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AXIS Capital Reports Fourth Quarter 2018 Results

AXIS Capital Holdings Limited ("AXIS Capital" or the "Company") has reported net loss attributable to common shareholders for the fourth quarter of 2018 of $198 million, or $(2.37) per diluted common share, compared to net loss of $38 million, or $(0.46) per diluted common share, for the fourth quarter of 2017. Net income available to common shareholders for the year ended December 31, 2018 was $0.4 million, compared to net loss attributable to common shareholders of $416 million, or $(4.94) per diluted common share, for the same period in 2017.

Operating loss1 for the fourth quarter of 2018 was $148 million, or $(1.77) per diluted common share2, compared to operating income of $20 million, or $0.24 per diluted common share, for the fourth quarter of 2017. For the year ended December 31, 2018, AXIS Capital reported operating income of $161 million, or $1.92 per diluted common share, compared to an operating loss of $265 million, or $(3.15) per diluted common share for the same period in 2017.

1 Operating income (loss) and 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 (attributable) to common shareholders and earnings per diluted common share, respectively) and a discussion of the rationale for the presentation of these items is included later in this press release.

2 Ex-PGAAP operating income (loss), ex-PGAAP operating income (loss) per diluted common share and ex-PGAAP return on average common equity ("ex-PGAAP operating ROACE") are non-GAAP financial measures as defined in SEC Regulation G. The reconciliation to the most comparable GAAP financial measures, (net income (loss) available (attributable) to common shareholders, earnings per diluted common share, and annualized return on average common equity, respectively) and a discussion of the rationale for the presentation of these items is included later in this press release.

 

Commenting on the fourth quarter 2018 financial results, Albert Benchimol, President and CEO of AXIS Capital, said:

“In 2018, we delivered improved full-year underwriting performance, both with and without cats. Following three quarters in which we achieved tangible progress toward delivering on our financial goals, however, heavy attritional property and catastrophe activity led to unsatisfactory results in the fourth quarter. Throughout the past year we took a number of significant actions to strengthen our portfolio and, over the past few months, we’ve accelerated these initiatives. Additionally, we anticipate that recent improvements in pricing and market discipline will also have a positive impact on the pace of our improvements.

“2018 was a year in which we made significant progress in advancing our strategy and in strengthening our business. We furthered our relevance and positioning in key markets, including transitioning our London operations to a leading position at Lloyd’s with the integration of Novae, and we scaled up a transformation program that is improving our efficiency and our agility in a rapidly evolving market.”

Fourth Quarter Highlights3

  • Gross premiums written increased by $76 million, or 7%, with an increase of $66 million, or 8%, in the insurance segment and an increase of $10 million, or 4%, in the reinsurance segment.
  • Net premiums written increased by 3% to $753 million.

KEY RATIOS

 

Q4 2018

 

Q4 2017

 

Change

Current accident year loss ratio excluding catastrophe and weather-related losses

     

65.4

%

       

62.8

%

       

2.6

 

pts

Catastrophe and weather-related losses ratio

     

22.5

%

       

11.2

%

       

11.3

 

pts

Current accident year loss ratio       87.9 %         74.0 %        

13.9

 

pts

Prior year reserve development       (3.3 %)         (4.7 %)        

1.4

 

pts

Net loss and loss expense ratio       84.6 %         69.3 %        

15.3

 

pts

Acquisition cost ratio       21.4 %         19.4 %        

2.0

 

pts

General and administrative expense ratio       11.3 %         12.0 %        

(0.7

 

pts)

Combined ratio       117.3 %         100.7 %        

16.6

 

