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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
☐        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-31721
AXIS CAPITAL HOLDINGS LIMITED
(Exact name of registrant as specified in its charter)
Bermuda
(State or other jurisdiction of incorporation or organization)
98-0395986
(I.R.S. Employer Identification No.)
92 Pitts Bay Road, Pembroke, Bermuda HM 08
(Address of principal executive offices and zip code)
(441) 496-2600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common shares, par value $0.0125 per shareAXSNew York Stock Exchange
Depositary Shares, each representing a 1/100th interest in a 5.50% Series E preferred shareAXS PRENew 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 23, 2021, there were 84,769,601 common shares outstanding, $0.0125 par value per share, of the registrant.

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AXIS CAPITAL HOLDINGS LIMITED
INDEX TO FORM 10-Q


 
Page
 PART I 
Item 1.
Item 2.
Item 3.
Item 4.
PART II
Item 1.
Item 1A.
Item 2.
Item 5.
Item 6.


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PART I     FINANCIAL INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. All statements, other than statements of historical facts included in this report, including statements regarding our estimates, beliefs, expectations, intentions, strategies or projections are forward-looking statements. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the United States ("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, our expectations regarding pricing and other market conditions, our growth prospects, and valuations of the potential impact of movements in interest rates, credit spreads, equity securities' prices and foreign currency rates.
Forward-looking statements only reflect our expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Accordingly, there are or will be important factors that could cause actual 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, 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 rates;
•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;

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•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 Twitter (@AXIS_Capital) and LinkedIn (AXIS Capital) accounts as channels of distribution of Company information. The information we post through these channels may be deemed material. Accordingly, investors should monitor these channels, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, 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 (www.axiscapital.com). The contents of our website and social media channels are not part of this Quarterly Report on Form 10-Q.

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ITEM 1.     CONSOLIDATED FINANCIAL STATEMENTS

 Page 
Consolidated Balance Sheets at June 30, 2021 (Unaudited) and December 31, 2020
Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020 (Unaudited)
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and 2020 (Unaudited)
Consolidated Statements of Changes in Shareholders' Equity for the three and six months ended June 30, 2021 and 2020 (Unaudited)
Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
Note 1 - Basis of Presentation and Significant Accounting Policies
Note 2 - Segment Information
Note 3 - Investments
Note 4 - Fair Value Measurements
Note 5 - Derivative Instruments
Note 6 - Reserve for Losses and Loss Expenses
Note 7 - Earnings Per Common Share
Note 8 - Share-Based Compensation
Note 9 - Shareholders' Equity
Note 10 - Debt and Financing Arrangements
Note 11 - Commitments and Contingencies
Note 12 - Other Comprehensive Income (Loss)
Note 13 - Related Party Transactions
























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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2021 (UNAUDITED) AND DECEMBER 31, 2020  
20212020
 (in thousands)
Assets
Investments:
Fixed maturities, available for sale, at fair value
    (Amortized cost 2021: $11,638,359; 2020: $11,566,930
    Allowance for expected credit losses 2021: $84; 2020: $323)
$11,898,300 $12,041,799 
Fixed maturities, held to maturity, at amortized cost
    (Fair value 2021: $403,034
    Allowance for expected credit losses 2021: $nil)
403,370 — 
Equity securities, at fair value
    (Cost 2021: $472,214; 2020: $421,744)
588,196 518,445 
Mortgage loans, held for investment, at fair value
     (Allowance for expected credit losses 2021: $nil; 2020: $nil)
656,056 593,290 
Other investments, at fair value865,238 829,156 
Equity method investments133,169 114,209 
Short-term investments, at fair value112,862 161,897 
Total investments14,657,191 14,258,796 
Cash and cash equivalents999,899 902,831 
Restricted cash and cash equivalents589,544 600,401 
Accrued interest receivable63,215 65,020 
Insurance and reinsurance premium balances receivable
     (Allowance for expected credit losses 2021: $9,898; 2020: $8,836)
3,393,777 2,738,342 
Reinsurance recoverable on unpaid losses and loss expenses
     (Allowance for expected credit losses 2021: $26,209; 2020: $23,711)
4,626,454 4,496,641 
Reinsurance recoverable on paid losses and loss expenses467,180 434,201 
Deferred acquisition costs574,658 431,439 
Prepaid reinsurance premiums1,479,328 1,194,455 
Receivable for investments sold3,671 2,150 
Goodwill100,801 100,801 
Intangible assets214,286 219,633 
Value of business acquired1,798 3,854 
Operating lease right-of-use assets112,444 123,579 
Other assets297,484 305,544 
Total assets$27,581,730 $25,877,687 
Liabilities
Reserve for losses and loss expenses$14,157,353 $13,926,766 
Unearned premiums4,698,944 3,685,886 
Insurance and reinsurance balances payable1,409,772 1,092,042 
Debt1,310,328 1,309,695 
Payable for investments purchased205,895 104,777 
Operating lease liabilities130,174 140,263 
Other liabilities279,504 322,564 
Total liabilities22,191,970 20,581,993 
Shareholders’ equity
Preferred shares 550,000 550,000 
Common shares (shares issued 2021: 176,580; 2020: 176,580
    shares outstanding 2021: 84,767; 2020: 84,353)
2,206 2,206 
Additional paid-in capital2,326,288 2,330,054 
Accumulated other comprehensive income 226,317 414,395 
Retained earnings6,034,151 5,763,607 
Treasury shares, at cost (2021: 91,813; 2020: 92,227)
(3,749,202)(3,764,568)
Total shareholders’ equity 5,389,760 5,295,694 
Total liabilities and shareholders’ equity$27,581,730 $25,877,687 

See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020
 Three months endedSix months ended
2021202020212020
 (in thousands, except for per share amounts)
Revenues
Net premiums earned$1,156,941 $1,104,003 $2,260,663 $2,192,628 
Net investment income104,672 45,040 218,836 138,140 
Other insurance related income (loss)5,817 1,996 8,598 (6,710)
Net investment gains (losses):
Allowance for expected credit losses
150 13,761 239 (6,257)
Impairment losses— (112)— (1,302)
Other realized and unrealized investment gains (losses)73,143 39,394 102,697 (2,272)
Total net investment gains (losses)73,293 53,043 102,936 (9,831)
Total revenues1,340,723 1,204,082 2,591,033 2,314,227 
Expenses
Net losses and loss expenses666,473 676,261 1,381,190 1,584,335 
Acquisition costs219,070 228,502 437,941 467,152 
General and administrative expenses162,452 140,652 320,860 297,712 
Foreign exchange losses (gains)19,602 9,709 23,716 (51,974)
Interest expense and financing costs15,235 20,595 30,806 44,067 
Reorganization expenses— 392 — (591)
    Amortization of value of business acquired1,028 1,285 2,056 3,083 
    Amortization of intangible assets3,324 2,855 6,013 5,725 
Total expenses1,087,184 1,080,251 2,202,582 2,349,509 
Income (loss) before income taxes and interest in income (loss) of equity method investments253,539 123,831 388,451 (35,282)
Income tax expense(27,865)(10,893)(48,641)(6,026)
Interest in income (loss) of equity method investments9,799 7,102 18,960 (16,475)
Net income (loss)235,473 120,040 358,770 (57,783)
Preferred share dividends7,563 7,563 15,125 15,125 
Net income (loss) available (attributable) to common shareholders$227,910 $112,477 $343,645 $(72,908)
Per share data
Earnings (loss) per common share:
Earnings (loss) per common share$2.69 $1.33 $4.06 $(0.87)
Earnings (loss) per diluted common share$2.67 $1.33 $4.04 $(0.87)
Weighted average common shares outstanding84,764 84,303 84,640 84,198 
Weighted average diluted common shares outstanding85,267 84,600 85,117 84,198 


See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020
 
 Three months endedSix months ended
 2021202020212020
 (in thousands)
Net income (loss) $235,473 $120,040 $358,770 $(57,783)
Other comprehensive income (loss), net of tax:
Available for sale investments:
Unrealized gains (losses) arising during the period for which an allowance for expected credit losses has not been recognized50,873 371,288 (120,971)117,968 
Unrealized gains (losses) arising during the period for which an allowance for expected credit losses has been recognized(179)3,212 (237)(3,029)
Adjustment for reclassification of net realized (gains) losses and impairment losses recognized in net income (loss)(42,720)(6,816)(71,601)(1,159)
Unrealized gains (losses) arising during the period, net of reclassification adjustment7,974 367,684 (192,809)113,780 
Foreign currency translation adjustment3,482 3,834 4,731 (3,891)
Total other comprehensive income (loss), net of tax11,456 371,518 (188,078)109,889 
Comprehensive income$246,929 $491,558 $170,692 $52,106 


See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021 AND 2020
Three months endedSix months ended
2021202020212020
 (in thousands)
Preferred shares
Balance at beginning of period$550,000 $550,000 $550,000 $775,000 
Shares repurchased— — — (225,000)
Balance at end of period550,000 $550,000 $550,000 $550,000 
Common shares (par value)
Balance at beginning and end of period2,206 2,206 2,206 2,206 
Additional paid-in capital
Balance at beginning of period2,316,147 2,307,998 2,330,054 2,317,212 
Treasury shares reissued(911)(456)(24,040)(19,151)
Share-based compensation expense11,052 9,812 20,274 19,293 
Balance at end of period2,326,288 2,317,354 2,326,288 2,317,354 
Accumulated other comprehensive income (loss)
Balance at beginning of period214,861 (89,919)414,395 171,710 
Unrealized gains (losses) on available for sale investments, net of tax:
Balance at beginning of period219,852 (72,383)420,635 181,521 
Unrealized gains (losses) arising during the period, net of reclassification adjustment7,974 367,684 (192,809)113,780 
Balance at end of period227,826 295,301 227,826 295,301 
Cumulative foreign currency translation adjustments, net of tax:
Balance at beginning of period(4,991)(17,536)(6,240)(9,811)
Foreign currency translation adjustment3,482 3,834 4,731 (3,891)
Balance at end of period(1,509)(13,702)(1,509)(13,702)
Balance at end of period226,317 281,599 226,317 281,599 
Retained earnings
Balance at beginning of period5,842,850 5,836,007 5,763,607 6,056,686 
Net income (loss)235,473 120,040 358,770 (57,783)
Preferred share dividends (1)
(7,563)(7,563)(15,125)(15,125)
Common share dividends (1)
(36,609)(35,455)(73,101)(70,749)
Balance at end of period6,034,151 5,913,029 6,034,151 5,913,029 
Treasury shares, at cost
Balance at beginning of period(3,749,674)(3,766,714)(3,764,568)(3,778,806)
Shares repurchased(439)(110)(9,819)(8,602)
Shares reissued911 456 25,185 21,040 
Balance at end of period(3,749,202)(3,766,368)(3,749,202)(3,766,368)
Total shareholders’ equity $5,389,760 $5,297,820 $5,389,760 $5,297,820 

(1) Refer to Note 9 'Shareholder's Equity' for details on dividends declared and paid related to the Company's common and preferred shares.



See accompanying notes to Consolidated Financial Statements.

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AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2021 AND 2020
Six months ended
20212020
 (in thousands)
Cash flows from operating activities:
Net income (loss)$358,770 $(57,783)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net investment (gains) losses(102,936)9,831 
Net realized and unrealized (gains) losses on other investments(83,247)39,700 
Amortization of fixed maturities19,054 14,850 
Interest in (income) loss of equity method investments(18,960)16,475 
Amortization of value of business acquired2,056 3,083 
Other amortization and depreciation31,346 30,481 
Share-based compensation expense, net of cash payments13,950 7,125 
Changes in:
Accrued interest receivable1,760 9,223 
Reinsurance recoverable balances on unpaid and paid losses(161,894)(353,946)
Deferred acquisition costs(144,256)(92,026)
Prepaid reinsurance premiums(284,411)(250,988)
Reserve for losses and loss expenses229,099 438,746 
Unearned premiums1,014,854 797,402 
Insurance and reinsurance balances, net(338,258)(440,688)
Other items(2,000)(65,493)
Net cash provided by operating activities534,927 105,992 
Cash flows from investing activities:
Purchases of:
Fixed maturities, available for sale(7,528,567)(5,311,263)
Fixed maturities, held to maturity(117,175)— 
Equity securities(66,443)(15,724)
Mortgage loans(73,472)(95,764)
Other investments(125,534)(75,803)
Short-term investments(116,599)(134,822)
Proceeds from the sale of:
Fixed maturities, available for sale6,255,928 5,357,595 
Equity securities10,876 86,833 
Other investments172,499 80,235 
Short-term investments124,271 81,215 
Proceeds from the redemption of fixed maturities, available for sale960,936 796,594 
Proceeds from the redemption of fixed maturities, held to maturity118,897 — 
Proceeds from redemption of short-term investments40,868 57,948 
Proceeds from the repayment of mortgage loans

10,940 3,951 
Purchase of other assets(14,107)(28,470)
Net cash provided by (used in) investing activities(346,682)802,525 
Cash flows from financing activities:
Taxes paid on withholding shares(9,820)(8,602)
Dividends paid - common shares(74,306)(71,994)
Repurchase of preferred shares— (225,000)
Dividends paid - preferred shares(15,125)(16,706)
Redemption of senior notes— (500,000)
Net cash used in financing activities(99,251)(822,302)
Effect of exchange rate changes on foreign currency cash, cash equivalents and restricted cash(2,783)(13,839)
Increase in cash, cash equivalents and restricted cash86,211 72,376 
Cash, cash equivalents and restricted cash - beginning of period1,503,232 1,576,457 
Cash, cash equivalents and restricted cash - end of period$1,589,443 $1,648,833 
Supplemental disclosures of cash flow information:
Income taxes paid (refund)$29,849 $(408)
Interest paid$29,700 $34,820 

See accompanying notes to Consolidated Financial Statements.

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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.

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

1.    BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES





Basis of Presentation
These unaudited consolidated financial statements (the "financial statements") have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the U.S. Securities and Exchange Commission's ("SEC") instructions to Form 10-Q and Article 10 of Regulation S-X and include AXIS Capital Holdings Limited ("AXIS Capital") and its subsidiaries (the "Company"). Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. This Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and related notes included in AXIS Capital's Annual Report on Form 10-K for the year ended December 31, 2020, 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.
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
Changes to the Company's significant accounting policies subsequent to its Annual Report on Form 10-K for the year ended December 31, 2020 are noted below:
a)    Investments
Fixed Maturities, Held to Maturity, at Amortized Cost
Fixed maturities are classified as held to maturity when the Company has the positive intent and ability to hold the securities to maturity or redemption. Fixed maturities classified as held to maturity are reported at amortized cost and are presented net of an allowance for expected credit losses. The allowance for expected credit losses is estimated based on the Company’s analysis of projected lifetime losses. The allowance for expected credit losses is recognized in net investment gains (losses) in the consolidated statements of operations. Any adjustment to the allowance for expected credit losses is recognized in the period in which it is determined.
b)    Share-based Compensation
The Company is authorized to issue restricted shares, restricted stock units, performance restricted stock units, stock options, stock appreciation rights and other equity-based awards to its employees and directors. The Company's plan includes share-settled and cash-settled service awards and performance awards.
Restricted Stock Units - Share-Settled and Cash-Settled
The fair value of share-settled and cash-settled service awards is based on market value of the Company's common shares measured at the grant date and is expensed over the requisite service period. The fair value of the cash-settled service awards is recognized as a liability in the consolidated balance sheets and is remeasured at the end of each reporting period. The Company recognizes forfeitures when they occur.
Performance Restricted Stock Units - Share-Settled and Cash-Settled
The fair value of share-settled performance awards which include a market condition is measured on the grant date using a Monte Carlo simulation model which requires inputs including share price, expected volatility, expected term, expected dividend yield and risk-free interest rates. The fair value of share-settled and cash-settled performance awards which include a performance condition is based on market value of the Company's common shares measured at the grant date. The fair value of share-settled and cash-settled performance awards is recognized on a straight-line basis over the requisite service period. The fair value of the cash-settled performance awards is recognized as a liability in the consolidated balance sheets and is remeasured at the end of each reporting period. The Company recognizes forfeitures when they occur.

