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AXIS Capital Reports Third Quarter 2017 Results

-AXIS Capital Holdings Limited ("AXIS Capital" or "the Company") (NYSE: AXS) today reported net loss attributable to common shareholders for the third quarter of 2017 of $468 million, or $(5.61) per diluted common share, compared to net income of $177 million, or $1.96 per diluted common share, for the third quarter of 2016. Net loss attributable to common shareholders for the nine months ended September 30, 2017 was $378 million, or $(4.47) per diluted common share, compared with net income of $335 million, or $3.61 per diluted common share, for the corresponding period in 2016.

Non-GAAP operating loss for the third quarter of 2017 was $446 million, or $(5.35) per diluted common share, compared to non-GAAP operating income of $161 million, or $1.78 per diluted common share, for the third quarter of 2016. For the nine months ended September 30, 2017, AXIS Capital reported non-GAAP operating loss of $284 million, or $(3.37) per diluted common share, compared with non-GAAP operating income of $309 million, or $3.34 per diluted common share for the first nine months of 2016.

Non-GAAP operating income (loss) and non-GAAP operating income (loss) per diluted common share are "non-GAAP financial measures" as defined in SEC Regulation G. The reconciliations of non-GAAP measures to the most comparable GAAP financial measures (net income (loss) available to common shareholders and diluted earnings per common share, respectively) are provided in this release, as is a discussion of the rationale for the presentation of these items.

 

Commenting on the third quarter 2017 financial results, Albert Benchimol, President and CEO of AXIS Capital, said:

"During the month of September, our industry experienced substantial natural catastrophe loss activity, comparable to full year levels incurred in 2005 and 2011, which were the highest catastrophe loss years on record. Our thoughts are with the victims of these natural catastrophes, who are in many cases still far from resuming a semblance of normal life. Our staff remains committed to supporting those in need and resolving claims as expeditiously as possible. We know that the aftermath of catastrophic events is a time when our clients depend on us the most, and here at AXIS, we take pride in demonstrating the real value of our products and services.

"The financial impact of this series of events was consistent with our expectations, reflecting lessons learned from prior large cat experience and recent changes to our portfolio. Our diluted book value per share, adjusted for dividends, declined 8% over the prior quarter. Excluding the impact of catastrophes, our annualized operating return on average common equity was 10%, reflecting the benefits of our profitability improvement initiatives, absorbing the ongoing negative impact of rate and trend and the Ogden rate change. We expect the market to react strongly to industry losses this quarter, which when combined with low interest rates and sustained multi-year pricing erosion, will drive adjustments to risk-based pricing.

"As a leader in the global wholesale marketplace that absorbed so much volatility, we are strategically well positioned for improving conditions. Importantly, we recently completed the acquisition of Novae, which creates a $2 billion participant in the London specialty market, with a top-10 position at Lloyd’s within a $6 billion international specialty (re)insurer. Our teams are working to ensure our operations are brought together seamlessly to maximize our ability to respond to opportunities, and, most importantly, we are encouraged by the positive market reaction to the combination. We are optimistic that the international specialty insurance market will deliver more benefits than we originally contemplated when the transaction was announced, and that we will approach the January 2018 renewal season with a strong platform, a strengthened brand, and a renewed commitment to deliver a superior value proposition to all of our stakeholders."

Third Quarter Highlights2

  • Gross premiums written increased by $226 million, or 24%, to $1.2 billion, with an increase of $157 million, or 55% (56% on a constant currency basis3), in our reinsurance segment and an increase of $69 million, or 10%, in our insurance segment;
  • Net premiums written increased 40% to $833 million;
  • Net premiums earned increased by 9% (10% on a constant currency basis) to $1 billion;
  • Combined ratio of 152.9%, compared to 92.6%;
  • Current accident year loss ratio of 126.2%, compared to 65.1%;
  • Estimated catastrophe and weather-related pre-tax net losses, net of reinstatement premiums, of $617 million, or 61.4 points, on the current accident year loss ratio compared to $22 million, or 2.3 points;
  • Favorable prior year net reserve development of $48 million (benefiting the combined ratio by 4.7 points), compared to $76 million (benefiting the combined ratio by 8.1 points);
  • Net investment income decreased to $95 million, compared to $117 million;
  • Pre-tax total return on cash and investmentsof 1.1%, including foreign exchange movements, or 0.9%, excluding foreign exchange movements5. The comparable prior period pre-tax total return was 1.1% including and excluding foreign exchange movements;
  • Fee income from strategic capital partners6 of $6 million, compared to $8 million;
  • Net loss attributable to common shareholders of $468 million, compared to net income of $177 million;
  • Non-GAAP operating loss of $446 million, compared to non-GAAP operating income of $161 million;
  • Net cash flows from operations of $163 million, compared to $203 million;
  • Diluted book value per common share of $55.33, a decrease of 8% compared to the prior quarter, and a 7% decrease over the last 12 months;
  • Dividends declared of $0.38 per common share, with the total common dividends declared of $1.52 per share over the past twelve months;
  • Adjusted for dividends, diluted book value per common share decreased by $4.74, or 8%, for the quarter and $2.92, or 5%, over the past twelve months; and
  • Total common shares repurchased during the quarter of $3 million. Following the offer to acquire Novae Group plc ("Novae") on July 5, 2017, the Company suspended its open market share repurchase program.
 