pts

                                 
  • Net favorable prior year reserve development of $40 million (Insurance $32 million; Reinsurance $7 million), compared to $57 million.
  • Underwriting loss included the recognition of premium attributable to the balance sheet of Novae Group plc ("Novae") at October 2, 2017 (the "closing date" or the "acquisition date"), without the recognition of the associated acquisition costs, which were written off at the closing date. The absence of $16 million and $33 million of acquisition expenses related to premiums earned in the fourth quarter of 2018 and 2017, respectively, benefited our acquisition cost ratio by 1.3 points and 2.7 points, respectively.
  • Amortization of value of business acquired ("VOBA") of $23 million and $50 million, recognized in the fourth quarter of 2018 and 2017, respectively. This expense impacted the Company's operating income, but was not included in the results of the Company's insurance and reinsurance segments.
  • Pre-tax cost savings of $17 million, $68 million on an annualized basis, related to the Company's transformation initiative and the integration of Novae recognized in the quarter. The Company has incurred cumulative pre- tax reorganization expenses of approximately $94 million since the third quarter of 2017.
  • Adjusted for dividends, book value per diluted common share decreased by $2.37, or 4%, compared to September 30, 2018.
3 All comparisons are with the same period of the prior year, unless otherwise stated.
 

Full Year Highlights3

  • Gross premiums written increased by $1,354 million, or 24%, to $6.9 billion, with an increase of 35% in the insurance segment, primarily attributable to the acquisition of Novae, and an increase of 14% in the reinsurance segment.
  • Adjusting for the impact of the Novae acquisition, gross premiums written increased by $331 million, with an increase of $60 million in the insurance segment, and an increase of $271 million in the reinsurance segment.
  • Net premiums written increased by 16% to $4.7 billion.

KEY RATIOS

 

2018

 

2017

 

Change

Current accident year loss ratio excluding catastrophe and weather-related losses

      61.7 %         63.7 %        

(2.0

 

pts)

Catastrophe and weather-related losses ratio       9.0 %         20.4 %        

(11.4

 

pts)

Current accident year loss ratio       70.7 %         84.1 %        

(13.4

 

pts)

Prior year reserve development       (4.1 %)         (4.9 %)        

0.8

 

pts

Net loss and loss expense ratio       66.6 %         79.2 %        

(12.6

 

pts)

Acquisition cost ratio       20.2 %         19.9 %        

0.3

 

pts

General and administrative expense ratio       13.1 %         14.0 %        

(0.9

 

pts)

Combined ratio       99.9 %         113.1 %        

(13.2

 

pts)

                                 
  • Net favorable prior year reserve development of $200 million (Insurance $93 million; Reinsurance $107 million ), compared to $200 million.
  • Underwriting income included the recognition of premium attributable to Novae's balance sheet at October 2, 2017, without the recognition of the associated acquisition costs, which were written off at the closing date. The absence of $125 million and $33 million of acquisition expenses related to premiums earned in the years ended December 31, 2018 and 2017, respectively benefited our acquisition cost ratio by 2.6 and 0.7 points, respectively.
  • Amortization of VOBA of $172 million and $50 million recognized for the year ended December 31, 2018 and 2017, respectively. This expense impacted the Company's operating income, but was not included in the results of the Company's insurance and reinsurance segments.
  • Pre-tax cost savings of $58 million related to the Company's transformation initiative and the integration of Novae recognized over the past twelve months.
  • Adjusted for dividends, book value per diluted common share decreased by $2.38, or 4%, over the past twelve months.

Segment Highlights

Insurance Segment

 

 

Three Months Ended December 31,

($ in thousands)   2018   2017   Change
Gross premiums written  

$

 

920,736

    $   854,311         7.8   %
Net premiums written       576,606         515,826         11.8   %
Net premiums earned       590,479         586,159         0.7   %
Underwriting income (loss)       (36,914 )       37,788             nm
                     
Underwriting ratios:                    

Current accident year loss ratio excluding catastrophe and weather-related losses

     

62.4

%

     

62.0

%

     

0.4

 

pts

Catastrophe and weather-related losses ratio       15.6 %       5.7 %      

9.9

 

pts

Current accident year loss ratio       78.0 %       67.7 %      

10.3

 

pts

Prior period reserve development       (5.4 %)       (4.2 %)      

(1.2

 

pts)

Net loss and loss expense ratio       72.6 %       63.5 %      

9.1

 

pts

Acquisition cost ratio       18.5 %       15.7 %      

2.8

 

pts

Underwriting-related general and administrative expense ratio       15.2 %       14.7 %      