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

2.    SEGMENT INFORMATION




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

Insurance
The Company's insurance segment offers specialty insurance products to a variety of niche markets on a worldwide basis. The product lines in this segment are property, marine, terrorism, aviation, credit and political risk, professional lines, liability, accident and health, and discontinued lines - Novae.
 
Reinsurance
The Company's reinsurance segment provides treaty reinsurance to insurance companies on a worldwide basis. The product lines in this segment are catastrophe, property, credit and surety, professional lines, motor, liability, engineering, agriculture, marine and aviation, accident and health, and discontinued lines - Novae.
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:
  20212020
Three months ended and at June 30,InsuranceReinsuranceTotalInsuranceReinsuranceTotal
Gross premiums written$1,268,472$672,714$1,941,186$1,037,568$678,615$1,716,183
Net premiums written712,885490,9731,203,858602,761453,1731,055,934
Net premiums earned631,675525,2661,156,941577,019526,9841,104,003
Other insurance related income5525,2655,8177551,2411,996
Net losses and loss expenses(332,175)(334,298)(666,473)(337,367)(338,894)(676,261)
Acquisition costs(106,963)(112,107)(219,070)(116,259)(112,243)(228,502)
Underwriting-related general and administrative expenses(99,569)(29,392)(128,961)(89,751)(24,073)(113,824)
Underwriting income$93,520$54,734148,254$34,397$53,01587,412
Net investment income104,67245,040
Net investment gains73,29353,043
Corporate expenses(33,491)(26,828)
Foreign exchange losses(19,602)(9,709)
Interest expense and financing costs(15,235)(20,595)
Reorganization expenses—(392)
Amortization of value of business acquired(1,028)(1,285)
Amortization of intangible assets(3,324)(2,855)
Income before income taxes and interest in income of equity method investments$253,539$123,831
Net losses and loss expenses ratio52.6 %63.6 %57.6 %58.5 %64.3 %61.3 %
Acquisition cost ratio16.9 %21.3 %18.9 %20.1 %21.3 %20.7 %
General and administrative expense ratio15.8 %5.7 %14.1 %15.6 %4.6 %12.7 %
Combined ratio85.3 %90.6 %90.6 %94.2 %90.2 %94.7 %
Goodwill and intangible assets$315,087$—$315,087$327,095$—$327,095



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



  

2.    SEGMENT INFORMATION (CONTINUED)

20212020
Six months ended and at June 30,InsuranceReinsuranceTotalInsuranceReinsuranceTotal
Gross premiums written$2,371,670$2,104,997$4,476,667$1,978,283$2,169,058$4,147,341
Net premiums written1,420,6991,562,0452,982,7441,184,4111,550,5672,734,978
Net premiums earned1,247,9621,012,7012,260,6631,139,0831,053,5452,192,628
Other insurance related income (loss)9677,6318,5981,403(8,113)(6,710)
Net losses and loss expenses(689,072)(692,118)(1,381,190)(809,180)(775,155)(1,584,335)
Acquisition costs(224,642)(213,299)(437,941)(229,010)(238,142)(467,152)
Underwriting-related general and administrative expenses(202,872)(58,757)(261,629)(190,529)(53,257)(243,786)
Underwriting income (loss)$132,343$56,158188,501$(88,233)$(21,122)(109,355)
Net investment income218,836138,140
Net investment gains (losses)102,936(9,831)
Corporate expenses(59,231)(53,926)
Foreign exchange (losses) gains(23,716)51,974
Interest expense and financing costs(30,806)(44,067)
Reorganization expenses—591
Amortization of value of business acquired(2,056)(3,083)
Amortization of intangible assets(6,013)(5,725)
Income (loss) before income taxes and interest in income (loss) of equity method investments$388,451$(35,282)
Net losses and loss expenses ratio55.2 %68.3 %61.1 %71.0 %73.6 %72.3 %
Acquisition cost ratio18.0 %21.1 %19.4 %20.1 %22.6 %21.3 %
General and administrative expense ratio16.3 %5.8 %14.2 %16.8 %5.0 %13.5 %
Combined ratio89.5 %95.2 %94.7 %107.9 %101.2 %107.1 %
Goodwill and intangible assets$315,087$—$315,087$327,095$—$327,095

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

3.    INVESTMENTS
a)     Fixed Maturities and Equity Securities

Fixed Maturities

The following table provides the amortized cost and fair values of the Company's fixed maturities classified as available for sale:
Amortized
cost
Allowance for expected credit lossesGross
unrealized
gains
Gross
unrealized
losses
Fair
value
At June 30, 2021
Available for sale
U.S. government and agency$2,542,892 $— $18,830 $(9,782)$2,551,940 
Non-U.S. government658,176 — 25,177 (2,781)680,572 
Corporate debt4,358,107 (42)154,343 (13,014)4,499,394 
Agency RMBS(1)
1,022,259 — 25,789 (3,492)1,044,556 
CMBS(2)
1,097,457 — 48,538 (1,403)1,144,592 
Non-agency RMBS204,437 (42)4,016 (922)207,489 
ABS(3)
1,493,549 — 8,488 (2,398)1,499,639 
Municipals(4)
261,482 — 8,776 (140)270,118 
Total fixed maturities, available for sale$11,638,359 $(84)$293,957 $(33,932)$11,898,300 
At December 31, 2020    
Available for sale
U.S. government and agency$1,881,489 $— $38,969 $(1,759)$1,918,699 
Non-U.S. government632,875 — 38,826 (428)671,273 
Corporate debt4,408,351 (303)254,261 (6,358)4,655,951 
Agency RMBS(1)
1,244,727 — 42,170 (688)1,286,209 
CMBS(2)
1,268,273 — 87,598 (2,284)1,353,587 
Non-agency RMBS136,198 (20)4,604 (678)140,104 
ABS(3)
1,712,236 — 14,527 (6,685)1,720,078 
Municipals(4)
282,781 — 13,148 (31)295,898 
Total fixed maturities, available for sale$11,566,930 $(323)$494,103 $(18,911)$12,041,799 
(1)Residential mortgage-backed securities ("RMBS") originated by U.S. government-sponsored agencies.
(2)Commercial mortgage-backed securities ("CMBS").
(3)Asset-backed securities ("ABS") include debt tranched securities collateralized primarily by auto loans, student loans, credit card receivables and collateralized loan obligations ("CLOs").
(4)Municipals include bonds issued by states, municipalities and political subdivisions.




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AXIS CAPITAL HOLDINGS LIMITED
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 lossesNet carrying valueGross
unrealized
gains
Gross
unrealized
losses
Fair
value
At June 30, 2021
Held to maturity
ABS(1)
$403,370 $— $403,370 $123 $(459)$403,034 
Total fixed maturities, held to maturity$403,370 $— $403,370 $123 $(459)$403,034 
(1)Asset-backed securities ("ABS") include debt tranched securities collateralized primarily by collateralized loan obligations ("CLOs").

On March 1, 2021, the Company transferred securities 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.

Fixed maturities, held to maturity of $403 million at June 30, 2021 were presented net of an allowance for expected credit losses. 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, 2021, the allowance for credit losses expected to be recognized over the life of our ABS, held to maturity was $nil.



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AXIS CAPITAL HOLDINGS LIMITED
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, 2021
Equity securities
Common stocks$943 $424 $(415)$952 
Preferred stocks115 136 — 251 
Exchange-traded funds203,336 107,019 (370)309,985 
Bond mutual funds267,820 9,188 — 277,008 
Total equity securities$472,214 $116,767 $(785)$588,196 
At December 31, 2020   
Equity securities
Common stocks$10,810 $689 $(557)$10,942 
Preferred stocks6,301 1,767 — 8,068 
Exchange-traded funds147,794 74,314 (390)221,718 
Bond mutual funds256,839 20,878 — 277,717 
Total equity securities$421,744 $97,648 $(947)$518,445 

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 68% of the Company's other investments. The investments in limited partnerships include hedge funds, direct lending funds, private equity funds and real estate funds as well as 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.



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AXIS CAPITAL HOLDINGS LIMITED
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, 2021
Maturity
Due in one year or less$524,297 $531,246 4.5 %
Due after one year through five years4,651,630 4,761,285 40.0 %
Due after five years through ten years2,435,663 2,495,245 21.0 %
Due after ten years209,067 214,248 1.8 %
 7,820,657 8,002,024 67.3 %
Agency RMBS1,022,259 1,044,556 8.8 %
CMBS1,097,457 1,144,592 9.6 %
Non-agency RMBS204,437 207,489 1.7 %
ABS1,493,549 1,499,639 12.6 %
Total$11,638,359 $11,898,300 100.0 %
At December 31, 2020
Maturity
Due in one year or less$436,287 $444,527 3.6 %
Due after one year through five years4,165,696 4,335,219 36.0 %
Due after five years through ten years2,344,859 2,489,050 20.7 %
Due after ten years258,654 273,025 2.3 %
 7,205,496 7,541,821 62.6 %
Agency RMBS1,244,727 1,286,209 10.7 %
CMBS1,268,273 1,353,587 11.2 %
Non-agency RMBS136,198 140,104 1.2 %
ABS1,712,236 1,720,078 14.3 %
Total$11,566,930 $12,041,799 100.0 %

ABS classified as held to maturity with a net carrying value of $403 million (2020: $nil) do not have a single maturity date and cannot be allocated over several maturity groupings.









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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 greaterLess than 12 monthsTotal
  
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
Fair
value
Unrealized
losses
At June 30, 2021
Fixed maturities, available for sale
U.S. government and agency$— $— $1,528,019 $(9,782)$1,528,019 $(9,782)
Non-U.S. government2,678 (540)195,003 (2,241)197,681 (2,781)
Corporate debt48,590 (1,227)862,851 (11,787)911,441 (13,014)
Agency RMBS4,548 (88)313,431 (3,404)317,979 (3,492)
CMBS7,078 (79)96,788 (1,324)103,866 (1,403)
Non-agency RMBS5,058 (457)84,771 (465)89,829 (922)
ABS49,347 (523)465,758 (1,875)515,105 (2,398)
Municipals— — 74,459 (140)74,459 (140)
Total fixed maturities, available for sale$117,299 $(2,914)$3,621,080 $(31,018)$3,738,379 $(33,932)
At December 31, 2020      
Fixed maturities, available for sale
U.S. government and agency$— $— $251,606 $(1,759)$251,606 $(1,759)
Non-U.S. government16,115 (262)3,652 (166)19,767 (428)
Corporate debt63,640 (2,244)233,970 (4,114)297,610 (6,358)
Agency RMBS6,580 (20)78,672 (668)85,252 (688)
CMBS19,736 (1,012)70,656 (1,272)90,392 (2,284)
Non-agency RMBS5,109 (598)9,558 (80)14,667 (678)
ABS325,436 (4,011)360,402 (2,674)685,838 (6,685)
Municipals— — 11,881 (31)11,881 (31)
Total fixed maturities, available for sale$436,616 $(8,147)$1,020,397 $(10,764)$1,457,013 $(18,911)

Fixed Maturities

At June 30, 2021, 1,403 fixed maturities (2020: 719) were in an unrealized loss position of $34 million (2020: $19 million), of which $3 million (2020: $7 million) was related to securities below investment grade or not rated.

At June 30, 2021, 162 fixed maturities (2020: 249) had been in a continuous unrealized loss position for twelve months or greater and had a fair value of $117 million (2020: $437 million).

The unrealized losses of $34 million (2020: $19 million) were due to non-credit factors and were expected to be recovered as the related securities approach maturity.

At June 30, 2021, 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.





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

3.    INVESTMENTS (CONTINUED)
b) Mortgage Loans

The following table provides details of the Company's mortgage loans, held for investment:
  
June 30, 2021December 31, 2020
  
Carrying value% of TotalCarrying value% of Total
Mortgage loans, held for investment:
Commercial$656,056 100 %$593,290 100 %
Total mortgage loans, held for investment$656,056 100 %$593,290 100 %

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

The Company has a high quality mortgage loan portfolio with a weighted average debt service coverage ratio of 2.5x (2020: 2.4x) and a weighted average loan-to-value ratio of 60% (2020: 60%). At June 30, 2021, there are no credit losses or past due amounts associated with the commercial mortgage loans held by the Company.


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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.    INVESTMENTS (CONTINUED)
c) Other Investments

The following tables provide a summary of the Company's other investments, together with additional information relating to the liquidity of each category:
Fair value
Redemption frequency
(if currently eligible)
  Redemption  
  notice period  
At June 30, 2021    
Long/short equity funds$3,774 — %Annually60 days
Multi-strategy funds108,974 13 %Quarterly, Semi-annually
60-95 days
Direct lending funds288,404 33 %
Quarterly(1)
90 days
Private equity funds190,465 22 %n/an/a
Real estate funds201,833 23 %
Quarterly(2)
45 days
CLO-Equities7,002 2 %n/an/a
Other privately held investments64,786 7 %n/an/a
Overseas deposits— — %n/an/a
Total other investments$865,238 100 % 
  
At December 31, 2020    
Long/short equity funds$25,300 3 %Annually60 days
Multi-strategy funds121,420 15 %Quarterly, Semi-annually
60-95 days
Direct lending funds272,131 33 %
Quarterly(1)
90 days
Private equity funds124,706 15 %n/an/a
Real estate funds164,250 20 %
Quarterly(2)
45 days
CLO-Equities6,173 1 %n/an/a
Other privately held investments70,011 8 %n/an/a
Overseas deposits45,165 5 %n/an/a
Total other investments$829,156 100 %  
     
n/a - not applicable
(1) Applies to one fund with a fair value of $43 million (2020: $38 million).
(2) Applies to one fund with a fair value of $74 million (2020: $61 million).

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, 2021 and 2020, neither of these restrictions impacted the Company's redemption requests. At June 30, 2021, $4 million (2020: $25 million), representing 3% (2020: 17%) of total hedge funds, relate to holdings where the Company is still within the lockup period. The expiration of this lockup period is March 2022. 

At June 30, 2021, the Company had $248 million (2020: $151 million) of unfunded commitments as a limited partner in direct lending funds. Once the full amount of committed capital has been called by the General Partner of each of these funds, the assets will not be fully returned until the completion of the fund's investment term. These funds have investment terms ranging from five to fifteen years and the General Partners of certain funds have the option to extend the term by up to three years.
At June 30, 2021, the Company had $21 million (2020: $20 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.

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3.    INVESTMENTS (CONTINUED)
At June 30, 2021, the Company had $224 million (2020: $201 million) of unfunded commitments as a limited partner in funds which invest in real estate and real estate securities and businesses. These funds include an open-ended fund and funds with investment terms ranging from two years to the dissolution of the underlying fund.
At June 30, 2021, the Company had $177 million (2020: $166 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.

