AXIS Capital Reports First Quarter 2017 Results
For the first quarter of 2017, the Company reports:
- Net income available to common shareholders of
$5 million , or$0.06 per diluted common share - Non-GAAP operating income1 of
$51 million , or$0.59 per diluted common share - Annualized return on average common equity of 0.4%
- Annualized non-GAAP operating return on average common equity of 4.0%
- Diluted book value per common share growth of 1% in the quarter and 5% for the last twelve months, to
$58.89
PEMBROKE,
Non-GAAP operating income for the first quarter of 2017 was
1 Non-GAAP operating income and non-GAAP operating return on average common equity are “non-GAAP financial measures” as defined in Regulation G. A reconciliation of non-GAAP operating income to net income available to common shareholders (the nearest GAAP financial measure) and the calculation of operating return on average common equity are provided in this release, as is a discussion of the rationale for the presentation of these items.
Commenting on the first quarter 2017 financial results,
“Notwithstanding the pressure from a number of unusual and one-time items in the quarter, we are pleased to report that, adjusted for dividends, diluted book value per common share increased by
First Quarter Highlights2
- Gross premiums written decreased by
$47 million or 2% to$1.9 billion , with a decrease of$88 million , or 7% (3% on a constant currency basis3) in our reinsurance segment partially offset by an increase of$41 million , or 6% (7% on a constant currency basis3) in our insurance segment; - Net premiums written decreased 10% (8% on a constant currency basis3) to
$1.5 billion ; - Net premiums earned increased by 4% (8% on a constant currency basis3) to
$939 million ; - Combined ratio of 102.1%, compared to 91.9%;
- Current year accident loss ratio of 67.3%, compared to 63.1%;
- Pre-tax catastrophe and weather-related net losses of
$35 million , or 3.7 points, associated with estimated industry losses of approximately$10 billion , compared to$14 million , or 1.6 points; - Pre-tax impact of
$59 million , or 6.3 points, reflecting the impact of the recent Ogden rate change, including the previously announced increase in prior year reserves of$50 million , and an increase in estimated current accident year losses for our motor lines of$9 million in the quarter; - Favorable prior year net reserve development of
$25 million (benefiting the combined ratio by 2.6 points), compared to$70 million (benefiting the combined ratio by 7.8 points); - Net investment income increased to
$99 million , compared to$49 million ; - Fee income from strategic capital partners4 of
$11 million , compared to$4 million ; - Realized losses and unfavorable mark-to-market adjustments on our weather derivatives business of
$9 million (included in other insurance related losses); - Loss on equity method investment of
$6 million in the quarter, due to an impairment loss associated with the exit from an equity method investment, partially offset by income attributable toHarrington Reinsurance Holdings Limited ; - Expenses of
$8 million attributable to senior executive severance costs; - Net income available to common shareholders of
$5 million and an annualized return on average common equity of 0.4%, compared to$38 million and 2.9%, respectively; - Non-GAAP operating income of
$51 million , representing an annualized non-GAAP operating return on average common equity of 4.0%, compared to$101 million and 7.7%; - Net cash flows used in operations of
$36 million , compared to$14 million ; - Diluted book value per common share of
$58.89 , an increase of 1% compared to the prior quarter, and a 5% increase over the last 12 months; - Dividends declared of
$0.38 per common share, with the total common dividends declared of$1.46 per share over the past twelve months; - Adjusted for dividends, diluted book value per common share increased by
$1.00 , or 2%, per common share for the quarter and$4.31 , or 8%, per common share over the past twelve months; and - Total common shares repurchased during the quarter were 2.2 million for
$151 million .
2 All comparisons are with the same period of the prior year, unless otherwise stated.
3Amounts presented on a constant currency basis are “non-GAAP financial measures” as defined in Regulation G. The constant currency basis is calculated by applying the average foreign exchange rate from the current year to prior year amounts.
4 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
Net premiums written increased by 7% in the first quarter of 2017, compared to the same period in 2016 reflecting the increase in premiums written in the quarter.
