, 2021, mainly driven by a decrease in personnel costs related to our exit from property reinsurance business and a decrease in office costs, partially offset by an increase in travel costs.
The underwriting-related general and administrative expense decreased to 5.7% for the six months ended June 30, 2022, from 5.8% for the six months ended June 30, 2021, mainly driven by a decrease in personnel costs related to our exit from property reinsurance business, an increase in fees related to arrangements with strategic capital partners and a decrease in office costs, largely offset by an increase in travel costs.
NET INVESTMENT INCOME AND NET INVESTMENT GAINS (LOSSES)
Net Investment Income
Net investment income from our cash and investment portfolio by major asset class was as follows:
Three months ended June 30,
Six months ended June 30,
2022
% Change
2021
2022
% Change
2021
Fixed maturities
$
72,607
19%
$
61,244
$
137,416
5%
$
130,714
Other investments
14,327
(65%)
41,414
40,377
(51%)
83,248
Equity securities
2,688
(13%)
3,100
4,860
(13%)
5,598
Mortgage loans
4,903
13%
4,355
9,067
6%
8,541
Cash and cash equivalents
3,679
nm
617
4,797
62%
2,953
Short-term investments
402
nm
66
567
nm
199
Gross investment income
98,606
(11%)
110,796
197,084
(15%)
231,253
Investment expense
(6,392)
4%
(6,124)
(13,515)
9%
(12,417)
Net investment income
$
92,214
(12%)
$
104,672
$
183,569
(16%)
$
218,836
Pre-tax yield:(1)
Fixed maturities
2.3
%
2.0
%
2.2
%
2.2
%
nm - not meaningful
(1) Pre-tax yield is calculated by dividing annualized net investment income by the average month-end amortized cost balances.
Fixed Maturities
Net investment income attributable to fixed maturities for the three and six months ended June 30, 2022, was $73 million and $137 million, respectively, compared to net investment income of $61 million and $131 million for the three and six months ended June 30, 2021, respectively. The increase for the three and six months ended June 30, 2022, compared to the same period in 2021, was due to higher yields.
Other Investments
Net investment income from other investments was as follows:
Three months ended June 30,
Six months ended June 30,
2022
2021
2022
2021
Hedge, direct lending, private equity and real estate funds
$
15,934
$
39,678
$
38,736
$
62,451
Other privately held investments
(2,410)
64
(384)
18,543
CLO-Equities
803
1,672
2,025
2,254
Net investment income from other investments
$
14,327
$
41,414
$
40,377
$
83,248
Pre-tax return on other investments(1)
1.5
%
5.0
%
4.2
%
10.3
%
(1)The pre-tax return on other investments is calculated by dividing total net investment income from other investments (non-annualized) by the average month-end fair value balances held for the periods indicated.
Net investment income attributable to other investments for the three and six months ended June 30, 2022, was $14 million and $40 million, respectively, compared to net investment income of $41 million and $83 million, respectively, for the three and six months ended June 30, 2021. The decrease for the three and six months ended June 30, 2022, compared to the same period in 2021, was due to lower gains from direct lending and other privately held investments.
Net unrealized gains (losses) on equity securities
(84,227)
22,757
(127,849)
19,282
Net investment gains (losses)
$
(173,263)
$
73,293
$
(267,771)
$
102,936
(1)Related to instances where we intend to sell securities, or it is more likely than not that we will be required to sell securities before their anticipated recovery.
Net investment losses for the three months ended June 30, 2022 were $173 million, compared to net investment gains of $73 million for the three months ended June 30, 2021. For the three months ended June 30, 2022, the net investment losses were primarily due to net realized losses on the sale of corporate debt, U.S government and Agency RMBS and net unrealized losses on equity securities. For the three months ended June 30, 2021, the net investment gains were primarily due to net realized gains on the sale of corporate debt and CMBS and net unrealized gains on equity securities.
Net investment losses for the six months ended June 30, 2022 were $268 million, compared to net investment gains of $103 million for the six months ended June 30, 2021. For the six months ended June 30, 2022, the net investment losses were primarily due to net realized losses on the sale of U.S government, corporate debt and Agency RMBS and net unrealized losses on equity securities. For the six months ended June 30, 2021, the net investment gains were primarily due to net realized gains on the sale of corporate debt and CMBS and net unrealized gains on equity securities.
On Sale of Investments
Generally, sales of individual securities occur when there are changes in the relative value, credit quality or duration of a particular issue. We may also sell securities to re-balance our investment portfolio in order to change exposure to particular asset classes or sectors.
Impairment Losses
The impairment losses for the three and six months ended June 30, 2022 were $0.5 million and $0.6 million, respectively, compared to impairment losses of $nil for the three and six months ended June 30, 2021.
Change in Fair Value of Investment Derivatives
From time to time, we economically hedge foreign exchange exposure with derivative contracts.