During 2015, the Company made a $50 million commitment as a limited partner of a bank revolver opportunity fund. The fund has an investment term of seven years and the General Partners have the option to extend the term by up to two years. At June 30, 2021, 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:
  
Three months ended June 30,Six months ended June 30,
  
2021202020212020
Fixed maturities$61,244 $80,459 $130,714 $170,402 
Other investments41,414 (37,580)83,248 (39,700)
Equity securities3,100 2,263 5,598 4,387 
Mortgage loans4,355 3,660 8,541 7,713 
Cash and cash equivalents617 2,392 2,953 7,323 
Short-term investments66 366 199 1,863 
Gross investment income
110,796 51,560 231,253 151,988 
Investment expenses(6,124)(6,520)(12,417)(13,848)
Net investment income$104,672 $45,040 $218,836 $138,140 


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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,
  2021202020212020
Gross realized investment gains
Fixed maturities and short-term investments$55,695 $51,017 $105,865 $90,948 
Equity securities4,433 22,038 5,002 23,958 
Gross realized investment gains60,128 73,055 110,867 114,906 
Gross realized investment losses
Fixed maturities and short-term investments(8,868)(55,056)(28,237)(77,821)
Equity securities(27)(3,120)(116)(5,802)
Gross realized investment losses(8,895)(58,176)(28,353)(83,623)
Change in allowance for expected credit losses150 13,761 239 (6,257)
Impairment losses(1)
— (112)— (1,302)
Change in fair value of investment derivatives(2)
(847)154 901 3,316 
Net unrealized gains (losses) on equity securities22,757 24,361 19,282 (36,871)
Net investment gains (losses)$73,293 $53,043 $102,936 $(9,831)
(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,
  2021202020212020
Balance at beginning of period$234 $20,019 $323 $— 
Expected credit losses on securities where credit losses were not previously recognized
1 2,357 64 22,376 
Additions (reductions) for expected credit losses on securities where credit losses were previously recognized
(151)(6,879)(256)(6,879)
Impairments of securities which the Company intends to sell or more likely than not will be required to sell— — — — 
Securities sold/redeemed/matured— (9,240)(47)(9,240)
Balance at end of period$84 $6,257 $84 $6,257 

g) Reverse Repurchase Agreements

At June 30, 2021, the Company held $34 million (2020: $91 million) of reverse repurchase agreements. These loans are fully collateralized, are generally outstanding for a short period of time and are presented on a gross basis as part of cash and cash equivalents in the Company's consolidated balance sheets. The required collateral for these loans is either cash or U.S. Treasuries at a minimum rate of 102% of the loan principal. Upon maturity, the Company receives principal and interest income. The Company monitors the estimated fair value of the securities loaned and borrowed on a daily basis with additional collateral obtained as necessary throughout the duration of the transaction.


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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.

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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.



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AXIS CAPITAL HOLDINGS LIMITED
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 and a variable yield security. These investments are initially valued at cost, which approximates fair value. In subsequent measurement periods, the fair values of these investments are generally determined using capital statements obtained from each investee company. In order to assess the reasonableness of the information received from each investee company, 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 investee companies. In addition, the Company engages in regular communication with management at the investee companies. The fair value of the variable yield security was determined using an externally developed discounted cash flow model. As the significant inputs used to price these investments are unobservable, the fair values of other privately held investments are classified as Level 3.

Overseas deposits include investments in private funds held by Syndicate 2007 where the underlying investments are primarily U.S. government, non-U.S. government and corporate debt securities. The funds do not trade on an exchange, therefore, they are not included in available for sale investments. As the significant inputs used to price the underlying investments are observable market inputs, the fair values of overseas deposits are classified as Level 2.

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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.


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

4.    FAIR VALUE MEASUREMENTS (CONTINUED)
The tables below present the financial instruments measured at fair value on a recurring basis for the periods indicated:
Quoted prices in active markets for identical assets (Level 1)Significant other observable inputs (Level 2)Significant unobservable inputs (Level 3)Fair value based on NAV practical expedientTotal fair value
At June 30, 2021
Assets
Fixed maturities, available for sale
U.S. government and agency$2,504,245 $47,695 $— $— $2,551,940 
Non-U.S. government— 680,572 — — 680,572 
Corporate debt— 4,476,668 22,726 — 4,499,394 
Agency RMBS— 1,044,556 — — 1,044,556 
CMBS— 1,144,592 — — 1,144,592 
Non-agency RMBS— 207,489 — — 207,489 
ABS— 1,487,079 12,560 — 1,499,639 
Municipals— 270,118 — — 270,118 
 2,504,245 9,358,769 35,286 — 11,898,300 
Equity securities
Common stocks952 — — — 952 
Preferred stocks251 — — — 251 
Exchange-traded funds309,985 — — — 309,985 
Bond mutual funds— 277,008 — — 277,008 
 311,188 277,008 — — 588,196 
Other investments
Hedge funds (1)
— — — 112,748 112,748 
Direct lending funds— — — 288,404 288,404 
Private equity funds— — — 190,465 190,465 
Real estate funds— — — 201,833 201,833 
CLO-Equities— — 7,002 — 7,002 
Other privately held investments— — 64,786 — 64,786 
Overseas deposits— — — — — 
— — 71,788 793,450 865,238 
Short-term investments— 112,862 — — 112,862 
Other assets
Derivative instruments (refer to Note 5)— 3,140 — — 3,140 
Total Assets$2,815,433 $9,751,779 $107,074 $793,450 $13,467,736 
Liabilities
Derivative instruments (refer to Note 5)$— $10,265 $8,117 $— $18,382 
Cash settled awards (refer to Note 8)— 5,804 — — 5,804 
 Total Liabilities$— $16,069 $8,117 $— $24,186 
(1) Includes Long/short equity and Multi-strategy funds.



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4.    FAIR VALUE MEASUREMENTS (CONTINUED)

Quoted prices in active markets for identical assets (Level 1)Significant other observable inputs (Level 2)Significant unobservable inputs (Level 3)Fair value based on NAV practical expedientTotal fair value
At December 31, 2020
Assets
Fixed maturities, available for sale
U.S. government and agency$1,861,240 $57,459 $— $— $1,918,699 
Non-U.S. government— 671,273 — — 671,273 
Corporate debt— 4,653,447 2,504 — 4,655,951 
Agency RMBS— 1,286,209 — — 1,286,209 
CMBS— 1,351,847 1,740 — 1,353,587 
Non-agency RMBS— 140,104 — — 140,104 
ABS— 1,709,413 10,665 — 1,720,078 
Municipals— 295,898 — — 295,898 
 1,861,240 10,165,650 14,909 — 12,041,799 
Equity securities
Common stocks$10,942 $— $— $— $10,942 
Preferred stocks8,068 — — — 8,068 
Exchange-traded funds221,718 — — — 221,718 
Bond mutual funds— 277,717 — — 277,717 
 240,728 277,717 — — 518,445 
Other investments
Hedge funds (1)
— — — 146,720 146,720 
Direct lending funds— — — 272,131 272,131 
Private equity funds— — — 124,706 124,706 
Real estate funds— — — 164,250 164,250 
CLO-Equities— — 6,173 — 6,173 
Other privately held investments— — 70,011 — 70,011 
Overseas deposits— 45,165 — — 45,165 
— 45,165 76,184 707,807 829,156 
Short-term investments— 161,897 — — 161,897 
Other assets
Derivative instruments (refer to Note 5)— 18,875 — — 18,875 
Total Assets$2,101,968 $10,669,304 $91,093 $707,807 $13,570,172 
Liabilities
Derivative instruments (refer to Note 5)$— $2,364 $9,122 $— $11,486 
Cash settled awards (refer to Note 8)— 13,273 — — 13,273 
Total Liabilities$— $15,637 $9,122 $— $24,759 
(1) Includes Long/short equity and Multi-strategy funds.


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AXIS CAPITAL HOLDINGS LIMITED
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, 2021 of investments classified as Level 3 in the fair value hierarchy:
Fair valueValuation techniqueUnobservable inputRange
Weighted
average
Other investments - CLO-Equities$7,002 Discounted cash flowDefault rates4.5%4.5%
  Loss severity rate50.0%50.0%
  Collateral spreads3.0%3.0%
Estimated maturity dates7 years7 years
Other investments - Other privately held investments
$21,643 Discounted cash flowDiscount rate1.3%1.3%
Default rate0.5%0.5%
Loss absorption yield1.0%1.0%
Estimated maturity date5 years5 years
Derivatives - Other underwriting-related derivatives
$(8,117)
Discounted cash flow
Discount rate0.9%0.9%
Note: Fixed maturities of $35 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 $43 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.



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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.

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4.    FAIR VALUE MEASUREMENTS (CONTINUED)
The following tables present 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)
PurchasesSales
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 $— 
CMBS905 — — — (2)— — (903)— — 
ABS7,175 12,382 (7,004)— 7 — — — 12,560 — 
 10,485 19,382 (7,004)— 26 13,300 — (903)35,286 — 
Other investments
CLO-Equities6,269 — — 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          
Corporate debt$2,504 $7,000 $— $— $(78)$13,300 $— $— $22,726 $— 
CMBS1,740 — — — 13 — — (1,753)— — 
ABS10,665 18,566 (16,207)— 36 — — (500)12,560 — 
 14,909 25,566 (16,207)— (29)13,300 — (2,253)35,286 — 
Other investments
CLO-Equities6,173 — — 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.

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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)
PurchasesSales
Settlements/
distributions
Closing
balance
Change in
unrealized
gains/(losses)(3)
  
Three months ended June 30, 2020
Fixed maturities, available for sale         
Corporate debt$2,245 $— $— $— $53 $— $— $— $2,298 $— 
CMBS4,371 — — — 81 — — (18)4,434 — 
Non-agency RMBS9,185 — — — 377 — — — 9,562 — 
ABS336 — — — 105 — — — 441 — 
 16,137 — — — 616 — — (18)16,735 — 
Other investments
CLO-Equities12,793 — — (2,322)— — — (528)9,943 (2,322)
Other privately held investments
37,441 — — (76)— 55 — — 37,420 (76)
 50,234 — — (2,398)— 55 — (528)47,363 (2,398)
Total assets$66,371 $— $— $(2,398)$616 $55 $— $(546)$64,098 $(2,398)
Other liabilities
Derivative instruments$20,164 $— $— $(375)$— $— $— $(9,971)$9,818 $(346)
Total liabilities$20,164 $— $— $(375)$— $— $— $(9,971)$9,818 $(346)
Six months ended June 30, 2020
Fixed maturities          
Corporate debt$2,297 $— $— $— $1 $— $— $— $2,298 $— 
CMBS5,235 — — — (212)— — (589)4,434 — 
Non-agency RMBS— 9,185 — — 377 — — — 9,562 — 
ABS489 — — — (48)— — — 441 — 
 8,021 9,185 — — 118 — — (589)16,735 — 
Other investments
CLO-Equities14,328 — — (3,169)— — — (1,216)9,943 (3,169)
Other privately held investments
36,934 — — 4 — 482 — — 37,420 4 
 51,262 — — (3,165)— 482 — (1,216)47,363 (3,165)
Total assets$59,283 $9,185 $— $(3,165)$118 $482 $— $(1,805)$64,098 $(3,165)
Other liabilities
Derivative instruments$9,672 $— $— $10,117 $— $— $— $(9,971)$9,818 $146 
Total liabilities$9,672 $— $— $10,117 $— $— $— $(9,971)$9,818 $146 
           

(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.






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4.    FAIR VALUE MEASUREMENTS (CONTINUED)
Transfers into Level 3 from Level 2

The transfers into Level 3 from Level 2 during the three and six months ended June 30, 2021 and the six months ended June 30, 2020 were primarily due to the lack of observable market inputs and multiple quotes from pricing vendors and broker-dealers for certain fixed maturities. There were no transfers into Level 3 from Level 2 during the three months ended June 30, 2020.

Transfers out of Level 3 into Level 2

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. There were no transfers out of Level 3 into Level 2 during the three and six months ended June 30, 2020.

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, 2021 and December 31, 2020 all funds measured at fair value using NAVs are reported on a 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.


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AXIS CAPITAL HOLDINGS LIMITED
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, 2021, 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, 2021, the Company's ABS fixed maturities held to maturity, were recorded at amortized cost with a carrying value of $403 million (2020: $nil) and a fair value of $403 million (2020: $nil). 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, 2021, 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, 2021, the Company's debt was recorded at amortized cost with a carrying value of $1,310 million (2020: $1,310 million) and a fair value of $1,467 million (2020: $1,485 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, 2021December 31, 2020
  
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$331,567 $3,080 $309 $105,781 $2 $2,364 
Relating to underwriting portfolio:
Foreign exchange forward contracts1,118,590 60 9,956 1,197,012 18,873 — 
Other underwriting-related contracts75,000 — 8,117 75,000 — 9,122 
Total derivatives$3,140 $18,382 $18,875 $11,486 
(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.



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AXIS CAPITAL HOLDINGS LIMITED
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, 2021December 31, 2020
Gross amountsGross amounts offset
Net
amounts(1)
Gross amountsGross amounts offset
Net
amounts(1)
Derivative assets$7,583 $(4,443)$3,140 $27,765 $(8,890)$18,875 
Derivative liabilities$22,825 $(4,443)$18,382 $20,376 $(8,890)$11,486 
(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.

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.



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AXIS CAPITAL HOLDINGS LIMITED
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 incomeThree months ended June 30,Six months ended June 30,
  2021202020212020
Relating to investment portfolio:
Foreign exchange forward contractsNet investment gains (losses)$(537)$154 $1,212 $3,316 
Relating to underwriting portfolio:
Foreign exchange forward contractsForeign exchange gains (losses)(604)(870)(26,660)(1,559)
Other underwriting-related contractsOther insurance related income (losses)344 470 1,005 (9,730)
Total$(797)$(246)$(24,443)$(7,973)


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 reserves for unpaid losses and loss expenses:
Six months ended June 30,
20212020
Gross reserve for losses and loss expenses, beginning of period$13,926,766 $12,752,081 
Less reinsurance recoverable on unpaid losses and loss expenses, beginning of period(4,496,641)(3,877,756)
Net reserve for unpaid losses and loss expenses, beginning of period9,430,125 8,874,325 
Net incurred losses and loss expenses related to:
Current year1,393,316 1,593,102 
Prior years(12,126)(8,767)
 1,381,190 1,584,335 
Net paid losses and loss expenses related to:
Current year(109,482)(89,724)
Prior years(1,239,814)(1,271,987)
 (1,349,296)(1,361,711)
Foreign exchange and other68,880 (78,304)
Net reserve for unpaid losses and loss expenses, end of period9,530,899 9,018,645 
Reinsurance recoverable on unpaid losses and loss expenses, end of period4,626,454 4,160,521 
Gross reserve for losses and loss expenses, end of period$14,157,353 $13,179,166 



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AXIS CAPITAL HOLDINGS LIMITED
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, 2021, the Company recognized catastrophe and weather-related losses, net of reinstatement premiums of $139 million (2020: $336 million).
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, 2021, 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 U.S. Winter Storms Uri and Viola 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,
  2021202020212020
Favorable (Adverse)Favorable (Adverse)Favorable (Adverse)Favorable (Adverse)
Insurance$6,427 $420 $7,932 $4,251 
Reinsurance381 2,235 4,194 4,516 
Total$6,808 $2,655 $12,126 $8,767 

The following sections provide further details on net prior year reserve development by segment, reserving class and accident year.










