AXIS Capital Holdings Limited (“AXIS Capital”) (NYSE:AXS) today reported
net income available to common shareholders for the three months ended
March 31, 2014, of $137 million, or $1.24 per diluted common share,
compared with $303 million, or $2.55 per diluted common share, for the
corresponding period of 2013.
Operating income1 for the first quarter of 2014 was $137
million, or $1.24 per diluted common share, compared with $227 million,
or $1.92 per diluted common share, for the first quarter of 2013.
1 Operating income and operating return on average common
equity are “non-GAAP financial measures” as defined in Regulation G. A
reconciliation of 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.
First Quarter Highlights2
-
Gross premiums written increased 4% to $1.8 billion, with growth of 1%
in our insurance segment and 6% in our reinsurance segment;
-
Net premiums written increased 6% to $1.7 billion;
-
Net premiums earned increased 8% to $946 million;
-
Combined ratio of 91.9%, compared to 83.0%;
-
Current accident year loss ratio of 62.1%, compared to 56.4%;
-
No significant natural catastrophe and weather-related losses;
-
Net favorable prior year reserve development of $43 million
(benefiting the combined ratio by 4.6 points), compared to $54 million
(benefiting the combined ratio by 6.2 points);
-
Net investment income of $83 million, compared to $109 million;
-
Pre-tax total return on cash and investments of 1.1%, compared to 0.7%;
-
Net income available to common shareholders of $137 million and
annualized return on average common equity of 10.6%, compared to $303
million and 22.7%;
-
Operating income of $137 million, representing an annualized operating
return on average common equity of 10.6%, compared to $227 million and
17.1%;
-
Net cash flows from operations of $151 million, compared to $221
million;
-
Share repurchases during the quarter totaling $179 million;
-
Diluted book value per common share of $47.13, a 3% increase during
the quarter and a 6% increase over the last 12 months; and
-
The issuance of $250 million of 2.65% senior unsecured notes due in
2019 and $250 million of 5.15% senior unsecured notes, which are due
in 2045.
2 All comparisons are with the same period of the prior year,
unless otherwise stated.
Commenting on the first quarter 2014 financial results, Albert
Benchimol, President and CEO of AXIS Capital said "AXIS reported first
quarter operating income of $1.24 per share and operating ROE of 10.6%.
We ended the quarter with diluted book value per share of $47.13, an
increase of 3% over the quarter. In addition, we returned to
shareholders over $200 million through share repurchases and dividends.
This year’s quarter was impacted by lower investment income from
alternative investments and higher property losses in the insurance
segment.
“While market conditions have weakened a little, there remain many
opportunities for profitable business across our core book. We also
continue to have success in developing and nurturing new business
initiatives. We completed a successful first season of coverage in our
Weather & Commodities business, and we recently brought on a new
Healthcare Professional Liability team. Our strategy of growing and
diversifying our consolidated portfolio is delivering highly
satisfactory results."
Segment Highlights
Insurance Segment
Our insurance segment reported gross premiums written of $602 million in
the quarter ended March 31, 2014, up $5 million, or 1%, from the first
quarter of 2013. The liability and credit and political risk lines of
business were the biggest drivers of the increase, which were partially
offset by a decrease in the property lines. Improvements in the U.S.
casualty markets continued to benefit our liability lines. Credit and
political risk growth reflects new business written during the quarter.
The decrease in the property lines was primarily driven by timing
differences in renewals of certain contracts.
Net premiums written were $457 million, an increase of 6% for the
current quarter compared to the first quarter of 2013. Growth rates
exceeded those for gross premiums written primarily due to reductions in
certain of our ceded reinsurance programs during 2013. Net premiums
earned were $449 million, an increase of 12% over the comparative
quarter in 2013 and reflect the growth in the professional, accident and
health and liability lines in recent periods, as well as the positive
impact of the reductions in the ceded reinsurance programs.
Our insurance segment reported underwriting income of $17 million for
the current quarter, compared to $41 million for the first quarter of
2013. The current quarter’s underwriting result reflected a combined
ratio of 96.3%, compared with 89.9% in the prior year quarter. The
segment’s current accident year loss ratio increased from 55.5% in the
first quarter of 2013 to 64.8% this quarter. This increase was driven
primarily by property classes, which were impacted, among other factors,
by a higher level of mid-size and attritional losses during the quarter.