Net premiums earned increased by 5% in the three months ended
Our insurance segment reported underwriting income of
During the first quarter of 2017, we incurred pre-tax catastrophe and weather-related losses of
Net favorable prior year loss reserve development was
The segment’s acquisition cost ratio increased to 14.9% from 14.0%, primarily related to business mix in our accident and health lines.
The segment’s general and administrative expense ratio increased slightly in the current quarter, to 19.7% from 19.5%, with higher personnel expenses, partially offset by an increase net premiums earned.
Reinsurance Segment
Our reinsurance segment reported gross premiums written of
Net premiums written decreased by 17% (13% on a constant currency basis) in the first quarter of 2017 compared to the same period in 2016, reflecting the decrease in premiums written, and an increase in premiums ceded to our strategic capital partners in the quarter. The increase in premiums ceded was attributable to our catastrophe, as well as our credit and surety lines, together with the impact of the retrocessional cover entered into with
Net premiums earned increased by 4% (11% on a constant currency basis) in the three months ended
Our reinsurance segment reported underwriting income of
During the first quarter of 2017, we incurred pre-tax catastrophe and weather-related losses of
Net favorable prior year reserve development was
Our reinsurance underwriting income for the three months ended
The segment’s acquisition cost ratio decreased slightly in the current quarter, to 25.3% from 25.7%, principally driven by changes in business mix, and a decrease in adjustments related to loss-sensitive features, partially offset by the impact of retrocessional contracts. In addition, the 2016 ratio included the benefits of fees from strategic capital partners (0.9 points), which are now included in other income and offset against general and administrative expenses.
The segment’s general and administrative expense ratio decreased in the current quarter, to 6.6% from 8.2%, reflecting the benefits of fees from strategic capital partner arrangements.
Investments
Net investment income of
Net realized investment losses for the quarter were
Capitalization / Shareholders’ Equity
Our total capital5 at
On
At
5 Total capital represents the sum of total shareholders’ equity and our senior notes.
Diluted book value per common share, calculated on a treasury stock basis, increased by
During the first quarter of 2017, the Company declared common dividends of
Conference Call
We will host a conference call on
In addition, a financial supplement relating to our financial results for the quarter ended
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CONSOLIDATED BALANCE SHEETS |
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2017 | 2016 | ||||||||||
(in thousands) | |||||||||||
Assets | |||||||||||
Investments: | |||||||||||
Fixed maturities, available for sale, at fair value | $ | 11,191,529 | $ | 11,397,114 | |||||||
Equity securities, available for sale, at fair value | 653,419 | 638,744 | |||||||||
Mortgage loans, held for investment, at amortized cost and fair value | 339,855 | 349,969 | |||||||||
Other investments, at fair value | 780,395 | 830,219 | |||||||||
Equity method investments | 111,233 | 116,000 | |||||||||
Short-term investments, at amortized cost and fair value | 13,338 | 127,461 | |||||||||
Total investments | 13,089,769 | 13,459,507 | |||||||||
Cash and cash equivalents | 1,165,263 | 1,039,494 | |||||||||
Restricted cash and cash equivalents | 286,307 | 202,013 | |||||||||
Accrued interest receivable | 69,649 | 74,971 | |||||||||
Insurance and reinsurance premium balances receivable | 2,891,811 | 2,313,512 | |||||||||
Reinsurance recoverable on unpaid and paid losses | 2,070,341 | 2,334,922 | |||||||||
Deferred acquisition costs | 609,773 | 438,636 | |||||||||
Prepaid reinsurance premiums | 645,663 | 556,344 | |||||||||
Receivable for investments sold | 40,448 | 14,123 | |||||||||