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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 otherMarineAviationCredit and political riskProfessional linesLiability
ShortShortShort/MediumMediumMediumLong
Reported lines of business
PropertyX
MarineX
TerrorismX
AviationX
Credit and political riskX
Professional linesX
LiabilityX
Accident and healthX
Discontinued lines - NovaeXXX

Prior year reserve development by reserve class was as follows:
  Three months ended June 30,Six months ended June 30,
  2021202020212020
Favorable (Adverse)Favorable (Adverse)Favorable (Adverse)Favorable (Adverse)
Property and other$35,290 $25,117 $50,681 $37,607 
Marine7,348 (1,262)19,221 (3,464)
Aviation4,808 2,002 5,844 5,993 
Credit and political risk4,055 (178)(1,316)(1,094)
Professional lines(33,054)(8,519)(47,646)(13,606)
Liability(12,020)(16,740)(18,852)(21,185)
Total$6,427 $420 $7,932 $4,251 

For the three months ended June 30, 2021, we recognized $6 million of net favorable prior year reserve development, the principal components of which were: 
•$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 the 2018 and 2020 catastrophe events and better than expected loss emergence attributable to the accident and health book of business 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 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.

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6.    RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED)
•$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 years.
For the three months ended June 30, 2020, we recognized $0.4 million of net favorable prior year reserve development, the principal components of which were: 
•$25 million of net favorable prior year reserve development on property and other business primarily due to better than expected loss emergence related to the 2019 accident year, better than expected loss emergence attributable to the 2017, 2018 and 2019 catastrophe events and decreases in loss estimates attributable to specific claims related to the 2014, 2016 and 2019 accident years.
•$17 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the U.S. excess casualty and programs books of business mainly related to the 2017 and 2018 accident years.
•$9 million of net adverse prior year reserve development on professional lines business primarily due to reserve strengthening related to the 2018 and 2019 accident years.
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 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 related to the 2020 accident year.
•$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.
•$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 years.
For the six months ended June 30, 2020, we recognized $4 million of net favorable prior year reserve development, the principal components of which were: 
•$38 million of net favorable prior year reserve development on property and other business primarily due to better than expected loss emergence related to 2018 and 2019 accident years, better than expected loss emergence attributable to the 2017, 2018 and 2019 catastrophe events, and decreases in loss estimates attributable to specific claims related to the 2014, 2016 and 2019 accident years.
•$6 million of net favorable prior year reserve development on aviation business primarily due to better than expected loss emergence related to the 2018 and 2019 accident years.
•$21 million of net adverse prior year reserve development on liability business primarily due to reserve strengthening within the U.S. excess casualty and programs books of business mainly related to the 2017 and 2018 accident years.
•$14 million of net adverse prior year reserve development on professional lines business primarily due to reserve strengthening related to the 2018 and 2019 accident years.


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

6.    RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED)
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 otherCredit and suretyProfessional linesMotorLiability
ShortMediumMediumLongLong
Reported lines of business
CatastropheX
PropertyX
Credit and suretyX
Professional linesX
MotorX
LiabilityX
EngineeringX
AgricultureX
Marine and aviationX
Accident and healthX
Discontinued lines - NovaeXXX

Prior year reserve development by reserve class was as follows:
  Three months ended June 30,Six months ended June 30,
  2021202020212020
Favorable
(Adverse)		Favorable
(Adverse)		Favorable
(Adverse)		Favorable
(Adverse)
Property and other$12,310 $(4,162)$13,278 $(8,065)
Credit and surety(4,917)10,483 (9,854)15,335 
Professional lines(8,600)(4,879)(10,804)283 
Motor12,946 4,448 30,086 17,533 
Liability(11,358)(3,655)(18,512)(20,570)
Total$381 $2,235 $4,194 $4,516 

For the three months ended June 30, 2021, we 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 mainly related to older accident years.
•$12 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 the 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 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 books of business 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 European and Latin American surety books of business related to the 2015 through 2018 accident years.

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

6.    RESERVE FOR LOSSES AND LOSS EXPENSES (CONTINUED)
For the three months ended June 30, 2020, we recognized $2 million of net favorable prior year reserve development, the principal components of which were:
•$10 million of net favorable prior year reserve development on credit and surety business primarily due to better than expected loss emergence related to multiple accident years.
•$4 million of net favorable prior year reserve development on motor business primarily due to non-proportional treaty business mainly related to the 2015 and 2016 accident years.
•$5 million of net adverse prior year reserve development on professional lines business primarily due to reserve strengthening related to the 2015 to 2017 accident years.
•$4 million of net adverse prior year development on property and other business primarily due to reserve strengthening within the European and the Bermuda proportional books of business related to the 2017 and 2018 accident years, partially offset by net favorable prior year reserve development on accident and health business attributable to the North America book of business related to the 2019 accident year.
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 mainly 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 the 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 loss 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 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 European and Latin American surety books of business related to the 2015 through 2018 accident years and an increase in the loss estimate attributable to a specific large loss related to the 2020 accident year.
For the six months ended June 30, 2020, we recognized $5 million of net favorable prior year reserve development, the principal components of which were:
•$18 million of net favorable prior year reserve development on motor business primarily due to non-proportional treaty business mainly related to the 2016 and older accident years.
•$15 million of net favorable prior year reserve development on credit and surety business primarily due to generally better than expected loss emergence related to multiple accident years.
•$21 million of net adverse prior year development on liability business primarily due to reserve strengthening associated with large U.S. commercial cedants and reserve strengthening within the U.S. multiline/regional, U.S. auto and the European non-proportional books of business related to the 2015 through 2019 accident years.
•$8 million of net adverse prior year development on property and other business primarily due to reserve strengthening within the engineering line of business related to the 2016 to 2019 accident years and the marine and other line of business related to the 2018 and 2019 accident years, partially offset by net favorable prior year reserve development on accident and health business attributable to the North America book of business related to the 2019 accident year and the agriculture line of business related to the 2018 and 2019 accident years.



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


7.    EARNINGS PER COMMON SHARE
The following table presents a comparison of earnings (loss) per common share and earnings (loss) per diluted common share:
  Three months ended June 30,Six months ended June 30,
  2021202020212020
Earnings (loss) per common share
Net income (loss)$235,473 $120,040 $358,770 $(57,783)
Less: Preferred share dividends7,563 7,563 15,125 15,125 
Net income (loss) available (attributable) to common shareholders227,910 112,477 343,645 (72,908)
Weighted average common shares outstanding84,764 84,303 84,640 84,198 
Earnings (loss) per common share$2.69 $1.33 $4.06 $(0.87)
Earnings (loss) per diluted common share
Net income (loss) available (attributable) to common shareholders$227,910 $112,477 $343,645 $(72,908)
Weighted average common shares outstanding 84,764 84,303 84,640 84,198 
    Share-based compensation plans(1)
503 297 477 — 
Weighted average diluted common shares outstanding85,267 84,600 85,117 84,198 
Earnings (loss) per diluted common share$2.67 $1.33 $4.04 $(0.87)
Weighted average anti-dilutive shares excluded from the dilutive computation445 1,391 1,071 1,098 
(1) Due to the net loss attributable to common shareholders recognized for the six months ended June 30, 2020, the share equivalents were anti-dilutive.



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

8.    SHARE-BASED COMPENSATION
Performance Restricted Stock Units

Performance Restricted Stock Units granted in 2021
Performance restricted stock units granted in 2021 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 2021 were share-settled awards.

Valuation assumptions

The fair value of performance restricted stock units granted in 2021 was measured on the grant date using a Monte Carlo simulation model.

The following table provides details of the significant inputs used in the Monte Carlo simulation model:
Six months ended June 30,2021
Expected volatility 32.99%
Expected term (in years)3.0
Expected dividend yieldn/a
Risk-free interest rate0.17%

Beginning share price: The beginning share price is 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 is based on the average 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 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 2021 is determined on the grant date based on the fair value calculated by the Monte Carlo simulation model. The fair value of these awards is recognized on a straight-line basis over the requisite service period.

Performance Restricted Stock Units granted in 2020 and 2019
Performance restricted stock units granted in 2020 and 2019 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 75% to 125% of target. Performance restricted stock units granted in 2020 and 2019 were share-settled awards.



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

8.    SHARE-BASED COMPENSATION (CONTINUED)
Compensation expense associated with performance restricted stock units granted in 2020 and 2019 is determined based on market value of the Company's common shares measured at the grant date. The fair value of these awards is recognized on a straight-line basis over the requisite service period and is subject to periodic adjustment based on the achievement of established performance criteria during the performance period.

Performance Restricted Stock Units granted in 2018
Performance restricted stock units granted in 2018 included a performance condition which was growth in the Company’s book value per diluted common share adjusted for dividends over three years compared to its peer group. Growth in book value per diluted common share adjusted for dividends was calculated in accordance with the terms of the applicable award agreements. Where performance goals were achieved, these awards cliff vested at the end of a three-year performance period within a range of 0% to 200% of target. Performance restricted stock units granted in 2018 were share-settled awards.

Compensation expense associated with performance restricted stock units granted in 2018 was determined based on market value of the Company's common shares measured at the grant date. The fair value of these awards was recognized on a straight-line basis over the requisite service period and was subject to periodic adjustment based on the achievement of established performance criteria during the performance period.

Share-Settled Awards

The following table provides an activity summary of the Company's share-settled restricted stock units for the six months ended June 30, 2021:
Share-Settled Performance
Restricted Stock Units		Share-Settled Service
Restricted Stock Units
Number of
restricted
stock units
Weighted 
average
grant date
fair value
Number of
restricted
stock units
Weighted  average
grant date
fair value
Non-vested restricted stock units - beginning of period289 $55.92 1,501 $56.50 
     Granted122 49.04 1,192 47.95 
     Vested(66)48.89 (546)56.45 
     Forfeited(4)62.26 (58)56.10 
Non-vested restricted stock units - end of period341 $54.74 2,089 $51.65 




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

8.    SHARE-BASED COMPENSATION (CONTINUED)
Cash-Settled awards

The following table provides an activity summary of the Company's cash-settled restricted stock units for the six months ended June 30, 2021:
Cash-Settled Service
Restricted Stock Units
Number of
restricted stock units
Non-vested restricted stock units - beginning of period471 
     Granted— 
     Vested(223)
     Forfeited(17)
Non-vested restricted stock units - end of period231 

The following table provides additional information related to share-based compensation:
Six months ended June 30,20212020
Share-based compensation expense(1)
$25,080 $25,410 
Tax benefits associated with share-based compensation expense
$4,075 $3,995 
Liability for cash-settled restricted stock units(2)
$5,804 $7,675 
Fair value of restricted stock units vested(3)
$41,671 $46,490 
Unrecognized share-based compensation expense$107,267 $98,005 
Expected weighted average period associated with the recognition of unrecognized share-based compensation expense2.8 years2.7 years
(1) Related to share-settled restricted stock units and cash-settled restricted stock units.
(2) Included in other liabilities in the consolidated balance sheets.
(3) Fair value is based on the closing price of the Company's common shares on the vest date.

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AXIS CAPITAL HOLDINGS LIMITED
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,
  2021202020212020
Shares issued, balance at beginning of period176,580 176,580 176,580 176,580 
Shares issued— — — — 
Total shares issued at end of period176,580 176,580 176,580 176,580 
Treasury shares, balance at beginning of period(91,827)(92,282)(92,227)(92,621)
Shares repurchased(8)(3)(197)(153)
Shares reissued 22 11 611 500 
Total treasury shares at end of period(91,813)(92,274)(91,813)(92,274)
Total shares outstanding84,767 84,306 84,767 84,306 
Treasury Shares
The following table presents common shares repurchased from shares held in Treasury:
  Three months ended June 30,Six months ended June 30,
  2021202020212020
In the open market:
Total shares— — — — 
Total cost$— $— $— $— 
Average price per share(1)
$— $— $— $— 
From employees:(2)
Total shares8 3 197 153 
Total cost$439 $110 $9,819 $8,602 
Average price per share(1)
$53.08 $36.77 $49.87 $56.05 
Total shares repurchased:
Total shares8 3 197 153 
Total cost$439 $110 $9,819 $8,602 
Average price per share(1)
$53.08 $36.77 $49.87 $56.05 
(1) Calculated using whole numbers.
(2)  Shares are repurchased from employees to satisfy withholding tax liabilities related to the vesting of share-settled restricted stock units.
Dividends
The following table presents dividends declared and paid related to the Company's common and preferred shares:
Per share data
Dividends declaredDividends paid in period of declarationDividends paid in period following declaration
Three months ended June 30, 2021
   Common shares$0.42 $— $0.42 
   Series E preferred shares$34.38 $— $34.38 
Three months ended June 30, 2020
   Common shares$0.41 $— $0.41 
   Series E preferred shares$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 
Six months ended June 30, 2020
   Common shares$0.82 $0.41 $0.41 
   Series E preferred shares$68.75 $34.38 $34.38 

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

10.    DEBT AND FINANCING ARRANGEMENTS
a)Letters of Credit

Effective March 31, 2021, certain of AXIS Capital’s operating subsidiaries (the "Participating Subsidiaries") amended their existing $750 million secured letter of credit facility to: (i) extend the expiration date of the $250 million secured letter of credit facility to March 31, 2022, with each letter of credit provided pursuant to such credit facility having a tenor not to extend beyond March 31, 2023; (ii) reduce the utilization capacity available under the $250 million secured letter of credit facility to $150 million, reducing the maximum aggregate utilization capacity of the credit facility from $750 million to $650 million; and (iii) make administrative changes to the remaining $500 million secured letter of credit facility.

Letters of credit issued under the secured letter of credit facility are principally used to support the reinsurance obligations of the Participating Subsidiaries. The Participating Subsidiaries are subject to certain covenants, including the requirement to maintain sufficient collateral to cover the obligations outstanding under the facilities. Such obligations include contingent reimbursement obligations for outstanding letters of credit and fees payable to Citibank Europe plc. In the event of default, Citibank Europe plc may exercise certain remedies, including the exercise of control over pledged collateral and the termination facility to any or all of the Participating Subsidiaries.

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.


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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
12.    OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the tax effects allocated to each component of other comprehensive income (loss):
20212020
Before tax amountIncome tax (expense) benefitNet of tax amountBefore tax amountIncome tax (expense) benefitNet of Tax Amount
Three months ended June 30,
Available for sale investments:
Unrealized gains (losses) arising during the period for which an allowance for expected credit losses has not been recognized $56,694 $(5,821)$50,873 $412,802 $(41,514)$371,288 
Unrealized gains (losses) arising during the period for which an allowance for expected credit losses has been recognized (179)— (179)3,342 (130)3,212 
Adjustment for reclassification of net realized (gains) losses and impairment losses recognized in net income (loss)
(46,704)3,984 (42,720)(9,610)2,794 (6,816)
Unrealized gains (losses) arising during the period, net of reclassification adjustment
9,811 (1,837)7,974 406,534 (38,850)367,684 
Foreign currency translation adjustment3,482 — 3,482 3,834 — 3,834 
Total comprehensive income, net of tax$13,293 $(1,837)$11,456 $410,368 $(38,850)$371,518 
Six months ended June 30,
Available for sale investments:
Unrealized gains (losses) arising during the period for which an allowance for expected credit losses has not been recognized$(139,268)$18,297 $(120,971)$140,018 $(22,050)$117,968 
Unrealized gains (losses) arising during the period for which an allowance for expected credit losses has been recognized(237)— (237)(2,757)(272)(3,029)
Adjustment for reclassification of net realized (gains) losses and impairment losses recognized in net income (loss)
(77,579)5,978 (71,601)(5,484)4,325 (1,159)
Unrealized gains (losses) arising during the period, net of reclassification adjustment
(217,084)24,275 (192,809)131,777 (17,997)113,780 
Foreign currency translation adjustment4,731 — 4,731 (3,891)— (3,891)
Total other comprehensive income (loss), net of tax$(212,353)$24,275 $(188,078)$127,886 $(17,997)$109,889 

The following table presents details of amounts reclassified from accumulated other comprehensive income ("AOCI") to net income (loss):
Amount reclassified from AOCI(1)
AOCI ComponentsConsolidated statement of operations line item that includes reclassification adjustmentThree months ended June 30,Six months ended June 30,
2021202020212020
Unrealized gains (losses) on available for sale investments
Other realized gains (losses)
$46,704 $9,722 $77,579 $6,786 
Impairment losses— (112)— (1,302)
Total before tax46,704 9,610 77,579 5,484 
Income tax (expense) benefit(3,984)(2,794)(5,978)(4,325)
Net of tax$42,720 $6,816 $71,601 $1,159 
(1)     Amounts in parentheses are charges to net income (loss).