In addition, the current accident year loss ratio was impacted by the
higher underlying loss ratio for professional U.S. D&O classes
established in Q4 2013 for business written in 2013, which continues to
earn into calendar year 2014. A change in the business mix also
contributed to the quarter over quarter increase although to a lesser
extent. Net favorable prior year reserve development was $12 million, or
2.6 points, this quarter compared with $6 million, or 1.4 points, in the
first quarter of 2013.
Reinsurance Segment
Our reinsurance segment reported gross premiums written of $1.2 billion
in the first quarter, up $70 million, or 6%, from the first quarter of
2013. The increase in the gross premiums written was primarily due to a
number of treaties written on a multi-year basis, specifically in the
property, catastrophe and motor lines. After adjusting for the portions
of the written premium that related to future underwriting years,
premiums written in the first quarter of 2014 were comparable to the
premiums written in the same period of 2013. Increases were noted in the
motor lines reflecting growth in our European business written on a
proportional basis and agriculture lines reflecting differences in the
timing of certain renewals and our continuing initiatives to grow this
line of business. This growth was offset by decreases in our
professional, property and catastrophe lines primarily due to higher
cedant retentions, treaty restructurings and non-renewals. Net premiums
earned increased 5% to $497 million, primarily reflecting growth in the
business written in prior periods in the professional, motor and
agriculture lines.
Our reinsurance segment reported underwriting income of $92 million for
the current quarter, compared to $130 million for the first quarter of
2013. The segment’s combined ratio increased to 82.1% for the current
quarter, compared to 72.5% in the first quarter of 2013. This included
an increase in the current accident year loss ratio from 57.2% in the
first quarter of 2013 to 59.7% this quarter, primarily attributed to
changes in the business mix. Net favorable prior year reserve
development was $32 million, or 6.4 points, this quarter compared with
$49 million, or 10.4 points, in the first quarter of 2013.
The acquisition cost ratio increased from 18.7% in the first quarter of
2013, to 21.5% in the current quarter. Adjustments related to
loss-sensitive features in reinsurance contracts reduced the segment's
acquisition cost ratio in the first quarter of 2013; however, these had
a lesser impact on the first quarter of 2014.
Investments
Net investment income of $83 million for the quarter represents a $26
million decrease from the first quarter of 2013, and a $31 million
decrease from the fourth quarter of 2013, with the variances primarily
driven by changes in the fair value of our alternative investments
("other investments"). These investments generated $17 million of income
in the current quarter, compared to income of $43 million in the first
quarter of 2013 and income of $41 million in the fourth quarter of 2013.
Net realized investment gains for the quarter were $11 million, compared
to $44 million in the first quarter of 2013 and $20 million in the
fourth quarter of 2013.
Capitalization / Shareholders’ Equity
Our total capital3 at March 31, 2014 was $7.3 billion,
including $1.5 billion of senior notes and $0.6 billion of preferred
equity, comparable to $6.8 billion at December 31, 2013. The increase
was primarily attributable to the issuance, during the first quarter of
2014, of $250 million of 2.65% senior unsecured notes, which are due for
repayment in 2019, and $250 million of 5.15% senior unsecured notes,
which are due in 2045. The net proceeds from these offerings are
expected to be used towards the repayment of the $500 million of our
5.75% senior unsecured notes, which mature on December 1, 2014.
Diluted book value per common share, calculated on a treasury stock
basis, increased by $1.33, or 3%, to $47.13 in the current quarter with
the increase primarily driven by our operating income. Over the past
twelve months, diluted book value per common share increased by $2.46,
or 6% with growth driven by operating income, which was partially offset
by the decline in the fair value of our available-for-sale fixed
maturity portfolio, following an upward shift in sovereign yield curves,
and the payment of dividends.
During the quarter we repurchased 4.0 million common shares at an
average price of $44.27 per share, for a total cost of $179 million. At
April 29, 2014, we had $550 million of remaining authorization under our
Board-authorized share repurchase program for common share repurchases
through December 31, 2015.
3 Total capital represents the sum of total shareholders'
equity attributable to AXIS Capital and our senior notes.
Conference Call
We will host a conference call on Wednesday, April 30, 2014 at 10:00 AM
(Eastern) to discuss the first 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 code 5-0-2-7-9-4-4.