All comparisons are with the same period of the prior year, unless otherwise stated.

Amounts presented on a constant currency basis are "non-GAAP financial measures" as defined in SEC Regulation G. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to prior year amounts. The reconciliations to the most comparable GAAP financial measures are provided in this release, as is a discussion of the rationale for the presentation of these items.

Pre-tax total return on cash and investments includes net investment income (loss), net realized investment gains (losses), interest in income (loss) of equity method investments and the change in unrealized gains (losses) generated by our average cash and investment balances. Total cash and invested assets represents the total cash, available for sale investments, mortgage loans, other investments, equity method investments, short-term investments, accrued interest receivable and net receivable (payable) for investments sold (purchased).

Pre-tax total return on cash and investments excluding foreign exchange movements is a "non-GAAP financial measure" as defined in SEC Regulation G. The reconciliation to pre-tax total return on cash and investments, the most comparable GAAP financial measure, also included foreign exchange gains (losses) of $22 million and $(8) million for the three months ended September 30, 2017 and 2016, respectively, and foreign exchange gains (losses) of $62 million and $(39) million for the nine months ended September 30, 2017 and 2016, respectively.

Fee income from strategic capital partners represents services fees and reimbursement of expenses earned by the AXIS Reinsurance segment from its strategic capital partners.

 

Segment Highlights

Insurance Segment

Our insurance segment reported gross premiums written of $744 million in the third quarter of 2017, an increase of $69 million, or 10%, compared to gross premiums written of $675 million in the third quarter of 2016. The increase in gross premiums written was attributable to our liability lines, and our credit and political risk lines driven by new business, together with an increase in our aviation lines associated with our recent acquisition of Aviabel. These increases were partially offset by a reduction in premiums written following our exit from some U.S. retail insurance operations last year.

For the nine months ended September 30, 2017, gross premiums written were $2.2 billion, an increase of $122 million, or 6%, compared to the same period in 2016. The increase in gross premiums written was attributable to our liability, accident and health, and professional lines driven by new business, together with an increase in our aviation lines associated with our recent acquisition of Aviabel. These increases were partially offset by a reduction in premiums written following our exit from some U.S. retail insurance operations last year.

Net premiums written increased by 15% and 7% (8% on a constant currency basis) in the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016, reflecting the increase in gross premiums written together with a decrease in premiums ceded in our property lines, partially offset by an increase in premiums ceded in our liability lines.

Net premiums earned increased by 12% and 9% (10% on a constant currency basis) in the three and nine months ended September 30, 2017, respectively, compared to the same periods in 2016. The increases were driven by strong premiums growth in our accident and health lines as well as our aviation lines in recent periods, together with a decrease in ceded premiums earned in our property lines. On a year-to-date basis net premiums earned were also impacted by strong premium growth in our property lines in recent periods.

Our insurance segment reported an underwriting loss of $282 million for the current quarter, compared to underwriting income of $25 million in the third quarter of 2016. The current quarter's underwriting results reflected a combined ratio of 156.9%, compared to 94.4% in the same period in 2016. This included an increase in the current accident year loss ratio to 127.3% this quarter from 66.1% in the third quarter of 2016. During the third quarter of 2017, we incurred pre-tax catastrophe and weather-related losses of $317 million, or 64.0 points, primarily attributable to Hurricanes Harvey, Irma and Maria as well as the two earthquakes in Mexico and U.S. weather-related events, compared to $15 million, or 3.3 points, of catastrophe and weather-related losses reported during the same period in 2016. After adjusting for catastrophe and weather-related losses, the segment's current accident year loss ratio in the third quarter increased by 0.5 points, compared to the same period in 2016, primarily due to an increase in attritional loss experience in our property lines, together with the adverse impact of rate and trend, partially offset by changes in business mix.