0.5

 

pts

Combined ratio       106.3 %       93.9 %      

12.4

 

pts

nm - not meaningful
 
  • Gross premiums written increased by $66 million, or 8% (8% increase on a constant currency basis4), attributable to credit and political risk, liability, and professional lines driven by new business.
  • Net premiums written increased by 12% (11% on a constant currency basis) reflecting the increase in gross premiums written in the quarter, together with a decrease in premiums ceded in professional lines, partially offset by an increase in premiums ceded in liability lines.
  • The current accident year loss ratio excluding catastrophe and weather-related losses increased in the fourth quarter compared to the same period in 2017 primarily due to an increase in attritional loss experience in property lines.
  • Pre-tax catastrophe and weather-related losses were $92 million primarily attributable to Hurricane Michael and the California Wildfires this quarter, compared to $34 million in the same period in 2017.
  • Net favorable prior year loss reserve development was $32 million this quarter, compared to $25 million in the same period in 2017.
  • The acquisition cost ratio increased in the quarter due to changes in business mix.
  • Underwriting loss included the recognition of premium attributable to Novae's balance sheet at October 2, 2017, without the recognition of the associated acquisition costs, which were written off at the closing date. The absence of $16 million and $26 million of acquisition costs related to premiums earned in the fourth quarter of 2018 and 2017, respectively, benefited the acquisition cost ratio by 2.7 points and 4.4 points, respectively.

 

 

Year Ended December 31,

($ in thousands)   2018   2017   Change
Gross premiums written     $   3,797,592       $   2,814,918         34.9   %
Net premiums written         2,324,747           1,775,825         30.9   %
Net premiums earned         2,362,606           1,816,438         30.1   %
Underwriting income (loss)         77,298           (241,642 )           nm
                         
Underwriting ratios:                        

Current accident year loss ratio excluding catastrophe and weather-related losses

       

58.5

%

       

61.3

%

     

(2.8

 

pts)

Catastrophe and weather-related losses ratio         8.7 %         22.7 %      

(14.0

 

pts)

Current accident year loss ratio         67.2 %         84.0 %      

(16.8

 

pts)

Prior period reserve development         (4.0 %)         (3.3 %)      

(0.7

 

pts)

Net loss and loss expense ratio         63.2 %         80.7 %      

(17.5

 

pts)

Acquisition cost ratio         16.9 %         14.9 %      

2.0

 

pts

Underwriting-related general and administrative expense ratio         16.8 %         17.9 %      

(1.1

 

pts)

Combined ratio         96.9 %         113.5 %      

(16.6

 

pts)

 
  • Gross premiums written increased by $983 million, or 35%, which included an increase of $923 million attributable to property, marine, professional lines, and credit and political risk lines associated with the acquisition of Novae. Excluding the impact of the acquisition of Novae, gross premiums written increased by 2% (2% on a constant currency basis) due to increases in professional lines and liability lines driven by new business, partially offset by a decrease in property, marine, and accident and health lines. The decreases were attributable to property lines due to our exit from onshore energy business in the fourth quarter of 2017, together with non-renewals in marine, and accident and health lines.
  • Net premiums written increased by $549 million or 31%. Excluding the impact of the acquisition of Novae, net premiums written decreased by 4% (5% on a constant currency basis) due to an increase in premiums ceded in property, liability, and professional lines, partially offset by the increase in gross premiums written in the year.
  • Underwriting income increased in the twelve months ended December 31, 2018, principally associated with an increase in net premiums earned, a decrease in catastrophe and weather-related losses, a decrease in the current accident year loss ratio excluding catastrophe and weather-related losses, an increase in net favorable prior year development and a decrease in the general and administrative expense ratio, partially offset by an increase in the acquisition cost ratio.
  • Underwriting income included the recognition of premium attributable to Novae's balance sheet at October 2, 2017, without the recognition of the associated acquisition costs, which were written off at the closing date. The absence of $121 million and $26 million of acquisition costs related to premiums earned in the years ended December 31, 2018 and 2017, respectively, benefited the acquisition cost ratio by 5.1 and 1.4 points, respectively.
4 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.
 