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 three weeks by
dialing (877) 344-7529 (U.S. callers) or (412) 317-0088 (international
callers) and entering the code 1-0-0-4-2-4-4-4. The webcast will be
archived in the Investor Information section of our website.
In addition, a financial supplement relating to our financial results
for the quarter ended March 31, 2014 is available in the Investor
Information section of our website.
AXIS Capital is a Bermuda-based global provider of specialty lines
insurance and treaty reinsurance with shareholders’ equity attributable
to AXIS Capital at March 31, 2014 of $5.8 billion and locations in
Bermuda, the United States, Europe, Singapore, Canada, Australia and
Latin America. Its operating subsidiaries have been assigned a rating of
“A+” (“Strong”) by Standard & Poor’s and “A+” (“Superior”) by A.M. Best.
For more information about AXIS Capital, visit our website at www.axiscapital.com.
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2014 (UNAUDITED) AND DECEMBER 31, 2013
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Assets
|
|
|
|
Investments:
|
|
|
|
Fixed maturities, available for sale, at fair value
|
|
|
$
|
12,095,839
|
|
|
$
|
11,986,327
|
|
Equity securities, available for sale, at fair value
|
|
|
708,412
|
|
|
701,987
|
|
Other investments, at fair value
|
|
|
1,005,762
|
|
|
1,045,810
|
|
Short-term investments, at fair value and amortized cost
|
|
|
296,800
|
|
|
46,212
|
|
Total investments
|
|
|
14,106,813
|
|
|
13,780,336
|
|
Cash and cash equivalents
|
|
|
1,205,754
|
|
|
923,326
|
|
Restricted cash and cash equivalents
|
|
|
88,955
|
|
|
64,550
|
|
Accrued interest receivable
|
|
|
89,536
|
|
|
97,132
|
|
Insurance and reinsurance premium balances receivable
|
|
|
2,292,954
|
|
|
1,688,957
|
|
Reinsurance recoverable on unpaid and paid losses
|
|
|
1,912,840
|
|
|
1,929,988
|
|
Deferred acquisition costs
|
|
|
634,413
|
|
|
456,122
|
|
Prepaid reinsurance premiums
|
|
|
299,994
|
|
|
330,261
|
|
Receivable for investments sold
|
|
|
1,972
|
|
|
1,199
|
|
Goodwill and intangible assets
|
|
|
90,350
|
|
|
89,528
|
|
Other assets
|
|
|
274,053
|
|
|
273,385
|
|
Total assets
|
|
|
$
|
20,997,634
|
|
|
$
|
19,634,784
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Reserve for losses and loss expenses
|
|
|
$
|
9,667,841
|
|
|
$
|
9,582,140
|
|
Unearned premiums
|
|
|
3,372,166
|
|
|
2,683,849
|
|
Insurance and reinsurance balances payable
|
|
|
207,909
|
|
|
234,412
|
|
Senior notes
|
|
|
1,490,198
|
|
|
995,855
|
|
Payable for investments purchased
|
|
|
162,747
|
|
|
21,744
|
|
Other liabilities
|
|
|
218,502
|
|
|
248,822
|
|
Total liabilities
|
|
|
15,119,363
|
|
|
13,766,822
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
|
|
|
Preferred shares
|
|
|
627,843
|
|
|
627,843
|
|
Common shares
|
|
|
2,188
|
|
|
2,174
|
|
Additional paid-in capital
|
|
|
2,247,102
|
|
|
2,240,125
|
|
Accumulated other comprehensive income
|
|
|
182,254
|
|
|
117,825
|
|
Retained earnings
|
|
|
5,170,948
|
|
|
5,062,706
|
|
Treasury shares, at cost
|
|
|
(2,403,286
|
)
|
|
(2,232,711
|
)
|
Total shareholders' equity attributable to AXIS Capital
|
|
|
5,827,049
|
|
|
5,817,962
|
|
Noncontrolling interests
|
|
|
51,222
|
|
|
50,000
|
|
Total shareholders' equity
|
|
|
5,878,271
|
|
|
5,867,962
|
|
Total liabilities and shareholders' equity
|
|
|
$
|
20,997,634
|
|
|
$
|
19,634,784
|
|
|
|
|
|
|
|
|
|
|
|
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