For the three and six months ended June 30, 2022, we recorded gains of $5 million and $7 million, respectively, related to foreign exchange contracts. For the three and six months ended June 30, 2021, we recorded losses of $1 million and gains of $1 million, respectively, related to foreign exchange contracts.
Total return on cash and investments was as follows:
Three months ended June 30,
Six months ended June 30,
2022
2021
2022
2021
Net investment income
$
92,214
$
104,672
$
183,569
$
218,836
Net investments gains (losses)
(173,263)
73,293
(267,771)
102,936
Change in net unrealized gains (losses) on fixed maturities (1)
(390,651)
9,811
(845,936)
(217,084)
Interest in income of equity method investments
1,050
9,799
12,600
18,960
Total
$
(470,650)
$
197,575
$
(917,538)
$
123,648
Average cash and investments(2)
$
15,863,410
$
15,864,451
$
16,066,338
$
15,817,566
Total return on average cash and investments, pre-tax:
Including investment related foreign exchange movements
(3.0
%)
1.2
%
(5.7
%)
0.8
%
Excluding investment related foreign exchange movements(3)
(2.5
%)
1.2
%
(5.1
%)
0.8
%
(1)Change in net unrealized gains (losses) on fixed maturities is calculated by taking net unrealized gains (losses) at period end less net unrealized gains (losses) at the prior period end.
(2)The average cash and investments balance is calculated by taking the average of the period end fair value balances.
(3)Pre-tax total return on cash and investments excluding foreign exchange movements is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to pre-tax total return on cash and investments, the most comparable GAAP financial measure, included foreign exchange (losses) gains of $(78) million and $7 million for the three months ended June 30, 2022 and 2021, respectively, and foreign exchange (losses) gains of $(106) million and $(5) million for the six months ended June 30, 2022 and 2021, respectively.
OTHER EXPENSES (REVENUES), NET
The following table provides a summary of other expenses (revenues), net:
Three months ended June 30,
Six months ended June 30,
2022
% Change
2021
2022
% Change
2021
Corporate expenses
$
30,183
(10%)
$
33,491
$
54,128
(9%)
$
59,231
Foreign exchange losses (gains)
(57,000)
nm
19,602
(101,274)
nm
23,716
Interest expense and financing costs
15,241
—%
15,235
30,805
—%
30,806
Income tax expense (benefit)
(4,965)
nm
27,865
(4,942)
nm
48,641
Total
$
(16,541)
$
96,193
$
(21,283)
$
162,394
nm – not meaningful
Corporate Expenses
Corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As a percentage of net premiums earned, corporate expenses decreased to 2.4% and 2.1% for the three and six months ended June 30, 2022, respectively, from to 2.9% and 2.6% for the three and six months ended June 30, 2021, respectively.
The decrease in corporate expenses for the three months ended June 30, 2022 was primarily related to a decrease in information technology costs.
The decrease in corporate expenses for the six months ended June 30, 2022 was primarily related to a decrease in information technology costs and professional fees, partially offset by an increase in travel costs.
Some of our business is written in currencies other than the U.S. dollar.
Foreign exchange gains of $57 million for the three months ended June 30, 2022 were mainly driven by the impact of the strengthening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling and euro.
Foreign exchange gains of $101 million for the six months ended June 30, 2022 were mainly driven by the impact of the strengthening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling and euro.
Foreign exchange losses of $20 million for the three months ended June 30, 2021 were mainly driven by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in euro, Canadian dollar and pound sterling.
Foreign exchange losses of $24 million for the six months ended June 30, 2021 were mainly driven by the impact of the weakening of the U.S. dollar on the remeasurement of net insurance-related liabilities denominated in pound sterling and Canadian dollar, partially offset by the strengthening of the U.S. dollar on the remeasurement of net insurance related liabilities denominated in euro.
Interest Expense and Financing Costs
Interest expense and financing costs are related to interest due on the 5.150% senior unsecured notes ("5.150% Senior Notes") issued in 2014, the 4.000% senior unsecured notes ("4.000% Senior Notes") issued in 2017, the 3.900% senior unsecured notes ("3.900% Senior Notes") and the 4.900% fixed-rate reset junior subordinated notes ("Junior Subordinated Notes") issued in 2019.
Interest expense and financing costs were $15 million and $31 million for the three and six months ended June 30, 2022, respectively.
Income Tax Expense (Benefit)
Income tax expense (benefit) primarily results from income (loss) generated by our operations in the U.S. and Europe. Our effective tax rate is calculated as income tax expense (benefit) divided by income (loss) before tax including interest in income (loss) of equity method investments. This effective rate can vary between periods depending on the distribution of net income (loss) among tax jurisdictions, as well as other factors.
The tax benefit of $5 million for the three months ended June 30, 2022 was principally due to the generation of pre-tax losses in our European operations, partially offset by the generation of pre-tax income in our U.S. and U.K. operations.