Reinsurance Segment

 

Three Months Ended December 31,

($ in thousands)   2018   2017   Change
Gross premiums written    

$

 

252,002

      $   242,190         4.1   %
Net premiums written         176,092           213,598         (17.6   )%
Net premiums earned         623,990           625,336         (0.2   )%
Underwriting income (loss)         (157,750 )         (11,658 )           nm
                         
Underwriting ratios:                        

Current accident year loss ratio excluding catastrophe and weather-related losses

       

68.3

%

       

63.6

%

     

4.7

 

pts

Catastrophe and weather-related losses ratio         28.8 %         16.3 %      

12.5

 

pts

Current accident year loss ratio         97.1 %         79.9 %      

17.2

 

pts

Prior period reserve development         (1.1 %)         (5.1 %)      

4.0

 

pts

Net loss and loss expense ratio         96.0 %         74.8 %      

21.2

 

pts

Acquisition cost ratio         24.1 %         22.8 %      

1.3

 

pts

Underwriting-related general and administrative expense ratio         3.9 %         4.4 %      

(0.5

 

pts)

Combined ratio         124.0 %         102.0 %      

22.0

 

pts

 
  • Gross premiums written increased by $10 million, or 4% (5% on a constant currency basis) attributable to catastrophe, and accident and health lines, partially offset by decreases in professional lines and property lines. The increase in catastrophe lines was largely due to reinstatements premiums and the increase in accident and health lines was due to new business, partially offset by a timing difference. The decrease in property lines was driven by premium adjustments and the decrease in professional lines was driven by the restructuring of a significant treaty.
  • Net premiums written decreased by $38 million, or 18% (16% on a constant currency basis) due to an increase in premiums ceded in catastrophe, accident and health, credit and surety, and liability lines, partially offset by the increase in gross premiums written in the quarter.
  • The current accident year loss ratio excluding catastrophe and weather-related losses increased in the fourth quarter compared to the same period in 2017, primarily due to an increase in mid-size and attritional loss experience in property lines, partially offset by favorable impact of rate increases in U.K. non- proportional motor business.
  • Pre-tax catastrophe and weather-related losses were $177 million primarily attributable to Hurricane Michael and the California Wildfires this quarter, compared to $99 million reported during the same period in 2017.
  • Net favorable prior year reserve development was $7 million this quarter compared to $32 million in the fourth quarter of 2017.
  • The acquisition cost ratio increased due the impact of retrocessional contracts, partially offset by favorable changes in business mix.
  • The general administrative expense ratio decreased in the quarter, largely attributable to benefits related to arrangements with strategic capital partners, partially offset by an increase in the allocation of corporate expenses.
  • Underwriting loss included the recognition of premium attributable to Novae's balance sheet at October 2, 2017, without the recognition of the associated acquisition costs, which were written off at the closing date. The absence of $7 million of acquisition costs related to premiums earned in the fourth quarter of 2017 benefited the acquisition cost ratio by 1.1 points.

 

 

Year Ended December 31,

($ in thousands)   2018   2017   Change
Gross premiums written     $   3,112,473       $   2,741,355         13.5   %
Net premiums written         2,334,215           2,251,318         3.7   %
Net premiums earned         2,428,889           2,332,322         4.1   %
Underwriting income (loss)         46,529           (171,684 )           nm
                         
Underwriting ratios:                        

Current accident year loss ratio excluding catastrophe and weather-related losses

       

64.8

%

       

65.6

%

     

(0.8

 

pts)

Catastrophe and weather-related losses ratio         9.4 %         18.5 %      

(9.1

 

pts)

Current accident year loss ratio         74.2 %         84.1 %      

(9.9

 

pts)

Prior period reserve development         (4.4 %)         (6.0 %)      

1.6

 

pts

Net loss and loss expense ratio         69.8 %         78.1 %      

(8.3

 

pts)

Acquisition cost ratio         23.5 %         23.7 %      

(0.2

 

pts)

Underwriting-related general and administrative expense ratio         5.1 %         5.3 %      

(0.2

 

pts)

Combined ratio         98.4 %         107.1 %      

(8.7

 

pts)