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84,613 | 85,049 | |||||||||
Other assets | 293,330 | 295,120 | |||||||||
Total assets | $ | 21,246,967 | $ | 20,813,691 | |||||||
Liabilities | |||||||||||
Reserve for losses and loss expenses | $ | 9,541,963 | $ | 9,697,827 | |||||||
Unearned premiums | 3,629,354 | 2,969,498 | |||||||||
Insurance and reinsurance balances payable | 514,356 | 493,183 | |||||||||
Senior notes | 993,229 | 992,950 | |||||||||
Payable for investments purchased | 83,783 | 62,550 | |||||||||
Other liabilities | 253,917 | 325,313 | |||||||||
Total liabilities | 15,016,602 | 14,541,321 | |||||||||
Shareholders' equity | |||||||||||
Preferred shares | 1,126,074 | 1,126,074 | |||||||||
Common shares | 2,206 | 2,206 | |||||||||
Additional paid-in capital | 2,276,671 | 2,299,857 | |||||||||
Accumulated other comprehensive income (loss) | 699 | (121,841 | ) | ||||||||
Retained earnings | 6,499,262 | 6,527,627 | |||||||||
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(3,674,547 | ) | (3,561,553 | ) | |||||||
Total shareholders' equity | 6,230,365 | 6,272,370 | |||||||||
Total liabilities and shareholders' equity | $ | 21,246,967 | $ | 20,813,691 | |||||||
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CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) |
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FOR THE THREE MONTHS ENDED |
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Three months ended | |||||||||||
2017 | 2016 | ||||||||||
(in thousands, except per |
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Revenues | |||||||||||
Net premiums earned | $ | 938,703 | $ | 902,340 | |||||||
Net investment income | 98,664 | 49,164 | |||||||||
Net realized investment losses | (25,050 | ) | (66,508 | ) | |||||||
Other insurance related losses | (3,783 | ) | (203 | ) | |||||||
Total revenues | 1,008,534 | 884,793 | |||||||||
Expenses | |||||||||||
Net losses and loss expenses | 606,942 | 498,962 | |||||||||
Acquisition costs | 189,792 | 180,635 | |||||||||
General and administrative expenses | 161,260 | 149,901 | |||||||||
Foreign exchange losses | 21,465 | 616 | |||||||||
Interest expense and financing costs | 12,791 | 12,833 | |||||||||
Total expenses | 992,250 | 842,947 | |||||||||
Income before income taxes and interest in income (loss) of equity method investments | 16,284 | 41,846 | |||||||||
Income tax benefit | 9,337 | 6,540 | |||||||||
Interest in loss of equity method investments | (5,766 | ) | — | ||||||||
Net income | 19,855 | 48,386 | |||||||||
Preferred shares dividends | 14,841 | 9,969 | |||||||||
Net income available to common shareholders | $ | 5,014 | $ | 38,417 | |||||||
Per share data | |||||||||||
Net income per common share: | |||||||||||
Basic net income | $ | 0.06 | $ | 0.41 | |||||||
Diluted net income | $ | 0.06 | $ | 0.41 | |||||||
Weighted average number of common shares outstanding - basic | 86,022 | 94,035 | |||||||||
Weighted average number of common shares outstanding - diluted | 86,793 | 94,853 | |||||||||
Cash dividends declared per common share | $ | 0.38 | $ | 0.35 | |||||||
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CONSOLIDATED SEGMENTAL DATA (UNAUDITED) |
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FOR THE THREE MONTHS ENDED |
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2017 | 2016 | ||||||||||||||||||||||||||||||
Insurance | Reinsurance | Total | Insurance | Reinsurance | Total | ||||||||||||||||||||||||||
(in thousands) | |||||||||||||||||||||||||||||||
Gross premiums written | $ | 694,006 | $ | 1,217,865 | $ | 1,911,871 | $ | 653,349 | $ | 1,305,812 | $ | 1,959,161 | |||||||||||||||||||
Net premiums written | 505,329 | 1,003,630 | 1,508,959 | 473,163 | 1,212,643 | 1,685,806 | |||||||||||||||||||||||||
Net premiums earned | 458,430 | 480,273 | 938,703 | 438,678 | 463,662 | 902,340 | |||||||||||||||||||||||||
Other insurance related income (losses) | 42 | (3,825 | ) | (3,783 | ) | 137 | (340 | ) | (203 | ) | |||||||||||||||||||||