The tax benefit of $5 million for the six months ended June 30, 2022 was principally due to the generation of pre-tax losses in our European operations together with the revaluation of net deferred tax assets and liabilities associated with the increase in the U.K. tax rate to 25% from 19%, effective 2023, partially offset by an income tax expense principally due to the generation of pre-tax income in our U.S. and U.K. operations.
The tax expense of $28 million for the three months ended June 30, 2021 was principally due to the generation of pre-tax income in our U.S., European and U.K. operations together with the revaluation of net deferred tax liabilities associated with the increase in the U.K. tax rate to 25% from 19%, effective 2023.
The tax expense of $49 million for the six months ended June 30, 2021 was principally due to the generation of pre-tax income in our U.S., European and U.K. operations together with the revaluation of net deferred tax liabilities associated with the increase in the U.K. tax rate to 25% from 19%, effective 2023.
We believe the following financial indicators are important in evaluating performance and measuring the overall growth in value generated for common shareholders:
Three months ended June 30,
Six months ended June 30,
2022
2021
2022
2021
Annualized return on average common equity(1)
2.5
%
19.3
%
7.5
%
14.3
%
Annualized operating return on average common equity(2)
13.7
%
14.4
%
14.6
%
10.6
%
Book value per diluted common share(3)
$
47.62
$
55.50
$
47.62
$
55.50
Cash dividends declared per common share
$
0.43
$
0.42
$
0.86
$
0.84
Increase (decrease) in book value per diluted common share adjusted for dividends
$
(3.92)
$
2.89
$
(6.17)
$
2.08
(1)Annualized return on average common equity ("ROACE") is calculated by dividing annualized net income (loss) available (attributable) to common shareholders for the period by the average common shareholders' equity determined using the common shareholders' equity balances at the beginning and end of the period.
(2)Annualized operating return on average common equity ("operating ROACE") is a non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to the most comparable GAAP financial measure, annualized ROACE, and a discussion of the rationale for its presentation is provided in 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures Reconciliation'.
(3)Book value per diluted common share represents total common shareholders’ equity divided by the number of diluted common share outstanding, determined using the treasury stock method. Cash-settled restricted stock units are excluded.
Return on Average Common Equity
Our objective is to generate superior returns on capital that appropriately reward common shareholders for the risks we assume and to grow revenue only when we expect the returns will meet or exceed our requirements. We recognize that the nature of underwriting cycles and the frequency or severity of large loss events in any one year may challenge the ability to achieve a profitability target in any specific period.
ROACE reflects the impact of net income (loss) available (attributable) to common shareholders including net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
The decrease in ROACE for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, was primarily driven by net investment losses, a decrease in underwriting income, reorganization expenses, and a decrease in net investment income, partially offset by foreign exchange gains and an income tax benefit. In addition, ROACE was impacted by a decrease in average common shareholder's equity.
The decrease in ROACE for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, was primarily driven by net investment losses, a decrease in net investment income, and reorganization expenses, partially offset by foreign exchange gains, an increase in underwriting income and an income tax benefit. In addition, ROACE was impacted by a decrease in average common shareholder's equity.
Operating ROACE excludes the impact of net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
The decrease in operating ROACE for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, was primarily driven by a decrease in underwriting income and net investment income, partially offset by an income tax benefit. In addition, operating ROACE was impacted by a decrease in average common shareholder's equity.
The increase in operating ROACE for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, was primarily driven by an increase in underwriting income and an income tax benefit, partially offset by a decrease in net investment income and a decrease in average common shareholder's equity.
We consider book value per diluted common share to be an appropriate measure of returns to common shareholders, as we believe growth in book value on a diluted basis will ultimately translate into appreciation of our stock price.
During the three months ended June 30, 2022, book value per diluted common share decreased by 8% due to net unrealized investment losses reported in other comprehensive income (loss) and common dividends declared, partially offset by the net income generated in the period.
During the six months ended June 30, 2022, book value per diluted common share decreased by 15% due to net unrealized investment losses reported in other comprehensive income (loss) and common dividends declared, partially offset by net income generated in the period.
Cash Dividends Declared per Common Share
We believe in returning excess capital to shareholders by way of dividends and share repurchases. Accordingly, dividend policy is an integral part of the value we create for shareholders. Our cumulative strong earnings have permitted our Board of Directors to approve eighteen successive annual increases in quarterly common share dividends.
Book Value per Diluted Common Share Adjusted for Dividends
Taken together, we believe that growth in book value per diluted common share and common share dividends declared represent the total value created for common shareholders. As companies in the insurance industry have differing dividend payout policies, we believe investors use the book value per diluted common share adjusted for dividends metric to measure comparable performance across the industry.
During the three months ended June 30, 2022, the decrease in total value of $3.92, or 8%, was driven by net unrealized losses reported in accumulated other comprehensive income (income), partially offset by the net income generated.
During the six months ended June 30, 2022, the decrease in total value of $6.17, or 13%, was driven by net unrealized losses reported in accumulated other comprehensive income (income), partially offset by the net income generated.