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AXIS CAPITAL HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
13.    RELATED PARTY TRANSACTIONS

At June 30, 2021, the Company has invested $14 million in co-investments with Rialto Real Estate Fund IV-Property, a fund managed by a portfolio company of Stone Point's private equity fund, Trident VII L.P.

At June 30, 2021, the Company has invested $6 million in Stone Point Credit Corporation.

On June 29, 2021, the Company invested $10 million in 7.25% fixed to floating rate, senior unsecured notes due 2031, issued by Harrington.



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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, 2021 and 2020 and our financial condition at June 30, 2021 and December 31, 2020. 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, 2020. Tabular dollars are in thousands, except per share amounts. Amounts in tables may not reconcile due to rounding differences.
 
 Page  
Second Quarter 2021 Financial Highlights
Overview
Consolidated Results of Operations
Results by Segment:
i) Insurance Segment
ii) Reinsurance Segment
Net Investment Income and Net Investment Gains (Losses)
Other Expenses (Revenues), Net
Financial Measures
Non-GAAP Financial Measures Reconciliation
Cash and Investments
Liquidity and Capital Resources
Critical Accounting Estimates
Recent Accounting Pronouncements
Off-Balance Sheet and Special Purpose Entity Arrangements


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SECOND QUARTER 2021 FINANCIAL HIGHLIGHTS

Second Quarter 2021 Consolidated Results of Operations
 
•Net income available to common shareholders of $228 million, or $2.69 per common share, and $2.67 per diluted common share
•Operating income(1) of $171 million, or $2.00 per diluted common share(1)
•Gross premiums written of $1.9 billion
•Net premiums written of $1.2 billion
•Net premiums earned of $1.2 billion
•Pre-tax catastrophe and weather-related losses, net of reinsurance of $29 million (Insurance: $11 million and Reinsurance: $17 million), or 2.5 points on the current accident year loss ratio, primarily attributable to weather-related events.
•Net favorable prior year reserve development of $7 million
•Underwriting income(2) of $148 million and combined ratio of 90.6%
•Net investment income of $105 million
•Net investment gains of $73 million
•Foreign exchange losses of $20 million
Second Quarter 2021 Consolidated Financial Condition 
•Total cash and investments of $16.1 billion; fixed maturities, cash and short-term securities comprise 87% 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 $14.2 billion and reinsurance recoverable on unpaid and paid losses and loss expenses of $5.1 billion
•Total debt of $1.3 billion and debt to total capital ratio(3) of 19.6%
•Common shareholders’ equity of $4.8 billion; book value per diluted common share of $55.50




(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 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'.    
(3)The debt to total capital ratio is calculated by dividing debt by total capital. Total capital represents the sum of total shareholders’ equity and debt.

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OVERVIEW

Business Overview
AXIS Capital Holdings Limited ("AXIS Capital"), through its operating subsidiaries, is a global provider of specialty lines insurance and treaty reinsurance 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 2021 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;

•continuing the implementation of a more focused distribution strategy;

•re-balancing our portfolio towards less volatile lines of business that carry attractive rates;

•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; and

•growing our corporate citizenship program to give back to our communities and help contribute to a more sustainable future.
















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Outlook

We are committed to leadership in specialty insurance and global reinsurance, where we have depth of talent and expertise. We believe we are well-positioned to succeed in the rapidly evolving marketplace. Through our hybrid strategy, we have developed substantial platforms, providing us with both balance and diversification, enabling us to take advantage of positive opportunities in either market to generate the most attractive risk-return portfolio for our shareholders. 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 driven by our tactical response to market conditions.
 
Rates, terms and conditions across virtually all insurance lines and geographies continued to see improvement through the second quarter of 2021. We expect many specialty segments will continue to experience further pricing improvements through the course of 2021 as carriers assess pricing adequacy, portfolio construction and account preferences. As insurance market conditions continue to improve, capacity and capital remains available and willing to support business across a broad range of return hurdles. In this market environment, we are focusing on those lines of business and market segments that are adequately priced, and we are trading off growth for profitability in other areas.

The reinsurance market is also experiencing an improvement in rates and terms and conditions. These improvements are due to a combination of pressures on the industry, including near-term drivers such as the failure of the industry to meet the cost of capital in the last four years, the increased frequency of natural catastrophe events, together with long term drivers such as the pressure on reserve adequacy levels, low interest rates and the uncertainty related to social inflation. Balanced with the case for change is the very strong industry capitalization, which dampens the impact. We believe the improvements will translate into a healthier and more profitable market. This environment requires a combination of strong underwriting discipline and portfolio management mixed with smart incremental growth where returns are attractive. We have repositioned our portfolio during the last several years and believe our business is well-positioned to sustain long term and profitable relationships with clients.

We are encouraged by the pricing improvements that we are seeing across both the insurance and reinsurance segments. While there is positive rate momentum across most lines and markets, not all lines are at adequate levels and, in multiple cases, more rate is needed to deliver adequate returns, particularly given recent high loss experience in the market, the COVID-19 pandemic and ongoing lower interest rates. Where prices appropriately reflect these trends to deliver adequate profitability we will look to grow within our risk and volatility guidelines. With the most balanced book in the history of our company, we believe AXIS is well positioned to drive profitable growth within the current market environment.




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CONSOLIDATED RESULTS OF OPERATIONS

  Three months ended June 30,Six months ended June 30,
  2021% Change20202021% Change2020
Underwriting revenues:
Gross premiums written$1,941,186 13%$1,716,183 $4,476,667 8%$4,147,341 
Net premiums written1,203,858 14%1,055,934 2,982,744 9%2,734,978 
Net premiums earned1,156,941 5%1,104,003 2,260,663 3%2,192,628 
Other insurance related income (loss)5,817 nm1,996 8,598 nm(6,710)
Underwriting expenses:
Net losses and loss expenses(666,473)(1%)(676,261)(1,381,190)(13%)(1,584,335)
Acquisition costs(219,070)(4%)(228,502)(437,941)(6%)(467,152)
Underwriting-related general and administrative expenses(1)
(128,961)13%(113,824)(261,629)7%(243,786)
Underwriting income (loss)$148,254 $87,412 $188,501 $(109,355)
Net investment income104,672 nm45,040 218,836 58%138,140 
Net investment gains (losses)73,293 38%53,043 102,936 nm(9,831)
Corporate expenses(1)
(33,491)25%(26,828)(59,231)10%(53,926)
Foreign exchange (losses) gains(19,602)nm(9,709)(23,716)nm51,974 
Interest expense and financing costs(15,235)(26%)(20,595)(30,806)(30%)(44,067)
Reorganization expenses— nm(392)— nm591 
Amortization of value of business acquired(1,028)(20%)(1,285)(2,056)(33%)(3,083)
Amortization of intangible assets(3,324)16%(2,855)(6,013)5%(5,725)
Income (loss) before income taxes and interest in income (loss) of equity method investments253,539 123,831 388,451 (35,282)
Income tax expense(27,865)nm(10,893)(48,641)nm(6,026)
Interest in income (loss) of equity method investments9,799 38%7,102 18,960 nm(16,475)
Net income (loss)$235,473 $120,040 $358,770 $(57,783)
Preferred share dividends(7,563)—%(7,563)(15,125)—%(15,125)
Net income (loss) available (attributable) to common shareholders$227,910 $112,477 $343,645 $(72,908)
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 $33,491 and $26,828 for the three months ended June 30, 2021 and 2020, respectively, and $59,231 and $53,926 for the six months ended June 30, 2021 and 2020, respectively. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Expenses (Revenues), Net' for further details on corporate expenses. Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Non-GAAP Financial Measures Reconciliation' for further details.





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Underwriting Revenues

Underwriting revenues by segment were as follows:
  Three months ended June 30,Six months ended June 30,
  2021% Change20202021% Change2020
Gross premiums written:
Insurance$1,268,472 22%$1,037,568 $2,371,670 20%$1,978,283 
Reinsurance672,714 (1%)678,615 2,104,997 (3%)2,169,058 
Total gross premiums written$1,941,186 13%$1,716,183 $4,476,667 8%$4,147,341 
Percent of gross premiums written ceded
Insurance44%2 pts42%40%0 pt40%
Reinsurance27%(6 pts)33%26%(3 pts)29%
Total percent of gross premiums ceded38%(1 pt)39%33%(1 pt)34%
Net premiums written:
Insurance$712,885 18%$602,761 $1,420,699 20%$1,184,411 
Reinsurance490,973 8%453,173 1,562,045 1%1,550,567 
Total net premiums written$1,203,858 14%$1,055,934 $2,982,744 9%$2,734,978 
Net premiums earned:
Insurance$631,675 9%$577,019 $1,247,962 10%$1,139,083 
Reinsurance525,266 —%526,984 1,012,701 (4%)1,053,545 
Total net premiums earned$1,156,941 5%$1,104,003 $2,260,663 3%$2,192,628 

Refer to 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Results by Segment' for further details on underwriting revenues.

Underwriting Expenses

The components of the combined ratio were as follows:
  Three months ended June 30,Six months ended June 30,
  2021
% Point
Change
20202021
% Point
Change
2020
Current accident year loss ratio excluding catastrophe and weather-related losses55.7 %(2.3)58.0 %55.4 %(2.1)57.5 %
Catastrophe and weather-related losses ratio2.5 %(1.0)3.5 %6.2 %(9.0)15.2 %
Current accident year loss ratio58.2 %(3.3)61.5 %61.6 %(11.1)72.7 %
Prior year reserve development ratio(0.6 %)(0.4)(0.2 %)(0.5 %)(0.1)(0.4 %)
Net losses and loss expenses ratio57.6 %(3.7)61.3 %61.1 %(11.2)72.3 %
Acquisition cost ratio18.9 %(1.8)20.7 %19.4 %(1.9)21.3 %
General and administrative expense ratio(1)
14.1 %1.412.7 %14.2 %0.713.5 %
Combined ratio90.6 %(4.1)94.7 %94.7 %(12.4)107.1 %
(1) The general and administrative expense ratio included corporate expenses not allocated to underwriting segments of 2.9% and 2.4% for the three months ended June 30, 2021 and 2020, respectively, and 2.6% and 2.5% for the six months ended June 30, 2021 and 2020, respectively Refer to 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Other Expenses (Revenues), Net' for further details.

Refer to 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Results by Segment' for further details on underwriting expenses.

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RESULTS BY SEGMENT

Insurance Segment

Results for the insurance segment were as follows:
  Three months ended June 30,Six months ended June 30,
  2021% Change20202021% Change2020
Revenues:
Gross premiums written$1,268,472 22%$1,037,568 $2,371,670 20%$1,978,283 
Net premiums written712,885 18%602,761 1,420,699 20%1,184,411 
Net premiums earned631,675 9%577,019 1,247,962 10%1,139,083 
Other insurance related income552 (27%)755 967 (31%)1,403 
Expenses:
Current accident year net losses and loss expenses(338,602)(337,787)(697,004)(813,431)
Prior year reserve development6,427 420 7,932 4,251 
Acquisition costs(106,963)(116,259)(224,642)(229,010)
Underwriting-related general and administrative expenses(99,569)(89,751)(202,872)(190,529)
Underwriting income (loss)$93,520 $34,397 $132,343 $(88,233)
Ratios:
% Point
Change
% Point
Change
Current accident year loss ratio excluding catastrophe and weather-related losses51.8 %(3.8)55.6 %52.1 %(2.8)54.9 %
Catastrophe and weather-related losses ratio1.8 %(1.1)2.9 %3.8 %(12.7)16.5 %
Current accident year loss ratio53.6 %(4.9)58.5 %55.9 %(15.5)71.4 %
Prior year reserve development ratio(1.0 %)(1.0)— %(0.7 %)(0.3)(0.4 %)
Net losses and loss expenses ratio52.6 %(5.9)58.5 %55.2 %(15.8)71.0 %
Acquisition cost ratio16.9 %(3.2)20.1 %18.0 %(2.1)20.1 %
Underwriting-related general and administrative expense ratio15.8 %0.215.6 %16.3 %(0.5)16.8 %
Combined ratio85.3 %(8.9)94.2 %89.5 %(18.4)107.9 %


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Gross Premiums Written

Gross premiums written by line of business were as follows:
  Three months ended June 30,Six months ended June 30,
  20212020
%
Change
20212020
%
Change
Property$320,393 26 %$278,841 27 %15%$582,179 25 %$502,444 25 %16%
Marine114,061 9 %116,398 11 %(2%)302,009 13 %272,694 14 %11%
Terrorism12,339 1 %11,008 1 %12%32,083 1 %27,528 1 %17%
Aviation29,742 2 %23,794 2 %25%50,143 2 %41,024 2 %22%
Credit and political risk43,140 3 %28,002 3 %54%80,592 3 %75,677 4 %6%
Professional lines463,796 37 %346,338 33 %34%801,561 34 %604,729 31 %33%
Liability241,630 19 %204,398 20 %18%434,781 18 %375,276 19 %16%
Accident and health43,481 3 %27,419 3 %59%88,328 4 %78,480 4 %13%
Discontinued lines - Novae(110)— %1,370 — %nm(6)— %431 — %nm
Total$1,268,472 100 %$1,037,568 100 %22%$2,371,670 100 %$1,978,283 100 %20%
nm – not meaningful

Gross premiums written for the three months ended June 30, 2021 increased by $231 million, or 22% ($214 million, or 21%, on a constant currency basis(1)), compared to the three months ended June 30, 2020. The increase was primarily attributable to professional lines, property, liability, accident and health, credit and political risk, and aviation lines.

The increases in professional lines, property, and liability lines were due to new business and favorable rate changes. The increases in accident and health, and credit and political risk lines was due to new business. In addition, the increase in credit and political risk lines was due to premium adjustments. The increase in aviation lines was due to premium adjustments, a timing difference and favorable rate.

Gross premiums written for the six months ended June 30, 2021 increased by $393 million, or 20% ($368 million, or 19%, on a constant currency basis(1)), compared to the six months ended June 30, 2020. The increase was primarily attributable to professional lines, property, liability, marine, accident and health, and aviation lines.

The increases in professional lines, property, liability, and marine lines were due to new business and favorable rate changes. The increase in accident and health lines was due to new business. The increase in aviation lines was due to premium adjustments, a timing difference and favorable rate..

Ceded Premiums Written

Ceded premiums written for the three months ended June 30, 2021, was $556 million, or 44%, of gross premiums written, compared to $435 million, or 42%, of gross premiums written for the three months ended June 30, 2020. The increase in ceded premiums written of $121 million, or 28%, was primarily driven by increases in professional lines, property, liability, accident and health, and credit and political risk lines.