|
|
|
|
|
Three months ended
|
|
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
Revenues
|
|
|
|
|
|
Net premiums earned
|
|
|
$
|
945,949
|
|
|
$
|
874,039
|
|
Net investment income
|
|
|
82,744
|
|
|
108,908
|
|
Net realized investment gains
|
|
|
10,620
|
|
|
44,478
|
|
Other insurance related income
|
|
|
3,082
|
|
|
595
|
|
Total revenues
|
|
|
1,042,395
|
|
|
1,028,020
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
Net losses and loss expenses
|
|
|
544,207
|
|
|
438,414
|
|
Acquisition costs
|
|
|
172,036
|
|
|
145,491
|
|
General and administrative expenses
|
|
|
152,729
|
|
|
141,475
|
|
Foreign exchange losses (gains)
|
|
|
4,233
|
|
|
(34,882
|
)
|
Interest expense and financing costs
|
|
|
16,594
|
|
|
15,834
|
|
Total expenses
|
|
|
889,799
|
|
|
706,332
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
152,596
|
|
|
321,688
|
|
Income tax expense
|
|
|
4,125
|
|
|
10,131
|
|
Net income
|
|
|
148,471
|
|
|
311,557
|
|
Net income attributable to noncontrolling interests
|
|
|
1,222
|
|
|
—
|
|
Net income attributable to AXIS Capital
|
|
|
147,249
|
|
|
311,557
|
|
Preferred shares dividends
|
|
|
10,022
|
|
|
8,741
|
|
Net income available to common shareholders
|
|
|
$
|
137,227
|
|
|
$
|
302,816
|
|
|
|
|
|
|
|
Per share data
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
Basic net income
|
|
|
$
|
1.26
|
|
|
$
|
2.59
|
|
Diluted net income
|
|
|
$
|
1.24
|
|
|
$
|
2.55
|
|
Weighted average number of common shares outstanding - basic
|
|
|
109,053
|
|
|
117,022
|
|
Weighted average number of common shares outstanding - diluted
|
|
|
110,391
|
|
|
118,658
|
|
Cash dividends declared per common share
|
|
|
$
|
0.27
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
AXIS CAPITAL HOLDINGS LIMITED
CONSOLIDATED SEGMENTAL DATA (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2013
|
|
|
|
Insurance
|
|
Reinsurance
|
|
Total
|
|
Insurance
|
|
Reinsurance
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Gross premiums written
|
|
|
$
|
601,721
|
|
|
$
|
1,219,678
|
|
|
$
|
1,821,399
|
|
|
$
|
596,715
|
|
|
$
|
1,149,768
|
|
|
$
|
1,746,483
|
|
Net premiums written
|
|
|
456,692
|
|
|
1,207,892
|
|
|
1,664,584
|
|
|
432,681
|
|
|
1,137,759
|
|
|
1,570,440
|
|
Net premiums earned
|
|
|
449,214
|
|
|
496,735
|
|
|
945,949
|
|
|
401,880
|
|
|
472,159
|
|
|
874,039
|
|
Other insurance related income
|
|
|
—
|
|
|
3,082
|
|
|
3,082
|
|
|
595
|
|
|
—
|
|
|
595
|
|
Net losses and loss expenses
|
|
|
(279,423
|
)
|
|
(264,784
|
)
|
|
(544,207
|
)
|
|
(217,336
|
)
|
|
(221,078
|
)
|
|
(438,414
|
)
|
Acquisition costs
|
|
|
(65,057
|
)
|
|
(106,979
|
)
|
|
(172,036
|
)
|
|
(57,261
|
)
|
|
(88,230
|
)
|
|
(145,491
|
)
|
Underwriting-related general and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
administrative expenses(4)
|
|
|
(87,946
|
)
|
|
(36,076
|
)
|
|
(124,022
|
)
|
|
(86,889
|
)
|
|
(33,041
|
)
|
|
(119,930
|
)
|
Underwriting income (4)
|
|
|
$
|
16,788
|
|
|
$
|
91,978
|
|
|
108,766
|
|
|
$
|
40,989
|
|
|
$
|
129,810
|
|
|
170,799
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expenses
|
|
|
|
|
|
|
(28,707
|
)
|
|
|
|
|
|
(21,545
|
)
|
Net investment income
|
|
|
|
|
|
|
82,744
|
|
|
|
|
|
|
108,908
|
|
Net realized investment gains
|
|
|
|
|
|
|
10,620
|
|
|
|
|
|
|
44,478
|
|
Foreign exchange (losses) gains
|
|
|
|
|
|
|
(4,233
|
)
|
|
|
|
|
|
34,882
|
|
Interest expense and financing costs
|
|
|
|
|
|
|
(16,594
|
)