During the three months ended June 30, 2021, the increase in total value of $2.89, or 5%, was driven by net income generated in the period.
During the six months ended June 30, 2021, the increase in total value of $1.25 or 2%, was driven by net income generated in the period, partially offset by a decrease in unrealized gains reporting in accumulated other comprehensive income.
Interest in income of equity method investments(4)
(1,050)
(9,799)
(12,600)
(18,960)
Income tax expense (benefit)
(9,165)
6,088
(9,663)
7,782
Operating income
$
148,991
$
170,508
$
328,819
$
253,247
Earnings per diluted common share
$
0.32
$
2.67
$
1.97
$
4.04
Net investment (gains) losses
2.02
(0.86)
3.12
(1.21)
Foreign exchange losses (gains)
(0.66)
0.23
(1.18)
0.28
Reorganization expenses
0.18
—
0.18
—
Interest in income of equity method investments
(0.01)
(0.11)
(0.15)
(0.22)
Income tax expense (benefit)
(0.11)
0.07
(0.11)
0.09
Operating income per diluted common share
$
1.74
$
2.00
$
3.83
$
2.98
Weighted average diluted common shares outstanding(5)
85,843
85,267
85,826
85,117
Average common shareholders' equity
$
4,361,586
$
4,733,075
$
4,506,644
$
4,792,727
Annualized return on average common equity
2.5
%
19.3
%
7.5
%
14.3
%
Annualized operating return on average common equity(6)
13.7
%
14.4
%
14.6
%
10.6
%
(1)Tax expense (benefit) of ($19,598) and $7,491 for the three months ended June 30, 2022 and 2021, respectively, and ($32,912) and $8,975 for the six months ended June 30, 2022 and 2021, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize capital losses.
(2)Tax expense (benefit) of $12,132 and $(1,403) for the three months ended June 30, 2022 and 2021, respectively, and $24,948 and ($1,193) for the six months ended June 30, 2022 and 2021, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the tax status of specific foreign exchange transactions.
(3)Tax expense (benefit) of $(1,699) for the three and six months ended June 30, 2022. Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
(4)Tax expense (benefit) of $nil for the three and six months ended June 30, 2022 and 2021, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
(5)Refer to Item 1, Note 7 to our Consolidated Financial Statements 'Earnings per Common Share' for further details.
(6)Annualized operating ROACE is a non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to the most comparable GAAP financial measure, annualized ROACE, is presented in the table above, and a discussion of the rationale for its presentation is provided below.
Rationale for the Use of Non-GAAP Financial Measures
We present our results of operations in a way we believe will be meaningful and useful to investors, analysts, rating agencies and others who use our financial information to evaluate our performance. Some of the measurements we use are considered non-GAAP financial measures under SEC rules and regulations. In this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"), we present underwriting-related general and administrative expenses, consolidated underwriting income (loss), operating income (loss) (in total and on a per share basis), annualized operating return on average common equity ("operating ROACE"), amounts presented on a constant currency basis and pre-tax total return on cash and investments excluding foreign exchange movements which are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. We believe that these non-GAAP financial measures, which may be defined and calculated differently by other companies, help explain and enhance the understanding of our results of operations. However, these measures should not be viewed as a substitute for those determined in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").
Underwriting-Related General and Administrative Expenses
Underwriting-related general and administrative expenses include those general and administrative expenses that are incremental and/or directly attributable to our underwriting operations. While this measure is presented in Item 1, Note 2 to the Consolidated Financial Statements 'Segment Information', it is considered a non-GAAP financial measure when presented elsewhere on a consolidated basis.
Corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As these costs are not incremental and/or directly attributable to our underwriting operations, these costs are excluded from underwriting-related general and administrative expenses, and therefore, consolidated underwriting income (loss). General and administrative expenses, the most comparable GAAP financial measure to underwriting-related general and administrative expenses, also includes corporate expenses.
The reconciliation of underwriting-related general and administrative expenses to general and administrative expenses, the most comparable GAAP financial measure, is presented in 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Results of Operations'.
Consolidated Underwriting Income (Loss)
Consolidated underwriting income (loss) is a pre-tax measure of underwriting profitability that takes into account net premiums earned and other insurance related income (loss) as revenues and net losses and loss expenses, acquisition costs and underwriting-related general and administrative expenses as expenses. While this measure is presented in Item 1, Note 2 to the Consolidated Financial Statements 'Segment Information', it is considered a non-GAAP financial measure when presented elsewhere on a consolidated basis.
We evaluate our underwriting results separately from the performance of our investment portfolio. As a result, we believe it is appropriate to exclude net investment income and net investment gains (losses) from our underwriting profitability measure.