 
  • Gross premiums written increased by $371 million, or 14%, which included an increase of $100 million attributable to catastrophe, and marine and aviation lines associated with the acquisition of Novae. Excluding the impact of the acquisition of Novae, gross premiums written increased by $271 million, or 10% (7% on a constant currency basis), attributable to credit and surety, motor, accident and health, and catastrophe lines. The increase in credit and surety lines was largely due to timing differences, together with the favorable impact of foreign exchange rate movements, favorable premiums adjustments, and new business. The increase in motor was largely due to new business and timing differences, together with the favorable impact of rate increases in U.K. non-proportional motor business following the reduction in the Ogden Rate during the first quarter of 2017. The increase in accident and health was largely due to new business, partially offset by premium adjustments. The increase in catastrophe lines was largely due to new business, increased line sizes on a number of treaties, and favorable rate increases, partially offset by a lower level of premiums written on a multi-year basis.
  • Net premiums written increased by $83 million, or 4%. Excluding the impact of the acquisition of Novae, net premiums written increased by $11 million or 1% (decreased by 3% on a constant currency basis) reflecting the increase in gross premiums written in the year, partially offset by an increase in premiums ceded in accident and health, catastrophe, credit and surety, and liability lines.
  • Underwriting income increased in the year ended December 31, 2018, principally associated with an increase in net premiums earned, a decrease in catastrophe and weather-related losses, and a decrease in the current accident year loss ratio excluding catastrophe and weather-related losses, partially offset by a decrease in net favorable prior year development.
  • Underwriting income included the recognition of premium attributable to Novae's balance sheet at October 2, 2017, without the recognition of the associated acquisition costs, which were written off at the closing date. The absence of $4 million and $7 million of acquisition costs related to premiums earned in the years ended December 31, 2018 and 2017, respectively, benefited the acquisition cost ratio by 0.1 and 0.3 points, respectively.

Investments

Net investment income of $113 million for the quarter represents an increase of $12 million from the fourth quarter of 2017, and a decrease of $1 million from the third quarter of 2018 due to changes in fair values of our alternative investments ("Other investments"). Net realized and unrealized investment losses recognized in net income for the quarter were $73 million, compared to $43 million of net realized investment gains in the fourth quarter of 2017 and $18 million of net realized and unrealized investment losses in the third quarter of 2018.

Pre-tax total return on cash and investments5 was 0.2% including foreign exchange movements (0.3% excluding foreign exchange movements6), as net investment income generated in the quarter was offset by net realized investments losses arising from the sale of fixed maturity securities and the decrease in the fair value of equity securities. The prior year period pre-tax total return was 0.6% including foreign exchange movements (0.5% excluding foreign exchange movements). Our fixed income portfolio book yield at December 31, 2018 was 3.1%, while the market yield was 3.6%.

Capitalization / Shareholders’ Equity

Total capital7 at December 31, 2018 was $6.4 billion, including $1.3 billion of senior notes and notes payable and $775 million of preferred equity, compared to $6.7 billion at December 31, 2017. The decrease in total capital is attributable to an increase in unrealized investment losses reported in other comprehensive income, following a decrease in the market value of our fixed income portfolio, and common share dividends declared.

Book value per diluted common share, calculated on a treasury stock basis, declined by $2.77 in the current quarter, and by $3.95 over the past twelve months, to $49.93. The decrease in the quarter was primarily driven by the net loss generated in the quarter and common share dividends declared. The decrease over the past twelve months was driven by unrealized investment losses reported in other comprehensive income, and common share dividends declared.

During the fourth quarter of 2018, the Company declared dividends of $0.40 per common share, with total dividends declared of $1.57 per common share over the past twelve months. Adjusted for dividends declared, the book value per diluted common share decreased by $2.37, or 4%, for the quarter and decreased by $2.38, or 4%, over the past twelve months.

5 Pre-tax total return on cash and investments includes net investment income (loss), net investment gains (losses), interest in income (loss) of equity method investments and change in unrealized investment gains (losses) generated by average cash and investment balances. Total cash and invested assets represents the total cash, fixed maturity securities, equity securities, mortgage loans, other investments, equity method investments, short-term investments, accrued interest receivable and net receivable (payable) for investments sold (purchased).
6 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 $(20)m and $18m for the three months ended December 31, 2018 and 2017, respectively.
7 Total capital represents the sum of total shareholders' equity and our senior notes payable and debt.
 
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