Net favorable prior year loss reserve development was $3 million, or 0.5 points, this quarter, compared to $21 million, or 4.7 points, in the third quarter of 2016.

The segment's acquisition cost ratio increased in the quarter to 15.0% from 13.9%, compared to the same period in 2016, primarily as a result of changes in business mix.

The segment's general and administrative expense ratio decreased in the quarter to 15.1% from 19.1%, compared to the same period in 2016 largely attributable to a decrease in performance-related compensation costs and an increase in net premiums earned.

For the nine months ended September 30, 2017, our insurance segment reported an underwriting loss of $269 million, compared to underwriting income of $31 million for the same period in 2016. The decrease in underwriting income was principally associated with an increase in catastrophe and weather-related losses.

Reinsurance Segment

Our reinsurance segment reported gross premiums written of $441 million in the third quarter of 2017, an increase of $157 million, or 55% (56% on a constant currency basis), compared to gross premiums written of $285 million in the third quarter of 2016. The increase in gross premiums written was attributable to our liability, catastrophe, property, and motor lines. The increase in our liability lines was due to timing differences and the increase in our catastrophe lines was largely due to reinstatement premiums. The increase in our property and motor lines was primarily driven by new business. Timing differences also contributed to the increase in premiums written in our motor lines.

For the nine months ended September 30, 2017, gross premiums written were $2.2 billion, an increase of $99 million, or 5% (7% on a constant currency basis), compared to the same period in 2016. The increase in gross premiums written was attributable to our catastrophe, agriculture, property, and motor lines, partially offset by a decrease in our credit and surety lines. The increase in our catastrophe and property lines was driven by new business spread across several cedants. Favorable premium adjustments and reinstatement premiums also contributed to the increase in premiums written in our catastrophe and agriculture lines. The increase in our motor lines was driven by new business and favorable premium adjustments, partially offset by a lower level of premiums written on a multi-year basis during 2017, compared to 2016, together with the impact of foreign exchange movements as the strengthening of the U.S. dollar drove comparative premium decreases in treaties denominated in foreign currencies. The decrease in our credit and surety lines was primarily due to a lower level of premiums written on a multi-year basis.

Net premiums written increased by 105% (107% on a constant currency basis) in the third quarter of 2017, compared to the same period in 2016, reflecting the increase in gross premiums written in the quarter together with a decrease in premiums ceded to our strategic capital partners. The decrease in premiums ceded was attributable to our professional and liability lines, due to the timing of premiums ceded to the retrocessional cover entered into with Harrington Re Ltd. in the same period in 2016, partially offset by an increase in premiums ceded in our catastrophe lines.

On a year-to-date basis, net premiums written decreased by 5% (2% on a constant currency basis), compared to 2016, reflecting an increase in premiums ceded to our strategic capital partners, partially offset by an increase in gross premiums written.

Net premiums earned increased by 6% (8% on a constant currency basis) in the third quarter of 2017, compared to the same period in 2016. The increase in net premiums earned was driven by strong premium growth in our motor lines as well as favorable premium adjustments impacting our catastrophe lines, partially offset by an increase in ceded premiums earned in our catastrophe lines.

On a year-to-date basis, net premiums earned increased by 2% (5% on a constant currency basis), compared to 2016. The increase in net premiums earned was driven by an increase in gross premiums earned in our motor and agriculture lines, partially offset by an increase in ceded premiums earned in our agriculture and professional lines, together with a decrease in gross premiums earned in our professional lines.

Our reinsurance segment reported an underwriting loss of $231 million for the current quarter, compared to underwriting income of $79 million in the third quarter of 2016. The current quarter's underwriting results reflected a combined ratio of 143.7%, compared to 85.1% in the same period in 2016. This included an increase in the current accident year loss ratio to 125.0% this quarter from 64.2% in the third quarter of 2016. During the third quarter of 2017, we incurred pre-tax catastrophe and weather-related losses, net of reinstatement premiums, of $299 million, or 58.7 points, attributable to Hurricanes Harvey, Irma, and Maria, as well as the two earthquakes in Mexico and U.S. weather-related events, compared to $7 million, or 1.5 points of catastrophe and weather-related losses reported during the same period in 2016. After adjusting for the catastrophe and weather-related losses, the segment's current accident year loss ratio in the third quarter increased by 3.6 points, compared to the same period in 2016, primarily due to an increase in mid-size loss experience in our credit and surety lines and the ongoing impact of the Ogden rate change on our motor lines.