Ceded premiums written for the six months ended June 30, 2021, was $951 million, or 40%, of gross premiums written, compared to $794 million, or 40%, of gross premiums written for the six months ended June 30, 2020. The increase in ceded premiums written of $157 million, or 20%, was primarily driven by increases in professional lines, property, liability, and accident and health lines, partially offset by a decrease in marine lines.





(1) Amounts presented on a constant currency basis are non-GAAP financial measures as defined in Item10 (e) of SEC Regulation S-K. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to the prior year balance.

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Net Premiums Earned

Net premiums earned by line of business were as follows:
  Three months ended June 30,Six months ended June 30,
  20212020
%
Change
20212020
%
Change
Property$155,768 22 %$156,876 27 %(1%)$316,867 25 %$307,158 26 %3%
Marine86,483 14 %75,760 13 %14%171,873 14 %143,704 13 %20%
Terrorism10,971 2 %10,584 2 %4%24,752 2 %22,947 2 %8%
Aviation23,407 4 %17,422 3 %34%41,127 3 %32,199 3 %28%
Credit and political risk22,770 4 %27,851 5 %(18%)43,770 4 %53,938 5 %(19%)
Professional lines212,009 34 %172,140 30 %23%415,268 33 %351,211 31 %18%
Liability85,371 14 %79,468 14 %7%163,083 13 %158,035 14 %3%
Accident and health34,826 6 %35,304 6 %(1%)71,022 6 %68,863 6 %3%
Discontinued lines - Novae70 — %1,614 — %nm200 — %1,028 — %nm
Total$631,675 100 %$577,019 100 %9%$1,247,962 100 %$1,139,083 100 %10%
nm – not meaningful

Net premiums earned for the three months ended June 30, 2021 increased by $55 million, or 9% ($42 million, or 7%, on a constant currency basis), compared to the three months ended June 30, 2020. The increase was primarily driven by increases in gross premiums earned in professional lines, liability, marine, and aviation lines, partially offset by increases in ceded premiums earned in professional lines and liability lines, and a decrease in gross premiums earned in credit and political risk lines.

Net premiums earned for the six months ended June 30, 2021 increased by $109 million, or 10% ($89 million, or 8%, on a constant currency basis), compared to the six months ended June 30, 2020. The increase was primarily driven by increases in gross premiums earned in professional lines, marine, property, and aviation lines, together with a decrease in ceded premiums earned in marine lines, partially offset by increases in ceded premiums earned in professional lines and property lines.

Loss Ratio

The components of the loss ratio were as follows:
  Three months ended June 30,Six months ended June 30,
2021
% Point
Change
20202021
% Point
Change
2020
Current accident year loss ratio53.6 %(4.9)58.5 %55.9 %(15.5)71.4 %
Prior year reserve development ratio(1.0 %)(1.0)— %(0.7 %)(0.3)(0.4 %)
Loss ratio52.6 %(5.9)58.5 %55.2 %(15.8)71.0 %

Current Accident Year Loss Ratio

The current accident year loss ratio decreased to 53.6% and 55.9% for the three and six months ended June 30, 2021, respectively, from 58.5% and 71.4% for the three and six months ended June 30, 2020, respectively.

The decrease in the current accident year loss ratio for three and six months ended June 30, 2021, compared to the same period in 2020, was impacted by a lower level of catastrophe and weather-related losses. During the three months ended June 30, 2021, catastrophe and weather-related losses were $11 million, or 1.8 points, primarily attributable to weather-related events. During the six months ended June 30, 2021, catastrophe and weather-related losses were $47 million, or 3.8 points, primarily attributable to Winter Storms Uri and Viola, and other weather-related events. Comparatively, during the three and six months ended June 30, 2020, catastrophe and weather-related losses, net of reinstatement premiums, were $16 million, or 2.9 points and $193 million, or 16.5 points, respectively.


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After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 51.8% for the three months ended June 30, 2021, from 55.6% for the three months ended June 30, 2020. The decrease in the current accident year loss ratio, after adjusting for the impact of the catastrophe and weather-related losses was principally due to the impact of favorable pricing over loss trends in liability, and property lines, and improved loss experience in property lines largely associated with repositioning the portfolio, and improved loss experience in marine lines.

After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 52.1% for the six months ended June 30, 2021, from 54.9% for the six months ended June 30, 2020. The decrease in the current accident year loss ratio, after adjusting for the impact of the catastrophe and weather-related losses was principally due to the impact of favorable pricing over loss trends in professional lines, liability, and property lines, and improved loss experience in property lines largely associated with repositioning the portfolio.

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 decreased to 16.9% and 18.0% for the three and six months ended June 30, 2021, respectively, from 20.1% and 20.1% for the three and six months ended June 30, 2020, respectively, principally related to changes in business mix and an increase in ceding commissions.

Underwriting-Related General and Administrative Expense Ratio

The underwriting-related general and administrative expense ratio of 15.8% for the three months ended June 30, 2021, was comparable to 15.6% for the three months ended June 30, 2020.

The underwriting-related general and administrative expense ratio decreased to 16.3% for the six months ended June 30, 2021, from 16.8% for the six months ended June 30, 2020, mainly driven by an increase in net premiums earned, partially offset by an increase in personnel costs and a decrease in fees related to arrangements with strategic capital partners.

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Reinsurance Segment

Results from the reinsurance segment were as follows:
  Three months ended June 30,Six months ended June 30,
  2021% Change20202021% Change2020
Revenues:
Gross premiums written$672,714 (1%)$678,615 $2,104,997 (3%)$2,169,058 
Net premiums written490,973 8%453,173 1,562,045 1%1,550,567 
Net premiums earned525,266 —%526,984 1,012,701 (4%)1,053,545 
Other insurance related income (loss)5,265 nm1,241 7,631 nm(8,113)
Expenses:
Current accident year net losses and loss expenses(334,679)(341,129)(696,312)(779,671)
Prior year reserve development381 2,235 4,194 4,516 
Acquisition costs(112,107)(112,243)(213,299)(238,142)
Underwriting-related general and administrative expenses(29,392)(24,073)(58,757)(53,257)
Underwriting income (loss) $54,734 $53,015 $56,158 $(21,122)
Ratios:
% Point
Change
% Point
Change
Current accident year loss ratio excluding catastrophe and weather-related losses60.4 %(0.2)60.6 %59.5 %(0.9)60.4 %
Catastrophe and weather-related losses ratio3.3 %(0.8)4.1 %9.3 %(4.3)13.6 %
Current accident year loss ratio63.7 %(1.0)64.7 %68.8 %(5.2)74.0 %
Prior year reserve development ratio(0.1 %)0.3(0.4 %)(0.5 %)(0.1)(0.4 %)
Net losses and loss expenses ratio63.6 %(0.7)64.3 %68.3 %(5.3)73.6 %
Acquisition cost ratio21.3 %—21.3 %21.1 %(1.5)22.6 %
Underwriting-related general and administrative expense ratio5.7 %1.14.6 %5.8 %0.85.0 %
Combined ratio90.6 %0.490.2 %95.2 %(6.0)101.2 %
nm – not meaningful

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Gross Premiums Written

Gross premiums written by line of business were as follows:
  Three months ended June 30,Six months ended June 30,
  20212020
% 
Change
20212020
% 
Change
Catastrophe$133,089 18 %$189,706 30 %(30%)$384,045 18 %$451,990 20 %(15%)
Property44,325 7 %54,763 8 %(19%)170,780 8 %187,952 9 %(9%)
Credit and surety37,413 6 %50,332 7 %(26%)120,634 6 %151,070 7 %(20%)
Professional lines148,398 22 %111,725 16 %33%279,653 13 %235,295 11 %19%
Motor39,781 6 %42,970 6 %(7%)263,304 13 %322,102 15 %(18%)
Liability182,106 27 %149,635 22 %22%451,308 21 %368,531 17 %22%
Engineering(2,502)— %3,006 — %nm(4,930)— %18,926 1 %nm
Agriculture46,874 7 %43,896 6 %7%63,314 3 %62,144 3 %2%
Marine and aviation25,613 4 %25,867 4 %(1%)57,954 3 %55,861 3 %4%
Accident and health16,934 3 %6,625 1 %nm318,252 15 %314,303 14 %1%
Discontinued lines - Novae683 — %90 — %nm683 — %884 — %(23%)
Total$672,714 100 %$678,615 100 %(1%)$2,104,997 100 %$2,169,058 100 %(3%)
nm – not meaningful

Gross premiums written for the three months ended June 30, 2021, decreased by $6 million, or 1%, compared to the three months ended June 30, 2020. The decrease was primarily attributable to catastrophe, credit and surety, property, and engineering lines, partially offset by increases in professional lines, liability, and accident and health lines.

The decrease in catastrophe lines was driven by non-renewals and decreased line sizes on a number of treaties bound in April and June. The decrease in credit and surety lines was driven by premium adjustments associated with the economic climate that prevailed in 2020. The decrease in property lines was driven by non-renewals and decreased line sizes associated with the repositioning of the portfolio. The decrease in engineering lines was driven by premium adjustments following the exit from this line of business in 2020.

The increases in professional lines and liability lines were driven by favorable market conditions associated with renewals and new business. In addition, the increase in professional lines was driven by premium adjustments associated with favorable market conditions. The increase in accident and health lines was driven by premium adjustments.

Gross premiums written for the six months ended June 30, 2021, decreased by $64 million, or 3% ($91 million, or 4%, on a constant currency basis), compared to the six months ended June 30, 2020. The decrease was primarily attributable to catastrophe, motor, credit and surety, engineering, and property lines, partially offset by increases in liability and professional lines.

The decreases in catastrophe, motor, and property lines were driven by non-renewals and decreased line sizes associated with the repositioning of the portfolio. The decrease in engineering lines was driven by non-renewals and premium adjustments following the exit from this line of business in 2020. The decrease in credit and surety lines was driven by premium adjustments and a reduced line size on a significant contract associated with the economic climate that prevailed in 2020.

The increases in liability and professional lines were driven by favorable market conditions associated with renewals and new business. In addition, the increase in professional lines was driven by premium adjustments associated with favorable market conditions.

Ceded Premiums Written

Ceded premiums written for the three months ended June 30, 2021, was $182 million, or 27%, of gross premiums written, compared to $225 million, or 33%, of gross premiums written for the three months ended June 30, 2020.



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The decrease in ceded premiums written of $44 million, or 19%, was primarily driven by catastrophe, property, and credit and surety lines, partially offset by increases in professional lines and liability lines.

The decrease in catastrophe lines was attributable to decreases in premiums ceded to strategic partners, the non-renewal of a significant excess of loss treaty and a significant fronting arrangement. The decrease in property lines was attributable to a non-renewal of an excess of loss treaty. The decrease in credit and surety lines was attributable to premium adjustments. The increases in professional lines and liability lines reflected the increase in gross premiums written for the three months ended June 30, 2021, compared to the three months ended June 30, 2020, compared to the three months ended June 30, 2020.

Ceded premiums written for the six months ended June 30, 2021, was $543 million, or 26%, of gross premiums written, compared to $618 million, or 29%, of gross premiums written for the six months ended June 30, 2020.

The decrease in ceded premiums written of $76 million, or 12%, was primarily driven by catastrophe, property, and credit and surety lines, partially offset by an increase in liability lines.

The decrease in catastrophe lines was attributable to the non-renewal of significant excess of loss treaties and decreases in premiums ceded to strategic partners, partially offset by additional costs associated with the purchase of catastrophe bond protection. The decrease in property lines was attributable to a non-renewal of a fronting arrangement and the non-renewal of significant excess of loss treaties. The decrease in credit and surety lines was attributable to premium adjustments. The increases in liability lines reflected the increase in gross premiums written for the six months ended June 30, 2021, compared to the six months ended June 30, 2020.

Net Premiums Earned

Net premiums earned by line of business were as follows:
  Three months ended June 30,Six months ended June 30,
  2021  2020  % Change2021  2020  % Change
Catastrophe$60,738 12 %$56,347 11 %8%$141,520 14 %$130,822 12 %8%
Property63,252 12 %66,796 13 %(5%)118,588 12 %133,523 13 %(11%)
Credit and surety37,539 7 %47,745 9 %(21%)72,972 7 %91,258 9 %(20%)
Professional lines61,506 12 %51,095 10 %20%112,353 11 %100,058 9 %12%
Motor68,051 13 %78,510 15 %(13%)123,001 12 %140,478 13 %(12%)
Liability106,527 20 %100,333 19 %6%198,567 20 %197,246 19 %1%
Engineering6,297 1 %15,861 3 %(60%)13,440 1 %29,194 3 %(54%)
Agriculture16,985 3 %17,907 3 %(5%)32,299 3 %40,199 4 %(20%)
Marine and aviation14,302 3 %12,684 2 %13%25,535 3 %22,538 2 %13%
Accident and health89,420 17 %79,597 15 %12%173,777 17 %167,216 16 %4%
Discontinued lines - Novae649 — %109 — %nm649 — %1,013 — %(36%)
Total$525,266 100 %$526,984 100 %—%$1,012,701 100 %$1,053,545 100 %(4%)
nm – not meaningful

Net premiums earned for the three months ended June 30, 2021, decreased by $2 million ($6 million, or 1%, on a constant currency basis), compared to the three months ended June 30, 2020. The decrease was primarily driven by decreases in gross premiums earned in credit and surety, engineering, and motor lines, together with an increase in ceded premiums earned in professional lines, partially offset by increases in gross premiums earned in professional lines and accident and health lines, and a decrease in ceded premiums earned in credit and surety lines.

Net premiums earned for the six months ended June 30, 2021, decreased by $41 million, or 4%, compared to the six months ended June 30, 2020. The decrease was primarily driven by decreases in gross premiums earned in credit and surety, property, catastrophe, engineering, and motor lines, together with an increase in ceded premiums earned in professional lines, partially offset by decreases in ceded premiums earned in catastrophe, credit and surety, and property lines, and an increase in gross premiums earned in professional lines.



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Other Insurance Related Income (Loss)

Other insurance related income of $5 million for the three months ended June 30, 2021, compared to other insurance related income of $1 million for the three months ended June 30, 2020 was primarily associated with fees related to arrangements with strategic capital partners.

Other insurance related income was $8 million for the six months ended June 30, 2021, compared to other insurance related loss of $8 million for the six months ended June 30, 2020. The other insurance related income for the six months ended June 30, 2021, was primarily associated with fees related to arrangements with strategic capital partners. The other insurance related loss for the six months ended June 30, 2020 was primarily due to the recognition of a full limit loss of $10 million associated with the WHO pandemic risk-linked swap.

Loss Ratio

The components of the loss ratio were as follows:
  Three months ended June 30,Six months ended June 30,
  2021
% Point
Change
20202021
% Point
Change
2020
Current accident year loss ratio63.7 %(1.0)64.7 %68.8 %(5.2)74.0 %
Prior year reserve development ratio(0.1 %)0.3(0.4 %)(0.5 %)(0.1)(0.4 %)
Loss ratio63.6 %(0.7)64.3 %68.3 %(5.3)73.6 %

Current Accident Year Loss Ratio

The current accident year loss ratio decreased to 63.7% and 68.8% for the three and six months ended June 30, 2021, respectively, from 64.7% and 74.0% for the three and six months ended June 30, 2020, respectively.