Net losses and loss expenses | (286,903 | ) | (320,039 | ) | (606,942 | ) | (274,405 | ) | (224,557 | ) | (498,962 | ) | |||||||||||||||||||
Acquisition costs | (68,157 | ) | (121,635 | ) | (189,792 | ) | (61,398 | ) | (119,237 | ) | (180,635 | ) | |||||||||||||||||||
Underwriting-related general and | |||||||||||||||||||||||||||||||
administrative expenses(6) | (90,448 | ) | (31,353 | ) | (121,801 | ) | (85,576 | ) | (38,013 | ) | (123,589 | ) | |||||||||||||||||||
Underwriting income (6) | $ | 12,964 | $ | 3,421 | 16,385 | $ | 17,436 | $ | 81,515 | 98,951 | |||||||||||||||||||||
Corporate expenses | (39,459 | ) | (26,312 | ) | |||||||||||||||||||||||||||
Net investment income | 98,664 | 49,164 | |||||||||||||||||||||||||||||
Net realized investment losses | (25,050 | ) | (66,508 | ) | |||||||||||||||||||||||||||
Foreign exchange losses | (21,465 | ) | (616 | ) | |||||||||||||||||||||||||||
Interest expense and financing costs | (12,791 | ) | (12,833 | ) | |||||||||||||||||||||||||||
Income before income taxes and |
$ | 16,284 | $ | 41,846 | |||||||||||||||||||||||||||
Net loss and loss expense ratio | 62.6 | % | 66.6 | % | 64.7 | % | 62.6 | % | 48.4 | % | 55.3 | % | |||||||||||||||||||
Acquisition cost ratio | 14.9 | % | 25.3 | % | 20.2 | % | 14.0 | % | 25.7 | % | 20.0 | % | |||||||||||||||||||
General and administrative | |||||||||||||||||||||||||||||||
expense ratio | 19.7 | % | 6.6 | % | 17.2 | % | 19.5 | % | 8.2 | % | 16.6 | % | |||||||||||||||||||
Combined ratio | 97.2 | % | 98.5 | % | 102.1 | % | 96.1 | % | 82.3 | % | 91.9 | % | |||||||||||||||||||
6 Underwriting-related general and administrative expenses and consolidated underwriting income are "non-GAAP financial measures", as defined in SEC Regulation G. Reconciliations of these amounts to the nearest GAAP financial measures (total general and administrative expenses and income before income taxes and interest in income (loss) of equity method investments, respectively) are provided in this release, as are discussions of the rationale for the presentation of these items.
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NON-GAAP FINANCIAL MEASURES RECONCILIATION (UNAUDITED) |
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NON-GAAP OPERATING INCOME, NON-GAAP OPERATING RETURN ON AVERAGE COMMON EQUITY |
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AND UNDERWRITING-RELATED GENERAL AND ADMINISTRATIVE EXPENSES |
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FOR THE THREE MONTHS ENDED |
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Three months ended | |||||||||
2017 | 2016 | ||||||||
(in thousands, except per share amounts) | |||||||||
Net income available to common shareholders | $ | 5,014 | $ | 38,417 | |||||
Net realized investment losses, net of tax(7) | 24,227 | 61,810 | |||||||
Foreign exchange losses, net of tax(8) | 21,723 | 1,047 | |||||||
Non-GAAP operating income | $ | 50,964 | $ | 101,274 | |||||
Earnings per common share - diluted | $ | 0.06 | $ | 0.41 | |||||
Net realized investment losses, net of tax | 0.28 | 0.65 | |||||||
Foreign exchange losses, net of tax | 0.25 | 0.01 | |||||||
Non-GAAP operating income per common share - diluted | $ | 0.59 | $ | 1.07 | |||||
Weighted average common shares and common share equivalents - diluted | 86,793 | 94,853 | |||||||
Average common shareholders' equity | 5,125,294 | 5,282,149 | |||||||
Annualized return on average common equity | 0.4 |
% |
2.9 | % | |||||
Annualized non-GAAP operating return on average common equity | 4.0 |
% |
7.7 | % | |||||
7 Tax benefit of (
8Tax cost of
In addition to underwriting-related general and administrative expenses, our total general and administrative expenses of
Cautionary Note Regarding Forward-Looking Statements
This release contains forward-looking statements within the meaning of the
Non-GAAP Financial Measures
In this release, we present non-GAAP operating income, consolidated underwriting income, underwriting-related general and administrative expenses and amounts presented on a constant currency basis, which are "non-GAAP financial measures" as defined in Regulation G.