Net favorable prior year reserve development was $45 million, or 8.6 points, this quarter compared to $55 million, or 11.3 points, in the third quarter of 2016.

Our reinsurance underwriting loss for the three months ended September 30, 2017 included other insurance related losses of $4 million, compared to other insurance related income of $6 million for the same period of 2016, largely attributable to a decrease in profit commissions associated with retrocessional agreements with strategic capital partners.

The segment's acquisition cost ratio decreased in the quarter to 23.1% from 26.1%, compared to the same period in 2016, primarily as a result of changes in business mix.

The segment's general and administrative expenses decreased in the quarter to 4.2%, from 6.1%, compared to the same period in 2016, largely attributable to a decrease in performance-related compensation costs, together with an increase in fees from strategic capital partners.

For the nine months ended September 30, 2017, our reinsurance segment reported an underwriting loss of $170 million, compared to underwriting income of $182 million for the same period of 2016, principally associated with higher catastrophe and weather-related losses.

Investments

Net investment income of $95 million for the quarter represents a $22 million decrease from the third quarter of 2016, and an $11 million decrease from the second quarter of 2017, primarily due to changes in the fair value of our alternative investments ("other investments"). These investments generated a gain of $17 million in the current quarter, compared to a gain of $38 million in the third quarter of 2016, and a gain of $24 million in the second quarter of 2017.

Net realized investment gains for the quarter were $15 million, compared to net realized investment gains of $5 million in the third quarter of 2016, and net realized investment losses of $4 million in the second quarter of 2017.

Capitalization / Shareholders’ Equity

Our total capital7 at September 30, 2017 was $6.4 billion, including $1 billion of senior notes and $775 million of preferred equity, compared to $7.3 billion at December 31, 2016. The decrease in total capital is attributable to the net loss generated, the redemption of $351 million of 6.875% Series C preferred shares, as well as the repurchase of $286 million of our common shares during the first nine months of 2017. These decreases were partially offset by an increase in unrealized investment gains reported in other comprehensive income, following an increase in the market value of our fixed income and equity investment portfolios in the nine months ended September 30, 2017.

At October 25, 2017, the Company had $739 million of remaining authorization under our Board-authorized share repurchase program for common share repurchases through December 31, 2017. Following the offer to acquire Novae on July 5, 2017, the Company suspended its open market share repurchase program. AXIS Capital acquired the shares of Novae on October 2, 2017.

Diluted book value per common share, calculated on a treasury stock basis, decreased by $5.12 in the current quarter and by $4.44 over the past twelve months, to $55.33. The decrease in the quarter was primarily driven by the net loss generated, while the decrease over the past twelve months was driven by the net loss generated during the period and common share dividends declared, partially offset by an increase in unrealized investment gains reported in other comprehensive income.

During the third quarter of 2017, the Company declared common dividends of $0.38 per share, with total common dividends declared of $1.52 per share over the past twelve months. Adjusted for dividends declared, the diluted book value per common share decreased by $4.74, or 8%, for the quarter and $2.92, or 5%, over the past twelve months.

 

7 Total capital represents the sum of total shareholders' equity and our senior notes.

 

Recent Developments

On August 24, 2017, AXIS Capital reached an agreement to acquire Novae by way of a Scheme of Arrangement. On August 29, 2017, Novae shareholders approved the Scheme of Arrangement which went into effect on that same day. The acquisition was completed in two phases. In the first phase, AXIS Capital acquired Novae for approximately $615.6 million on October 2, 2017. The results of Novae will be included in the AXIS Capital results from this date. This was followed by the commencement of management control and integration of the combined businesses upon receipt of clearance from the European Commission on October 6, 2017.

Conference Call

We will host a conference call on Thursday, October 26, 2017 at 9:00 AM (Eastern) to discuss the third quarter financial results and related matters. The teleconference can be accessed by dialing (888) 317-6003 (U.S. callers) or (412) 317-6061 (international callers) approximately ten minutes in advance of the call and entering the passcode 3755829. A live, listen-only webcast of the call will also be available via the Investor Information section of the Company's website at www.axiscapital.com. A replay of the teleconference will be available for two weeks by dialing (877) 344-7529 (U.S. callers) or (412) 317-0088 (international callers) and entering the passcode 10112955. The webcast will be archived in the Investor Information section of the Company's website.

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