Foreign exchange losses (gains) in our consolidated statements of operations primarily relate to the impact of foreign exchange rate movements on our net insurance-related liabilities. However, we manage our investment portfolio in such a way that unrealized and realized foreign exchange losses (gains) on our investment portfolio generally offset a large portion of the foreign exchange losses (gains) arising from our underwriting portfolio. As a result, we believe that foreign exchange losses (gains) in our consolidated statements of operations in isolation are not a meaningful contributor to our underwriting performance, therefore, foreign exchange losses (gains) are excluded from consolidated underwriting income (loss).
Interest expense and financing costs primarily relate to interest payable on our debt. As these expenses are not incremental and/or directly attributable to our underwriting operations, these expenses are excluded from underwriting-related general and administrative expenses, and therefore, consolidated underwriting income (loss).
Reorganization expenses relate to our exit from property reinsurance business, part of an overall approach to reduce our exposure to volatile catastrophe risk, in the second quarter of 2022. Reorganization expenses are primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from consolidated underwriting income (loss).
Amortization of intangible assets including value of business acquired ("VOBA") arose from business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from consolidated underwriting income (loss).
We believe that the presentation of underwriting-related general and administrative expenses and consolidated underwriting income (loss) provides investors with an enhanced understanding of our results of operations, by highlighting the underlying pre-tax profitability of our underwriting activities. The reconciliation of consolidated underwriting income (loss) to net income (loss), the most comparable GAAP financial measure, is presented in 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Results of Operations'.
Operating Income (Loss)
Operating income (loss) represents after-tax operational results exclusive of net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.
Although the investment of premiums to generate income and investment gains (losses) is an integral part of our operations, the determination to realize investment gains (losses) is independent of the underwriting process and is heavily influenced by the availability of market opportunities. Furthermore, many users believe that the timing of the realization of investment gains (losses) is somewhat opportunistic for many companies.
Foreign exchange losses (gains) in our consolidated statements of operations primarily relate to the impact of foreign exchange rate movements on net insurance-related liabilities. In addition, we recognize unrealized foreign exchange losses (gains) on our equity securities and foreign exchange losses (gains) realized on the sale of our available for sale investments and equity securities in net investment gains (losses). We recognize unrealized foreign exchange losses (gains) on our available for sale investments in other comprehensive income (loss). These unrealized foreign exchange losses (gains) generally offset a large portion of the foreign exchange losses (gains) reported in net income (loss), thereby minimizing the impact of foreign exchange rate movements on total shareholders' equity. As a result, we believe that foreign exchange losses (gains) in our consolidated statements of operations in isolation are not a meaningful contributor to the performance of our business, therefore, foreign exchange losses (gains) are excluded from consolidated operating income (loss).
Reorganization expenses relate to the exit from property reinsurance business, part of an overall approach to reduce our exposure to volatile catastrophe risk, in the second quarter of 2022. Reorganization expenses are primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from operating income (loss).
Interest in income (loss) of equity method investments is primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, this income (loss) is excluded from operating income (loss).
Certain users of our financial statements evaluate performance exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments to understand the profitability of recurring sources of income.
We believe that showing net income (loss) available (attributable) to common shareholders exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments reflects the underlying fundamentals of our business. In addition, we believe that this presentation enables investors and other users of our financial information to analyze performance in a manner similar to how our management analyzes the underlying business performance. We also believe this measure follows industry practice and, therefore, facilitates comparison of our performance with our peer group. We believe that equity analysts and certain rating agencies that follow us, and the insurance industry as a whole, generally exclude these items from their analyses for the same reasons. The reconciliation of operating income (loss) to net income (loss) available (attributable) to common shareholders, the most comparable GAAP financial measure, is presented above.
We also present operating income (loss) per diluted common share and annualized operating ROACE, which are derived from the operating income (loss) measure and are reconciled above to the most comparable GAAP financial measures, earnings (loss) per diluted common share and annualized return on average common equity ("ROACE"), respectively.
We present gross premiums written, net premiums written and net premiums earned on a constant currency basis in this MD&A. The amounts presented on a constant currency basis are calculated by applying the average foreign exchange rate from the current year to the prior year amounts. We believe this presentation enables investors and other users of our financial information to analyze growth in gross premiums written, net premiums written and net premiums earned on a constant basis. The reconciliation to gross premiums written, net premiums written and net premiums earned on a GAAP basis is presented in 'Management's Discussion and Analysis of Financial Condition and Results of Operations – Results by Segment'.
Pre-Tax Total Return on Cash and Investments excluding Foreign Exchange Movements
Pre-tax total return on cash and investments excluding foreign exchange movements measures net investment income, net investments gains (losses), interest in income (loss) of equity method investments, and change in unrealized gains (losses) generated by average cash and investment balances. We believe this presentation enables investors and other users of our financial information to analyze the performance of our investment portfolio. The reconciliation of pre-tax total return on cash and investments excluding foreign exchange movements to pre-tax total return on cash and investments, the most comparable GAAP financial measure, is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Net Investment Income and Net Investment Gains (Losses)'.
