AXIS Capital Holdings Limited — FY2018 Form 10-K
Business and reporting period: Bermuda-based specialty insurer and reinsurer operating through AXIS Insurance and AXIS Re. This 10-K covers the fiscal year ended December 31, 2018; it is an annual report, not a standalone fourth-quarter filing. Figures below are U.S. dollars unless stated otherwise.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Gross premiums written | $6.91 billion | $5.56 billion |
| Net premiums earned | $4.79 billion | $4.15 billion |
| Net investment income | $438.5 million | $400.8 million |
| Net investment gains (losses) | $(150.2) million | $28.2 million |
| Net income (loss) | $43.0 million | $(369.0) million |
| Net income (loss) attributable to common shareholders | $0.4 million | $(415.8) million |
| Operating income (non-GAAP) | $161.4 million; $1.92 per diluted share | $(264.6) million; $(3.15) per diluted share |
| Combined ratio | 99.9% | 113.1% |
| Operating return on average common equity (non-GAAP) | 3.7% | (5.4)% |
- Underwriting income was $123.8 million, versus a $413.3 million underwriting loss in 2017. Net favorable prior-year reserve development was $199.7 million, compared with $200.1 million.
- Catastrophe and weather losses were $430 million net of reinstatement premiums, or 9.0 percentage points of the current-year loss ratio, versus $835 million and 20.4 points in 2017.
- Total revenue was $5.09 billion. The filing reports total expenses of $5.08 billion and income before tax and equity-method investment results of $12.5 million.
- Cash provided by operating activities was $10.8 million, down from $259.2 million; investing activities provided $638.6 million and financing activities used $186.2 million. Cash, cash equivalents and restricted cash ended at $1.83 billion.
- At year-end, total assets were $24.13 billion; total investments were $13.16 billion; common shareholders’ equity was $4.26 billion; and total capital was $6.37 billion. Debt was $1.34 billion, with debt-to-total-capital of 21.1%.
- Book value per diluted common share was $49.93, down from $53.88. Common dividends declared were $1.57 per share. Total cash and investments were approximately $15.0 billion.
Material changes and unusual items
- Gross premiums written rose 24%, with a substantial contribution from the 2017 Novae acquisition. Insurance premiums grew 35% and reinsurance premiums 14%; acquisition-related growth was especially material in insurance.
- The combined ratio improved from 113.1% to 99.9%, primarily reflecting lower catastrophe losses and a lower current accident-year loss ratio excluding catastrophe losses (61.7%, versus 63.7%).
- Despite higher investment income, investment results turned to a $150.2 million loss from a $28.2 million gain. FY2018 included $66.9 million of unrealized equity-security losses recognized in earnings following adoption of a new accounting standard, as well as realized fixed-maturity losses.
- Common shareholders’ equity declined by about $311 million. The year included $190.8 million of net unrealized available-for-sale investment losses in other comprehensive income, dividends and share repurchases.
- Transformation and reorganization expenses were $66.9 million; amortization of value of business acquired and other intangible assets totaled $186.1 million. The filing says these costs relate in large part to Novae integration and broader operational changes.
- The company completed a reinsurance-to-close transaction for Novae Syndicate 2007’s 2015 and prior years of account. Consideration was $819 million, including $600 million settled by securities transfer; the transaction reduced reserves by $819 million in the reserve roll-forward.
- Fourth-quarter results were weak: the company reported a $198.4 million loss attributable to common shareholders and a $194.7 million underwriting loss. The filing also reports $72.7 million of investment losses in the quarter.
Outlook, risks and contingencies
- Management anticipated opportunities for profitable growth in 2019 and beyond, but described market conditions as competitive and uneven. It said it would prioritize adequately priced business and trade growth for profitability where pricing was insufficient.
- Management expected approximately $100 million of annual pre-tax run-rate cost savings beginning in 2020 from organizational redesign, operating efficiencies, systems integration and contract rationalization.
- The filing reports $430 million of catastrophe and weather losses in 2018 and warns that actual losses from the 2018 and 2017 catastrophe events may differ materially from current estimates. Loss reserves totaled $12.28 billion; reserve adequacy is a significant judgment area, particularly for long-tail lines.
- Other principal risks include catastrophe accumulation and climate uncertainty, competitive pricing and alternative capital, investment market and credit-spread volatility, inflation and claims trends, reinsurer collectability, broker concentration, cyber and data-security exposure, and Brexit-related operating and regulatory uncertainty.
- Liquidity was supported by a high-quality investment portfolio; management estimated about $12.8 billion of cash and invested assets could be available within one to three business days under normal conditions, including $5.5 billion of restricted assets. Subsidiary dividend capacity was stated as $1.0 billion, subject to regulatory and other constraints.
- The $250 million 2.65% notes were due in 2019; the company said the 2017-issued 4.0% notes were intended to refinance them. A $750 million secured letter-of-credit facility had $395 million outstanding at year-end, and its $250 million component was due to expire March 31, 2019 unless extended.
- The board had not authorized a common-share repurchase plan for 2019. Future dividends remained discretionary. The auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the near-break-even GAAP income attributable to common shareholders ($0.4 million) with non-GAAP operating income ($161.4 million), including the exclusions and tax effects.
- Assess reserve development and the sustainability of the $199.7 million favorable prior-year release, especially the $22 million adverse development in insurance liability reserves and the uncertainty in catastrophe estimates.
- Track the realization and timing of the expected $100 million annual cost savings, integration progress, and whether acquisition-related premium growth produces adequate underwriting returns.
- Review investment portfolio valuation and liquidity, including the effects of widening credit spreads, unrealized losses, lower alternative-investment returns and restricted assets.
- Confirm refinancing or repayment of the 2019 debt maturity, renewal of letter-of-credit capacity, and the extent to which regulated subsidiaries can distribute cash to the holding company.