AXIS Capital Holdings Limited — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. AXIS is a Bermuda-based global specialty insurer and reinsurer, reporting through AXIS Insurance and AXIS Re. Figures below are in U.S. dollars.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Gross premiums written | $5.56 billion | $4.97 billion |
| Net premiums written | $4.03 billion | $3.75 billion |
| Net premiums earned | $4.15 billion | $3.71 billion |
| Net investment income | $401 million | $353 million |
| Net income (loss) available to common shareholders | $(416) million | $465 million |
| Diluted earnings (loss) per share | $(4.94) | $5.08 |
| Underwriting income (loss), non-GAAP | $(413) million | $279 million |
| Combined ratio | 113.1% | 95.9% |
| Operating cash flow | $259 million | $407 million |
- Estimated catastrophe and weather-related losses, net of reinstatement premiums, were $835 million, versus $204 million in 2016. The current-year loss ratio rose to 84.1% from 67.4%.
- Net favorable prior-year reserve development was $200 million, down from $292 million. Reported loss and loss expense reserves were $13.0 billion; reinsurance recoverables on paid and unpaid losses were $3.34 billion.
- Net realized investment gains were $28 million, compared with losses of $61 million in 2016. Foreign exchange losses were $135 million, versus gains of $121 million.
- Total cash and investments were $16.1 billion; cash and cash equivalents were $1.36 billion, including $415 million of restricted cash. Fixed maturities had an average credit rating of AA-.
- Total assets were $24.8 billion. Total debt was $1.38 billion; debt to total capital was 20.5%, up from 13.7%. Total capital was $6.72 billion, and common shareholders’ equity was $4.57 billion.
- Diluted book value per common share was $53.88, down from $58.27. Common dividends declared were $1.53 per share, versus $1.43.
Material changes versus 2016
- Gross premiums written grew 12%, with increases in both segments. Net premiums earned grew 12%; net premiums written grew 7%, reflecting increased reinsurance cessions.
- Underwriting results shifted from $279 million of income to a $413 million loss. Both segments reported underwriting losses: $228 million in Insurance and $185 million in Reinsurance.
- AXIS acquired Aviabel in April and Novae in October 2017. Novae added $141 million of net premiums written after acquisition and $2.13 billion of loss reserves at year-end. The company also recognized $27 million in Novae transaction and integration costs and $50 million of amortization of acquired business value.
- AXIS redeemed $351 million of Series C preferred shares and issued $350 million of 4.0% senior notes due 2027. A portion of note proceeds repaid a $67 million Novae term loan; management said it intended to use further proceeds toward the 2.65% notes due 2019.
- Operating cash flow declined by $148 million. Management attributed the decrease mainly to increased reinsurance and retrocession purchases and higher loss payments.
Outlook, commentary, risks and unusual items
- Management said insurance pricing and terms had generally improved following years of deterioration and 2017’s catastrophe losses, with the strongest rate momentum in catastrophe-exposed property. Reinsurance pricing also showed upward movement. Management cautioned that conditions would remain variable and said it would prioritize adequately priced business.
- Management expected net premiums written to grow less than gross premiums written as AXIS shared more risk with strategic capital partners. It forecast approximately $60 million in Novae run-rate cost savings by 2020: $30–$35 million in 2018 and $50–$55 million in 2019, with additional integration costs expected through 2020.
- The company reported a 2017 non-GAAP operating loss of $265 million, or $(3.15) per diluted share, and non-GAAP operating ROACE of negative 5.4%, compared with positive 7.9% in 2016.
- U.S. Tax Reform reduced the U.S. corporate tax rate from 35% to 21%. AXIS recorded a $42 million tax expense for revaluing net deferred tax assets; reported net income also reflected a $15 million Aviabel bargain purchase gain.
- Rating agencies affirmed operating-subsidiary financial strength ratings, but S&P revised its outlook on AXIS Capital to negative following the Novae acquisition. A.M. Best also revised its outlook to negative in February 2018, citing unfavorable operating trends, particularly in Insurance. Moody’s outlook remained stable.
- Key risks include catastrophe frequency and severity, reserve-estimation uncertainty, long-tail claims inflation and legal changes, reinsurance counterparty collectability, investment-market and foreign-exchange volatility, integration and execution of acquisitions, competitive pricing, and Brexit-related regulatory uncertainty. Management noted that estimates for 2017 catastrophe losses remained uncertain.
- Liquidity was supported by $13.8 billion of cash and invested assets expected to be available within one to three business days under normal conditions; $7.0 billion of that amount was restricted. The company stated that operating cash flows and investment liquidity should cover foreseeable requirements.
- The auditor issued unqualified opinions on the financial statements and internal controls. The internal-control assessment excluded Novae, acquired October 2, 2017.
Most important facts for investors to verify
- How 2017 catastrophe claims develop against the $835 million estimate, and whether reserve assumptions or recoveries change.
- Whether underwriting margins recover from the 113.1% combined ratio, including performance excluding catastrophe losses and prior-year reserve releases.
- Whether Novae integration delivers the stated savings, and the effect of acquired reserves, intangible amortization and Lloyd’s consolidation.
- Debt repayment plans and refinancing of the $250 million 2.65% notes due in 2019; also confirm availability and terms of credit and letter-of-credit facilities.
- Capital adequacy, restricted liquidity, and the effect of negative rating outlooks on business, collateral requirements and financing costs.
- Whether the stated 2018 market improvement and cost-savings outlook is achieved; the filing does not provide specific earnings or EPS guidance.