CASH AND INVESTMENTS
Details of cash and investments are as follows:
June 30, 2022
December 31, 2021
Fair Value
Fair Value
Fixed maturities, available for sale
$
11,304,682
$
12,313,200
Fixed maturities, held to maturity(1)
619,891
445,033
Equity securities
522,161
655,675
Mortgage loans
656,112
594,088
Other investments
981,774
947,982
Equity method investments
158,893
146,293
Short-term investments
65,683
31,063
Total investments
$
14,309,196
$
15,133,334
Cash and cash equivalents(2)
$
1,497,928
$
1,317,690
(1)Presented at net carrying value of $641 million (2021: $446 million) in the consolidated balance sheets.
(2)Includes restricted cash and cash equivalents of $653 million and $473 million at June 30, 2022 and at December 31, 2021, respectively.
The fair value of total investments decreased by $824 million in the six months ended June 30, 2022, driven by the decrease in market value of fixed maturities due to the increase in yields and the widening of credit spreads.
An analysis of our investment portfolio by asset class is detailed below:
Fixed Maturities
Details of our fixed maturities portfolio are as follows:
June 30, 2022
December 31, 2021
Fair Value
% of Total
Fair Value
% of Total
Fixed maturities:
U.S. government and agency
$
2,438,309
20
%
$
2,682,448
21
%
Non-U.S. government
654,720
5
%
795,178
6
%
Corporate debt
4,400,738
38
%
4,532,884
36
%
Agency RMBS
1,019,124
9
%
1,074,589
8
%
CMBS
1,083,040
9
%
1,248,191
10
%
Non-agency RMBS
148,104
1
%
186,164
1
%
ABS
2,016,360
17
%
2,029,941
16
%
Municipals(1)
164,178
1
%
208,838
2
%
Total
$
11,924,573
100
%
$
12,758,233
100
%
Credit ratings:
U.S. government and agency
$
2,438,309
20
%
$
2,682,448
21
%
AAA(2)
4,183,875
35
%
4,491,643
34
%
AA
906,082
8
%
981,837
8
%
A
1,889,260
16
%
1,917,006
15
%
BBB
1,431,532
12
%
1,595,285
13
%
Below BBB(3)
1,075,515
9
%
1,090,014
9
%
Total
$
11,924,573
100
%
$
12,758,233
100
%
(1)Includes bonds issued by states, municipalities, and political subdivisions.
(2)Includes U.S. government-sponsored agencies, residential mortgage-backed securities ("RMBS") and commercial mortgage-backed securities ("CMBS").
(3)Non-investment grade and non-rated securities.
At June 30, 2022, fixed maturities had a weighted average credit rating of AA- (2021: AA-), a book yield of 2.4% (2021: 1.9%) and an average duration of 3.0 years (2021: 3.0 years). At June 30, 2022, fixed maturities together with short-term investments, and cash and cash equivalents (i.e. total investments of $13.5 billion), had an average credit rating of AA- (2021: AA-) and an average duration of 2.7 years (2021: 2.8 years).
At June 30, 2022, net unrealized losses on fixed maturities were $781 million, compared to net unrealized gains of $71 million at December 31, 2021, a decrease of $852 million due to the increase in yields and the widening of credit spreads.
Equity Securities
At June 30, 2022, net unrealized losses on equity securities were $1 million, compared to net unrealized gains of $127 million at December 31, 2021, a decrease of $128 million driven by the decline in market value of bond mutual funds and the decline in equity markets.
At June 30, 2022, our investment in commercial mortgage loans was $656 million, compared to $594 million at December 31, 2021, an increase of $62 million. The commercial mortgage loans are high quality and collateralized by a variety of commercial properties and are diversified both geographically throughout the U.S. and by property type to reduce the risk of concentration. At June 30, 2022, there were no credit losses or past due amounts associated with our commercial mortgage loans portfolio.
Other Investments
Details of our other investments portfolio are as follows:
June 30, 2022
December 31, 2021
Fair Value
% of Total
Fair Value
% of Total
Hedge funds
Long/short equity funds
$
—
—
%
$
3,476
—
%
Multi-strategy funds
44,653
5
%
56,012
6
%
Total hedge funds
44,653
5
%
59,488
6
%
Direct lending funds
260,120
26
%
289,867
31
%
Private equity funds
266,412
27
%
249,974
26
%
Real estate funds
289,811
30
%
238,222
25
%
Total hedge, direct lending, private equity and real estate funds
860,996
88
%
837,551
88
%
CLO-Equities
4,808
—
%
5,910
1
%
Other privately held investments
115,970
12
%
104,521
11
%
Total other investments
$
981,774
100
%
$
947,982
100
%
Refer to Note 3(c) to the Consolidated Financial Statements 'Investments'.