The decrease in the current accident year loss ratio for three and six months ended June 30, 2021, compared to the same period in 2020, was impacted by a lower level of catastrophe and weather-related losses. During the three months ended June 30, 2021, catastrophe and weather-related losses were $17 million, or 3.3 points, primarily attributable to weather-related events. During the six months ended June 30, 2021, catastrophe and weather-related losses, net of reinstatement premiums, were $92 million, or 9.3 points, primarily attributable to Winter Storms Uri and Viola and other weather-related events. Comparatively, during the three and six months ended June 30, 2020, catastrophe and weather-related losses, net of reinstatement premiums were $20 million, or 4.1 points and $143 million or 13.6%, respectively.

After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 60.4% for the three months ended June 30, 2021, from 60.6% for the three months ended June 30, 2020. The decrease in the current accident year loss ratio after adjusting for the impact of catastrophe and weather-related losses was principally due the impact of favorable pricing over loss trends attributable to most lines of business and changes in business mix, partially offset by the impact of changes to retrocessional arrangements.

After adjusting for the impact of the catastrophe and weather-related losses, the current accident year loss ratio decreased to 59.5% for the six months ended June 30, 2021, from 60.4% for the six months ended June 30, 2020. The decrease in the current accident year loss ratio after adjusting for the impact of catastrophe and weather-related losses was principally due to the impact of favorable pricing over loss trends attributable to most lines of business and changes in business mix, partially offset by the impact of changes to retrocessional arrangements and an increase in loss experience in property lines.



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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 was 21.3% for the three months ended June 30, 2021 and for the three months ended June 30, 2020.

The acquisition cost ratio decreased to 21.1% for the six months ended June 30, 2021, from 22.6% for the six months ended June 30, 2020, principally due to changes in business mix and the impact of retrocessional contracts, partially offset by adjustments related to loss sensitive features.

Underwriting-Related General and Administrative Expense Ratio:

The underwriting-related general and administrative expense increased to 5.7% for the three months ended June 30, 2021, from 4.6% for the three months ended June 30, 2020, mainly driven by a decrease in fees related to arrangements with strategic capital partners and an increase in performance-related compensation costs.

The underwriting-related general and administrative expense increased to 5.8% for the six months ended June 30, 2021, from 5.0% for the six months ended June 30, 2020, mainly driven by a decrease in fees related to arrangements with strategic capital partner, an increase in performance-related compensation costs and a decrease in net premiums earned.


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NET INVESTMENT INCOME AND NET INVESTMENT GAINS (LOSSES)

Net Investment Income

Net investment income from our cash and investment portfolio by major asset class was as follows:
  Three months ended June 30,Six months ended June 30,
  2021% Change20202021% Change2020
Fixed maturities$61,244(24%)$80,459$130,714(23%)$170,402
Other investments41,414nm(37,580)83,248nm(39,700)
Equity securities3,10037%2,2635,59828%4,387
Mortgage loans4,35519%3,6608,54111%7,713
Cash and cash equivalents617(74%)2,3922,953(60%)7,323
Short-term investments66(82%)366199(89%)1,863
Gross investment income110,796nm51,560231,25352%151,988
Investment expense(6,124)(6%)(6,520)(12,417)(10%)(13,848)
Net investment income$104,672nm$45,040$218,83658%$138,140
Pre-tax yield:(1)
Fixed maturities2.0 %2.7 %2.2 %2.8 %
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, 2021 was $61 million and $131 million, respectively, compared to net investment income of $80 million and $170 million for the three and six months ended June 30, 2020, respectively. The decrease for the three and six months ended June 30, 2021, compared to the same period in 2020, was due to the decrease in yields.

Other Investments

Net investment income from other investments was as follows:
  Three months ended June 30,Six months ended June 30,
  2021202020212020
Hedge, direct lending, private equity and real estate funds$39,678$(35,182)$62,451$(36,534)
Other privately held investments64(76)18,5434
CLO-Equities1,672(2,322)2,254(3,170)
Net investment income (loss) from other investments (1)
$41,414$(37,580)$83,248$(39,700)
Pre-tax return on other investments(2)
5.0 %(5.1 %)10.3 %(5.5 %)
(1)Excluding overseas deposits.
(2)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, excluding overseas deposits.

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Net investment income attributable to other investments for the three and six months ended June 30, 2021 was $41 million and $83 million, respectively, compared to net investment loss of $38 million and $40 million for the three and six months ended June 30, 2020, respectively. The increase for the three and six months ended June 30, 2021, compared to the same period in 2020, was due to higher returns from direct lending, private equity and real estate funds.

Net Investment Gains (Losses)

Net investment gains (losses) were as follows:
  Three months ended June 30,Six months ended June 30,
  2021202020212020
On sale of investments:
Fixed maturities and short-term investments$46,827 $(4,039)$77,628 $13,127 
Equity securities4,406 18,918 4,886 18,156 
 51,233 14,879 82,514 31,283 
Change in allowance for expected credit losses150 13,761 239 (6,257)
Impairment losses— (112)— (1,302)
Change in fair value of investment derivatives(847)154 901 3,316 
Net unrealized gains (losses) on equity securities22,757 24,361 19,282 (36,871)
Net investment gains (losses)$73,293 $53,043 $102,936 $(9,831)

Net investment gains for the three months ended June 30, 2021 were $73 million, compared to net investment gains of $53 million for the three months ended June 30, 2020. 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. For the three months ended June 30, 2020, the net investment gains were primarily due to net unrealized gains on equity securities, net realized gains on equity securities and a reduction in the allowance for expected credit losses on corporate debt securities.

Net investment gains for the six months ended June 30, 2021 were $103 million, compared to net investment losses of $10 million for the six months ended June 30, 2020. 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. For the six months ended June 30, 2020, the net investment losses were primarily due to net unrealized losses on equity securities and an allowance for expected credit losses on corporate debt securities, partially offset by net realized gains on the sale of equities, U.S. government, and agency RMBS 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, 2021 were $nil, compared to impairment losses of $nil and $1 million for the three and six months ended June 30, 2020. For the three and six months ended June 30, 2020, these losses were principally due to impairments of non-investment grade corporate debt securities that we intend to sell or more likely than not will be required to sell.








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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, 2021, we recorded losses of $1 million and gains of $1 million, respectively, related to foreign exchange contracts. For the three and six months ended June 30, 2020, we recorded gains of $nil and $3 million, respectively, related to foreign exchange contracts.

Total Return

Total return on cash and investments was as follows:
  Three months ended June 30,Six months ended June 30,
  2021202020212020
Net investment income$104,672$45,040$218,836$138,140
Net investments gains (losses)73,29353,043102,936(9,831)
Change in net unrealized gains (losses) on fixed maturities (1)
9,811406,534(217,084)131,777
Interest in income (loss) of equity method investments9,7997,10218,960(16,475)
Total$197,575$511,719$123,648$243,611
Average cash and investments(2)
$15,864,451$15,190,181$15,817,566$15,487,375
Total return on average cash and investments, pre-tax:
Including investment related foreign exchange movements1.2 %3.4 %0.8 %1.6 %
Excluding investment related foreign exchange movements(3)
1.2 %3.3 %0.8 %1.9 %
(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 $7 million and $13 million for the three months ended June 30, 2021 and 2020, respectively, foreign exchange (losses) gains of $(5) million and $(48) million for the six months ended June 30, 2021 and 2020, 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,
  2021% Change20202021% Change2020
Corporate expenses$33,491 25%$26,828 $59,231 10%$53,926 
Foreign exchange losses (gains)19,602 nm9,709 23,716 nm(51,974)
Interest expense and financing costs15,235 (26%)20,595 30,806 (30%)44,067 
Income tax expense27,865 nm10,893 48,641 nm6,026 
Total$96,193 $68,025 $162,394 $52,045 
nm – not meaningful



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Corporate Expenses

Corporate expenses include holding company costs necessary to support our worldwide insurance and reinsurance operations and costs associated with operating as a publicly-traded company. As a percentage of net premiums earned, corporate expenses increased to 2.9% and 2.6% for the three and six months ended June 30, 2021, respectively, from 2.4% and 2.5% for the three and six months ended June 30, 2020, respectively.

The increases in corporate expenses for the three months ended and six months ended June 30, 2021 were primarily related to an increase in personnel and performance-related compensation costs, partially offset by a decrease in information technology costs.

Foreign Exchange Losses (Gains)

Some of our business is written in currencies other than the U.S. dollar. 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.

Foreign exchange losses of $10 million for the three months ended June 30, 2020 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.

Foreign exchange gains of $52 million for the six months ended June 30, 2020 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.

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 decreased by $5 million and $13 million for the three and six months ended June 30, 2021, respectively, compared to the same period in 2020, due to the repayment of the 5.875% Senior Notes on June 1, 2020.

Income Tax Expense (Benefit)

Income tax expense (benefit) primarily results from income (loss) generated by our foreign 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 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.

The tax expense of $11 million for the three months ended June 30, 2020 was principally due to the generation of pre-tax income in our U.K., European, and U.S. operations. The tax expense of $6 million for the six months ended June 30, 2020, was principally due to the generation of pre-tax income in our U.S. and European operations, partially offset by pre-tax losses in our U.K. operations.

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FINANCIAL MEASURES

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,
  2021202020212020
Annualized return on average common equity(1)
19.3 %10.0 %14.3 %(3.1 %)
Annualized operating return on average common equity(2)
14.4 %6.3 %10.6 %(3.9 %)
Book value per diluted common share(3)
$55.50$55.09$55.50$55.09
Cash dividends declared per common share$0.42$0.41$0.84$0.82
Increase (decrease) in book value per diluted common share adjusted for dividends$2.89$5.72$2.08$0.73
(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 the presentation of this item 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 diluted common shares outstanding, determined using the treasury stock method. Cash-settled restricted stock units are excluded.

Return on Average Common Equity
Our objective is to generate superior returns on capital that appropriately reward common shareholders for the risks we assume and to grow revenue only when we expect the returns will meet or exceed our requirements. We recognize that the nature of underwriting cycles and the frequency or severity of large loss events in any one year may challenge the ability to achieve a profitability target in any specific period.

ROACE reflects the impact of net income (loss) available (attributable) to common shareholders including net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.

The increase in ROACE for the three months ended June 30, 2021, compared to the three months ended June 30, 2020, was primarily driven by increases in net investment income, underwriting income, and net investment gains, together with a decrease in interest expense and financing costs, partially offset by increases in income tax expense, foreign exchange losses, and corporate expenses.

The increase in ROACE for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, was primarily driven by increases in underwriting income, net investment gains, net investment income, interest in income of equity method investments, together with a decrease in interest expense and financing costs, partially offset by the foreign exchange losses and an increase in income tax expense.

Operating ROACE excludes the impact of net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.

The increase in operating ROACE for the three months ended June 30, 2021, compared to the three months ended June 30, 2020, was primarily driven by increases net investment income and underwriting income, together with a decrease in interest expense and financing costs, partially offset by increases in income tax expense and corporate expenses.

The increase in operating ROACE for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, was primarily driven by increases in underwriting income and net investment income, together with a decrease in interest expense and financing costs, partially offset by an increase in income tax expense.



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Book Value per Diluted Common Share

We consider book value per diluted common share to be an appropriate measure of returns to common shareholders, as we believe growth in book value on a diluted basis will ultimately translate into appreciation of stock price.

During the three months ended June 30, 2021, book value per diluted common share increased by 5% due to net income generated in the period, partially offset by common dividends declared.

During the six months ended June 30, 2021, book value per diluted common share increased by 1% due to net income generated in the period, partially offset by a decrease in net unrealized gains reported in accumulated other comprehensive income and common dividends declared.

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 seventeen 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, 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.

During the three months ended June 30, 2020, the increase in total value of $5.72, or 11% was driven by the net income generated in the period and unrealized investment gains reported in accumulated other comprehensive income.

During the six months ended June 30, 2020, the increase in total value of $0.12 was driven by net unrealized investment gains recognized in accumulated other comprehensive income, partially offset by the net loss generated in the period.

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NON-GAAP FINANCIAL MEASURES RECONCILIATION

Three months ended June 30,Six months ended June 30,
2021202020212020
Net income (loss) available (attributable) to common shareholders$227,910$112,477$343,645$(72,908)
Net investment (gains) losses(1)
(73,293)(53,043)(102,936)9,831
Foreign exchange losses (gains)(2)
19,6029,70923,716(51,974)
Reorganization expenses(3)
—392—(591)
Interest in (income) loss of equity method investments(4)
(9,799)(7,102)(18,960)16,475
Income tax expense 6,0889,0707,7826,259
Operating income (loss)$170,508$71,503$253,247$(92,908)
Earnings (loss) per diluted common share$2.67$1.33$4.04$(0.87)
Net investment (gains) losses(0.86)(0.63)(1.21)0.12
Foreign exchange losses (gains)0.230.110.28(0.62)
Reorganization expenses———(0.01)
Interest in (income) loss of equity method investments(0.11)(0.08)(0.22)0.20
Income tax expense 0.070.110.090.07
Operating income (loss) per diluted common share(5)
$2.00$0.84$2.98$(1.11)
Weighted average diluted common shares outstanding(6)
85,26784,60085,11784,198
Average common shareholders' equity$4,733,075$4,518,699$4,792,727$4,758,414
Annualized return on average common equity19.3 %10.0 %14.3 %(3.1 %)
Annualized operating return on average common equity(7)
14.4 %6.3 %10.6 %(3.9 %)
(1)Tax expense (benefit) of $7,491 and $8,114 for the three months ended June 30, 2021 and 2020, respectively, and $8,975 and $2,437 for the six months ended June 30, 2021 and 2020, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the ability to utilize capital losses.
(2)Tax expense (benefit) of ($1,403) and $1,084 for the three months ended June 30, 2021 and 2020, respectively, and ($1,193) and $3,611 for the six months ended June 30, 2021 and 2020, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions, after consideration of other relevant factors including the tax status of specific foreign exchange transactions.
(3)Tax expense (benefit) of ($128) for the three months ended June 30, 2020 and $211 for the six months ended June 30, 2020, respectively. 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, 2021 and 2020, respectively. Tax impact is estimated by applying the statutory rates of applicable jurisdictions.
(5)Loss per diluted common share and operating loss per diluted common share for the six months ended June 30, 2020 were calculated using weighted average common shares outstanding due to the net loss attributable to common shareholders and the operating loss recognized in the period.
(6)Refer to Item 1, Note 7 to our Consolidated Financial Statements 'Earnings per Common Share' for further details.
(7)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.


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Rationale for the Use of Non-GAAP Financial Measures

We present our results of operations in a way we believe will be meaningful and useful to investors, analysts, rating agencies and others who use our financial information to evaluate our performance. Some of the measurements we use are considered non-GAAP financial measures 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) are not a meaningful contributor to our underwriting performance, therefore, foreign exchange losses (gains) are excluded from consolidated underwriting income (loss).

Interest expense and financing costs primarily relate to interest payable on our debt. As these expenses are not incremental and/or directly attributable to our underwriting operations, these expenses are excluded from underwriting-related general and administrative expenses, and therefore, consolidated underwriting income (loss).

Reorganization expenses are related to the transformation program which was launched in 2017. This program encompasses the integration of Novae Group plc ("Novae"), which commenced in the fourth quarter of 2017, the realignment of our accident and health business, together with other initiatives designed to increase efficiency and enhance profitability, while delivering a customer-centric operating model. Reorganization expenses are primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from consolidated underwriting income (loss).