Non-GAAP operating income represents after-tax operational results without consideration of after-tax net realized investment gains (losses) and foreign exchange losses (gains). We also present diluted non-GAAP operating income per share and non-GAAP operating return on average common equity ("non-GAAP operating ROACE"), which are derived from the non-GAAP operating income measure. Reconciliations of non-GAAP operating income, diluted non-GAAP operating earnings per share and non-GAAP operating ROACE to the nearest GAAP financial measures (based on net income available to common shareholders) are included above.
Consolidated underwriting income 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 costs as expenses. Underwriting-related general and administrative expenses include those general and administrative expenses that are incremental and/or directly attributable to our individual underwriting operations. While these measures are presented in the Segment Information footnote to our Consolidated Financial Statements, they are considered non-GAAP financial measures when presented elsewhere on a consolidated basis. A reconciliation of consolidated underwriting income to income before income taxes and interest in income (loss) of equity method investments (the nearest GAAP financial measure) is included in the 'Consolidated Segmental Data' section of this press release. Our total general and administrative expenses (the nearest GAAP financial measure to underwriting-related general and administrative expenses) also includes corporate expenses. The two components of total general and administrative expenses are separately presented in the 'Consolidated Segmental Data' section of this press release.
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 present our results of operations in the way we believe will be most meaningful and useful to investors, analysts, rating agencies and others who use our financial information to evaluate our performance. This includes the presentation of "non-GAAP operating income" (in total and on a per share basis), "annualized non-GAAP operating ROACE" (which is based on the "non-GAAP operating income" measure) and "consolidated underwriting income", which incorporates "underwriting-related general and administrative expenses".
Non-GAAP Operating Income
Although the investment of premiums to generate income and realized 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 are primarily driven by the impact of foreign exchange rate movements on net insurance-related liabilities. However, this movement is only one element of the overall impact of foreign exchange rate fluctuations on our financial position. In addition, we recognize unrealized foreign exchange losses (gains) on our available-for-sale investments in other comprehensive income and foreign exchange losses (gains) realized upon the sale of these investments in net realized investment gains (losses). These unrealized and realized foreign exchange movements generally offset a large portion of the foreign exchange losses (gains) reported separately in earnings, thereby minimizing the impact of foreign exchange rate movements on total shareholders’ equity. As such, the Statement of Operations foreign exchange losses (gains) in isolation are not a fair representation of the performance of our business.
In this regard, certain users of our financial statements evaluate earnings excluding after-tax net realized investment gains (losses) and foreign exchange losses (gains) to understand the profitability of recurring sources of income.
We believe that showing net income available to common shareholders exclusive of net realized gains (losses) and foreign exchange losses (gains) 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.
Consolidated Underwriting Income/Underwriting-Related General and Administrative 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 these costs are not incremental and/or directly attributable to our individual underwriting operations, we exclude them from underwriting-related general and administrative expenses and, therefore, consolidated underwriting income. Interest expense and financing costs primarily relate to interest payable on our senior notes and are excluded from consolidated underwriting income for the same reason.
We evaluate our underwriting results separately from the performance of our investment portfolio. As such, we believe it appropriate to exclude net investment income and net realized investment gains (losses) from our underwriting profitability measure.
As noted above, foreign exchange losses (gains) in our Consolidated Statement of Operations primarily relate to our net insurance-related liabilities. However, we manage our investment portfolio in such a way that unrealized and realized foreign exchange rate 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 and, therefore, exclude them from consolidated underwriting income.
We believe that presentation of underwriting-related general and administrative expenses and consolidated underwriting income provides investors with an enhanced understanding of our results of operations, by highlighting the underlying pre-tax profitability of our underwriting activities.
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