Equity Method Investments
In our consolidated results, our ownership interest in Harrington is reported in interest in income of equity method investments. Interest in income of equity method investments of $1 million and $13 million, for the three and six months ended June 30, 2022, respectively, compared to $10 million and $19 million for the three and six months ended June 30, 2021, respectively, was attributable to positive investment returns realized by Harrington.
Refer to the ‘Liquidity and Capital Resources’ section included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021 for a general discussion of liquidity and capital resources.
The following table summarizes consolidated capital:
June 30, 2022
December 31, 2021
Debt
$
1,311,637
$
1,310,975
Preferred shares
550,000
550,000
Common equity
4,152,631
4,860,656
Shareholders’ equity
4,702,631
5,410,656
Total capital
$
6,014,268
$
6,721,631
Ratio of debt to total capital
21.8
%
19.5
%
Ratio of debt and preferred equity to total capital
31.0
%
27.7
%
We finance operations with a combination of debt and equity capital. Debt to total capital, and debt and preferred equity to total capital ratios, provide an indication of our capital structure, along with some insight into our financial strength. While the impact of unrealized losses recognized in other comprehensive income (loss), following a decrease in market value of our fixed maturities, has reduced common shareholders' equity, we believe that our financial flexibility remains strong.
Common Equity
During the six months ended June 30, 2022, common equity decreased by $708 million. The following table reconciles opening and closing common equity positions:
Six months ended June 30,
2022
Common equity - opening
$
4,860,656
Share-based compensation expense
25,478
Change in unrealized gains (losses) on available for sale investments, net of tax
(777,232)
Foreign currency translation adjustment
(3,418)
Net income (loss)
183,982
Preferred share dividends
(15,125)
Common share dividends
(74,922)
Treasury shares repurchased
(48,333)
Treasury shares reissued
1,545
Common equity - closing
$
4,152,631
During the six months ended June 30, 2022, we repurchased 885,000 common shares for a total of $48 million, including $35 million repurchased pursuant to our Board-authorized share repurchase program and $13 million from employees to facilitate the satisfaction of their personal withholding tax liabilities that arise on the vesting of share-settled restricted stock units granted under our 2017 Long-Term Equity Compensation Plans.
At June 30, 2022, we had $65 million of remaining authorization under our Board-authorized share repurchase program for common share repurchases through December 31, 2022 (refer to Part II, Item 2 'Unregistered Sales of Equity Securities and Use of Proceeds' for further details).
We expect cash flows generated from operations, combined with liquidity provided by our investment portfolio, will be sufficient to cover cash outflows and other contractual commitments through the foreseeable future.
Financial Strength Ratings
On May 31, 2022, Moody's Investors Service revised its outlook from negative to stable due to improved core underwriting profitability and reduced catastrophe risk exposure.
On July 20, 2022, Standard and Poor's revised its outlook from negative to stable due to improved underwriting performance and reduced prospective earnings volatility as a result of our exit from property and property catastrophe reinsurance lines.
CRITICAL ACCOUNTING ESTIMATES
The consolidated financial statements include certain amounts that are inherently uncertain and judgmental in nature. As a result, we are required to make assumptions and best estimates in order to determine the reported values. We consider an accounting estimate to be critical if: (1) it requires that significant assumptions be made in order to deal with uncertainties and (2) changes in the estimate could have a material impact on our results of operations, financial condition or liquidity.
We believe the material items requiring such subjective and complex estimates are:
•reserves for losses and loss expenses;
•reinsurance recoverable on unpaid losses and loss expenses, including the allowance for expected credit losses;
•gross premiums written and net premiums earned;
•fair value measurements of financial assets and liabilities; and
•the allowance for expected credit losses associated with fixed maturities, available for sale.
We believe that the critical accounting estimates discussion in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2021, continues to describe the significant estimates and judgments included in the preparation of the consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
At June 30, 2022, there were no recently issued accounting pronouncements that we have not yet adopted that we expect could have a material impact on our results of operations, financial condition or liquidity.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Refer to Item 7A included in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to this item since December 31, 2021, with the exception of the changes in exposure to foreign currency risk presented below.
Foreign Currency Risk
The table below provides a sensitivity analysis of total net foreign currency exposures:
AUD
NZD
CAD
EUR
GBP
JPY
Other
Total
At June 30, 2022
Net managed assets (liabilities), excluding derivatives
$
7,276
$
3,333
$
329,816
$
(454,261)
$
(316,608)
$
(18,227)
$
76,754
$
(371,917)
Foreign currency derivatives, net
3,456
3,438
(300,653)
377,463
236,240
36,117
(1,768)
354,293
Net managed foreign currency exposure
10,732
6,771
29,163
(76,798)
(80,368)
17,890
74,986
(17,624)
Other net foreign currency exposure
—
—
85
(1,714)
(1,418)
—
234
(2,813)
Total net foreign currency exposure
$
10,732
$
6,771
$
29,248
$
(78,512)
$
(81,786)
$
17,890
$
75,220
$
(20,437)
Net foreign currency exposure as a percentage of total shareholders’ equity
0.2
%
0.1
%
0.6
%
(1.7
%)
(1.7
%)
0.4
%
1.6
%
(0.4
%)
Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement(1)
$
1,073
$
677
$
2,925
$
(7,851)
$
(8,179)
$
1,789
$
7,522
$
(2,044)
(1)Assumes 10% appreciation in underlying currencies relative to the U.S. dollar.