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Amortization of intangible assets including value of business acquired ('VOBA") arose from business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from consolidated underwriting income (loss).

We believe that the presentation of underwriting-related general and administrative expenses and consolidated underwriting income (loss) provides investors with an enhanced understanding of our results of operations, by highlighting the underlying pre-tax profitability of our underwriting activities. The reconciliation of consolidated underwriting income (loss) to net income (loss), the most comparable GAAP financial measure, is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Consolidated Results of Operations'.

Operating Income (Loss)

Operating income (loss) represents after-tax operational results exclusive of net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments.

Although the investment of premiums to generate income and investment gains (losses) is an integral part of our operations, the determination to realize investment gains (losses) is independent of the underwriting process and is heavily influenced by the availability of market opportunities. Furthermore, many users believe that the timing of the realization of investment gains (losses) is somewhat opportunistic for many companies.

Foreign exchange losses (gains) in our consolidated statements of operations primarily relate to the impact of foreign exchange rate movements on net insurance-related liabilities. In addition, we recognize unrealized foreign exchange losses (gains) on our equity securities and foreign exchange losses (gains) realized on the sale of our available for sale investments and equity securities in net investment gains (losses). We also recognize unrealized foreign exchange losses (gains) on our available for sale investments in other comprehensive income (loss). These unrealized foreign exchange losses (gains) generally offset a large portion of the foreign exchange losses (gains) reported in net income (loss), thereby minimizing the impact of foreign exchange rate movements on total shareholders' equity. As a result, foreign exchange losses (gains) in our consolidated statements of operations in isolation are not a meaningful contributor to the performance of our business.

Reorganization expenses are related to the transformation program which was launched in 2017. This program encompasses the integration of Novae, which commenced in the fourth quarter of 2017, the realignment of our accident and health business, together with other initiatives designed to increase efficiency and enhance profitability, while delivering a customer-centric operating model. Reorganization expenses are primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, these expenses are excluded from operating income (loss).

Interest in income (loss) of equity method investments is primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore, this income (loss) is excluded from operating income (loss).

Certain users of our financial statements evaluate performance exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments to understand the profitability of recurring sources of income.

We believe that showing net income (loss) available (attributable) to common shareholders exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), reorganization expenses, and interest in income (loss) of equity method investments reflects the underlying fundamentals of our business. In addition, we believe that this presentation enables investors and other users of our financial information to analyze performance in a manner similar to how our management analyzes the underlying business performance. We also believe this measure follows industry practice and, therefore, facilitates comparison of our performance with our peer group. We believe that equity analysts and certain rating agencies that follow us, and the insurance industry as a whole, generally exclude these items from their analyses for the same reasons. The reconciliation of operating income (loss) to net income (loss) available (attributable) to common shareholders, the most comparable GAAP financial measure, is presented above.

We also present operating income (loss) per diluted common share and 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.

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Constant Currency Basis

We present gross premiums written, net premiums written and net premiums earned on a constant currency basis in this MD&A. The amounts presented on a constant currency basis are calculated by applying the average foreign exchange rate from the current year to the prior year amounts. We believe this presentation enables investors and other users of our financial information to analyze growth in gross premiums written, net premiums written and net premiums earned on a constant basis. The reconciliation to gross premiums written, net premiums written and net premiums earned on a GAAP basis is presented in 'Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results by Segment'.

Pre-Tax Total Return on Cash and Investments excluding Foreign Exchange Movement

Pre-tax total return on cash and investments excluding foreign exchange movements measures net investment income (loss), net investments gains (losses), interest in income (loss) of equity method investments, and change in unrealized gains (losses) generated by average cash and investment balances. 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)'. We believe this presentation enables investors and other users of our financial information to analyze the performance of our investment portfolio.


CASH AND INVESTMENTS

Details of cash and investments are as follows:
  June 30, 2021December 31, 2020
  Fair ValueFair Value
Fixed maturities, available for sale$11,898,300 $12,041,799 
Fixed maturities, held to maturity(1)
403,034 — 
Equity securities588,196 518,445 
Mortgage loans656,056 593,290 
Other investments865,238 829,156 
Equity method investments133,169 114,209 
Short-term investments112,862 161,897 
Total investments$14,656,855 $14,258,796 
Cash and cash equivalents(2)
$1,589,443 $1,503,232 
(1)Presented at net carrying value of $403 million (2020: $nil) in the consolidated balance sheets.
(2)Includes restricted cash and cash equivalents of $590 million and $600 million at June 30, 2021 and at December 31, 2020, respectively.




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Overview

The fair value of total investments increased by $398 million in the six months ended June 30, 2021, driven by cash inflows from operations, partially offset by the decrease in market value of fixed maturities due to the increase in yields.

An analysis of our investment portfolio by asset class is detailed below:

Fixed Maturities

Details of our fixed maturities portfolio are as follows:
  June 30, 2021December 31, 2020
  Fair Value% of TotalFair Value% of Total
Fixed maturities:
U.S. government and agency$2,551,940 21 %$1,918,699 16 %
Non-U.S. government680,572 6 %671,273 6 %
Corporate debt4,499,394 37 %4,655,951 39 %
Agency RMBS1,044,556 8 %1,286,209 11 %
CMBS1,144,592 9 %1,353,587 11 %
Non-agency RMBS207,489 2 %140,104 1 %
ABS1,902,673 15 %1,720,078 14 %
Municipals(1)
270,118 2 %295,898 2 %
Total$12,301,334 100 %$12,041,799 100 %
Credit ratings:
U.S. government and agency$2,551,940 21 %$1,918,699 16 %
AAA(2)
4,328,173 35 %4,551,312 37 %
AA906,128 7 %913,707 8 %
A1,792,264 15 %1,896,407 16 %
BBB1,623,363 13 %1,732,058 14 %
Below BBB(3)
1,099,466 9 %1,029,616 9 %
Total$12,301,334 100 %$12,041,799 100 %
(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, 2021, fixed maturities had a weighted average credit rating of AA- (2020: AA-), a book yield of 2.0% (2020: 2.3%) and an average duration of 3.1 years (2020: 3.3 years). At June 30, 2021, fixed maturities together with short-term investments, and cash and cash equivalents (i.e. total investments of $14.0 billion), had an average credit rating of AA- (2020: AA-) and an average duration of 2.8 years (2020: 3.0 years).

At June 30, 2021, net unrealized gains on fixed maturities were $260 million, compared to net unrealized gains of $475 million at December 31, 2020, a decrease of $215 million due to the increase in yields.

Equity Securities

At June 30, 2021, net unrealized gains on equity securities were $116 million, compared to net unrealized gains of $97 million at December 31, 2020, an increase of $19 million driven by the rally in equity markets.

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Mortgage Loans

During the six months ended June 30, 2021, our investment in commercial mortgage loans increased by $63 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, 2021, there were no credit losses or past due amounts associated with our commercial mortgage loans portfolio.

Other Investments

Details of our other investments portfolio are as follows:
June 30, 2021December 31, 2020
  Fair Value% of TotalFair Value% of Total
Hedge funds
Long/short equity funds$3,774 — %$25,300 3 %
Multi-strategy funds108,974 13 %121,420 15 %
Total hedge funds112,748 13 %146,720 18 %
Direct lending funds288,404 33 %272,131 33 %
Private equity funds190,465 22 %124,706 15 %
Real estate funds201,833 23 %164,250 20 %
Total hedge, direct lending, private equity and real estate funds793,450 91 %707,807 86 %
CLO-Equities7,002 2 %6,173 1 %
Other privately held investments64,786 7 %70,011 8 %
Overseas deposits— — %45,165 5 %
Total other investments$865,238 100 %$829,156 100 %

Refer to Note 3(c) to the Consolidated Financial Statements 'Investments'.

Equity Method Investments

During 2016, we paid $108 million including direct transactions 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"). Harrington is not a variable interest entity that is required to be included in our consolidated financial statements. We account for our ownership interest in Harrington under the equity method of accounting.

In our consolidated results, our ownership interest in Harrington is reported in interest in income (loss) of equity method investments.
Interest in income of equity method investments was $10 million and $19 million for the three and six months ended June 30, 2021, respectively, compared to interest in income (loss) of equity method investments of $7 million and ($16 million) for the three and six months ended June 30, 2020, respectively. The income for the three and six months ended June 30, 2021 was attributable to positive investment returns realized by Harrington.


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LIQUIDITY AND CAPITAL RESOURCES

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, 2020 for a general discussion of liquidity and capital resources.

The following table summarizes consolidated capital:
June 30, 2021December 31, 2020
Debt$1,310,328 $1,309,695 
Preferred shares550,000 550,000 
Common equity4,839,760 4,745,694 
Shareholders’ equity5,389,760 5,295,694 
Total capital$6,700,088 $6,605,389 
Ratio of debt to total capital19.6 %19.8 %
Ratio of debt and preferred equity to total capital27.8 %28.2 %

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. We believe that our financial flexibility remains strong. Refer to Item 1, Note 10 to the Consolidated Financial Statements 'Debt and Financing Arrangements' for recent changes to our capital structure.

Common Equity

During the six months ended June 30, 2021, common equity increased by $94 million. The following table reconciles opening and closing common equity positions:
Six months ended June 30,2021
Common equity - opening$4,745,694 
Treasury shares reissued1,145 
Share-based compensation expense20,274 
Change in unrealized gains (losses) on available for sale investments, net of tax(192,809)
Foreign currency translation adjustment4,731 
Net income (loss)358,770 
Preferred share dividends(15,125)
Common share dividends(73,101)
Treasury shares repurchased(9,819)
Common equity - closing$4,839,760 

During the six months ended June 30, 2021, we repurchased 197,000 common shares from employees to satisfy withholding tax liabilities related to the vesting of share-settled restricted stock units granted under our Amended and Restated 2007 and 2017 Long-Term Equity Compensation Plans for a total cost of $9.8 million.

A common share repurchase plan has not been authorized for 2021.

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.

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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 and fixed maturities, held to maturity securities.

Other than our consideration of the impact of the allowance for expected credit losses associated with fixed maturities, held to maturity securities detailed in Note 1 'Basis of Presentation and Significant Accounting Policies' to the consolidated financial statements, 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, 2020, continue to describe the significant estimates and judgments included in the preparation of the consolidated financial statements.


RECENT ACCOUNTING PRONOUNCEMENTS

At June 30, 2021, there were no recently issued accounting pronouncements that we have not yet adopted that we expect could have a material impact on our results of operations, financial condition or liquidity.
 

OFF-BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS

At June 30, 2021, the Company had not entered into any off-balance sheet arrangements, as defined by Item 303(a)(4) of Regulation S-K.


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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, 2020. There have been no material changes to this item since December 31, 2020, 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.
AUDNZDCADEURGBPJPYOtherTotal
At June 30, 2021
Net managed assets (liabilities), excluding derivatives
$18,330 $11,364 $293,756 $(387,809)$(226,323)$(72,618)$89,010 $(274,290)
Foreign currency derivatives, net
(14,243)(5,933)(291,344)420,735 214,601 77,865 (59)401,621 
Net managed foreign currency exposure
4,087 5,431 2,412 32,926 (11,722)5,247 88,951 127,331 
Other net foreign currency exposure1 — 110 (1,837)(1,932)— 35,704 32,046 
Total net foreign currency exposure$4,088 $5,431 $2,522 $31,089 $(13,654)$5,247 $124,655 $159,377 
Net foreign currency exposure as a percentage of total shareholders’ equity
0.1 %0.1 %— %0.6 %(0.3 %)0.1 %2.3 %3.0 %
Pre-tax impact of net foreign currency exposure on shareholders’ equity given a hypothetical 10% rate movement(1)
$409 $543 $252 $3,109 $(1,365)$525 $12,465 $15,938 
(1)Assumes 10% change in underlying currencies relative to the U.S. dollar.

Total Net Foreign Currency Exposure

At June 30, 2021, total net foreign currency assets were $159 million driven by increases in exposures to the euro and other non-core currencies primarily due to new business written during the six months ended June 30, 2021. In addition, $36 million included in other net foreign currency exposures related to assets managed by specific investment managers who have the discretion to hold foreign currency exposures as part of their total return strategy. An emerging market debt portfolio is the primary contributor to this group of assets.




















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ITEM 4.     CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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, 2021. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, at June 30, 2021, 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, 2021.

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, 2021 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 remote work model due to the COVID-19 pandemic.


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, 2020.







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ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities
Common Shares
The following table shows information regarding the number of common shares repurchased:
Period
Total number
of shares
purchased(a) (b)
Average
price paid
per share
Total number of shares purchased as part of
publicly announced
plans or programs
Maximum number (or approximate
dollar value) of shares that may yet be
purchased under the plans
or programs(b)
April 1-30, 20214 $50.76 — — 
May 1-31, 20212 $55.80 — — 
June 1-30, 20212 $53.87 — — 
Total  
8  — — 
(a)        In thousands.
(b)        Shares are repurchased from employees to satisfy withholding tax liabilities related to the vesting of share-settled restricted stock units.



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 reinsurance portfolios may have some exposure to Iran. In addition, we underwrite 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, 2021, 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.

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ITEM 6.     EXHIBITS
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).
Amended and Restated Bye-Laws (incorporated by reference to Exhibit 4.2 to the Company’s Registration Statement on Form S-8 filed on May 15, 2009).
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).
Amendment No. 2 to Employment Agreement dated June 17, 2021 by and between Peter Vogt and AXIS Specialty U.S. Services, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on June 21, 2021).
Amendment No. 1 to Employment Agreement dated June 17, 2021 by and between David Phillips and AXIS Specialty U.S. Services, Inc. (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on June 21, 2021).
Employment Agreement dated May 21, 2021 by and between AXIS Re SE, Dublin (Zurich Branch) and Steve K. Arora (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 26, 2021).
Employment Agreement dated May 21, 2021 by and between AXIS Re SE, Dublin (Zurich Branch) and Steve K. Arora (incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed on May 26, 2021).
AXIS Capital Holdings Limited Amended and Restated 2017 Long-Term Equity Compensation Plan (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 11, 2021).
Deed of Amendment dated April 1, 2021 to Committed Letter of Credit Facility dated December 18, 2015, as amended, by and among, AXIS Specialty Limited, AXIS Re SE, AXIS Specialty Europe SE, AXIS Insurance Company, AXIS Reinsurance Company, AXIS Surplus Insurance Company and Citibank Europe plc. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 6, 2021).
Deed of Amendment dated April 1, 2021 to Committed Letter of Credit Facility Number 2 dated March 27, 2017, as amended, by and among, AXIS Specialty Limited, AXIS Re SE, AXIS Specialty Europe SE, AXIS Insurance Company, AXIS Reinsurance Company, AXIS Surplus Insurance Company and Citibank Europe plc. (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on April 6, 2021).
†31.1
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
†31.2
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
†32.1
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
†32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
†101The following financial information from AXIS Capital Holdings Limited’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 formatted in Inline XBRL: (i) Consolidated Balance Sheets at June 30, 2021 and December 31, 2020; (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2021 and 2020; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and 2020; (iv) Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2021 and 2020; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020; and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.
†104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*    Exhibits 10.1 and 10.5 represent a management contract, compensatory plan or 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.

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SIGNATURES

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.
Dated: July 27, 2021
 
AXIS CAPITAL HOLDINGS LIMITED
By:/S/ ALBERT BENCHIMOL
Albert Benchimol
President and Chief Executive Officer
(Principal Executive Officer)
/S/ PETER VOGT
Peter Vogt
Chief Financial Officer
(Principal Financial Officer)


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