Total Net Foreign Currency Exposure
At June 30, 2022, total net foreign currency liabilities were $20 million primarily driven by exposures to the euro and pound sterling due to new business written during the six months ended June 30, 2022.
The Company’s management has performed an evaluation, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act")) at June 30, 2022. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, at June 30, 2022, the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
The Company’s management has performed an evaluation, with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of changes in the Company’s internal control over financial reporting that occurred during the three months ended June 30, 2022.
Based upon that evaluation, there were no changes in the Company's internal control over financial reporting that occurred during the three months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The Company has not experienced any material impact to its internal control over financial reporting resulting from the introduction of a hybrid work model.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we are subject to routine legal proceedings, including arbitrations, arising in the ordinary course of business. These legal proceedings generally relate to claims asserted by or against us in the ordinary course of insurance or reinsurance operations. Estimated amounts payable under such proceedings are included in the reserve for losses and loss expenses in the consolidated balance sheets.
We are not party to any material legal proceedings arising outside the ordinary course of business.
ITEM 1A. RISK FACTORS
There were no material changes from the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table shows information regarding the number of common shares repurchased in the quarter ended June 30, 2022:
Period
Total number
of shares
purchased (a)(b)
Average
price paid
per share
Total number of shares purchased as part of
publicly announced
programs (a)
Maximum number (or approximate
dollar value) of shares that may yet be
purchased under the announced plans
or programs (c)
April 1-30, 2022
5
$60.66
—
$100 million
May 1-31, 2022
1
$57.33
—
$100 million
June 1-30, 2022
634
$55.23
634
$65 million
Total
640
634
$65 million
(a) In thousands.
(b) Includes shares repurchased from employees to facilitate the satisfaction of their personal withholding tax liabilities that arise on the vesting of share-settled restricted stock units and shares repurchased as part of our publicly announced program, described below.
(c) On December 2, 2021, our Board of Directors authorized a share repurchase program for up to $100 million of our common shares, effective January 1, 2022 through to December 31, 2022. Share repurchases may be effected from time to time in the open market or privately negotiated transactions, depending on market conditions.
ITEM 5. OTHER INFORMATION
Disclosure of Certain Activities Under Section 13(r) of the Securities Exchange Act of 1934
Section 13(r) of the Securities Exchange Act of 1934, as amended, requires issuers to disclose in their annual and quarterly reports whether they or any of their affiliates knowingly engaged in certain activities with Iran or with individuals or entities that are subject to certain sanctions under U.S. law. Issuers are required to provide this disclosure even where the activities, transactions or dealings are conducted outside of the U.S. in compliance with applicable law.
As and when allowed by the applicable law and regulations, certain of our non-U.S. subsidiaries provide treaty reinsurance coverage to non-U.S. insurers on a worldwide basis, including insurers of liability, marine, aviation and energy risks, and as a result, these underlying insurance and reinsurance portfolios may have some exposure to Iran. In addition, we provide insurance and facultative reinsurance on a global basis to non-U.S. insureds and insurers, including for liability, marine, aviation and energy risks. Coverage provided to non-Iranian business may indirectly cover an exposure in Iran. For example, certain of our operations underwrite global marine hull war and cargo policies that provide coverage for vessels navigating into and out of ports worldwide, including Iran. For the quarter ended June 30, 2022, there has been no material amount of premium allocated or apportioned to activities relating to Iran. We intend for our non-U.S. subsidiaries to continue to provide such coverage only to the extent permitted by applicable law.
Rule 2.7 Announcement, dated July 5, 2017 in connection with acquisition of Novae Group plc (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on July 6, 2017).
Rule 2.7 Announcement, dated August 24, 2017 in connection with acquisition of Novae Group plc (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on August 25, 2017).
Certificate of Incorporation and Memorandum of Association (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1(Amendment No. 1) (No. 333-103620) filed on April 16, 2003).
Specimen Common Share Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (Amendment No. 3) (No. 333-103620) filed on June 10, 2003).
Certificate of Designations establishing the specific rights, preferences, limitations and other terms of the Series E Preferred Shares (incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on November 7, 2016).
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
†101
The following financial information from AXIS Capital Holdings Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 formatted in Inline XBRL: (i) Consolidated Balance Sheets at June 30, 2022 and December 31, 2021; (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2022 and 2021; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021; (iv) Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2022 and 2021; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.
†104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Exhibit 10.1 represents a management contract, a compensatory plan or an arrangement in which directors and/or executive officers are eligible to participate.
† Filed herewith.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