|
|
|
|
|
|
(15,834
|
)
|
Income before income taxes
|
|
|
|
|
|
|
$
|
152,596
|
|
|
|
|
|
|
$
|
321,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss and loss expense ratio
|
|
|
62.2
|
%
|
|
53.3
|
%
|
|
57.5
|
%
|
|
54.1
|
%
|
|
46.8
|
%
|
|
50.2
|
%
|
Acquisition cost ratio
|
|
|
14.5
|
%
|
|
21.5
|
%
|
|
18.2
|
%
|
|
14.2
|
%
|
|
18.7
|
%
|
|
16.6
|
%
|
General and administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense ratio
|
|
|
19.6
|
%
|
|
7.3
|
%
|
|
16.2
|
%
|
|
21.6
|
%
|
|
7.0
|
%
|
|
16.2
|
%
|
Combined ratio
|
|
|
96.3
|
%
|
|
82.1
|
%
|
|
91.9
|
%
|
|
89.9
|
%
|
|
72.5
|
%
|
|
83.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4Underwriting-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, respectively) are provided in
this release, as are discussions of the rationale for the presentation
of these items.
AXIS CAPITAL HOLDINGS LIMITED
NON-GAAP FINANCIAL MEASURE RECONCILIATION (UNAUDITED)
OPERATING INCOME, OPERATING RETURN ON AVERAGE COMMON EQUITY
AND UNDERWRITING-RELATED GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE THREE MONTHS ENDED MARCH 31, 2014 AND 2013
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
2014
|
|
2013
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share amounts)
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
|
$
|
137,227
|
|
|
$
|
302,816
|
|
Net realized investment gains, net of tax(1)
|
|
|
(4,299
|
)
|
|
(41,071
|
)
|
Foreign exchange losses (gains), net of tax(2)
|
|
|
4,141
|
|
|
(34,253
|
)
|
Operating income
|
|
|
$
|
137,069
|
|
|
$
|
227,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share - diluted
|
|
|
$
|
1.24
|
|
|
$
|
2.55
|
|
Net realized investment gains, net of tax
|
|
|
(0.04
|
)
|
|
(0.34
|
)
|
Foreign exchange losses (gains), net of tax
|
|
|
0.04
|
|
|
(0.29
|
)
|
Operating income per common share - diluted
|
|
|
$
|
1.24
|
|
|
$
|
1.92
|
|
|
|
|
|
|
|
Weighted average common shares and common share
|
|
|
|
|
|
equivalents - diluted
|
|
|
110,391
|
|
|
118,658
|
|
|
|
|
|
|
|
Average common shareholders' equity
|
|
|
$
|
5,194,663
|
|
|
$
|
5,331,753
|
|
|
|
|
|
|
|
Annualized return on average common equity
|
|
|
10.6
|
%
|
|
22.7
|
%
|
|
|
|
|
|
|
Annualized operating return on average common equity
|
|
|
10.6
|
%
|
|
17.1
|
%
|
|
|
|
|
|
|
|
|
(1)
|
|
Tax cost of $6,321 and $3,407 for the three months ended March 31,
2014 and 2013, respectively. Tax impact is estimated by applying the
statutory rates of applicable jurisdictions, after consideration of
other relevant factors including the ability to utilize capital
losses.
|
(2)
|
|
Tax benefit (cost) of $92 and ($629) for the three months ended
March 31, 2014 and 2013, respectively. Tax impact is estimated by
applying the statutory rates of applicable jurisdictions, after
consideration of other relevant factors including the tax status of
specific foreign exchange transactions.
|
|
|
|
In addition to underwriting-related general and administrative expenses,
our total general and administrative expenses of $152,729 and $141,475
for the three months ended March 31, 2014 and 2013, respectively,
include corporate expenses.
Cautionary Note Regarding Forward-Looking Statements
This release contains forward-looking statements within the meaning of
the U.S. federal securities laws. Forward-looking statements contained
in this release include our expectations regarding market conditions and
information regarding our estimates of losses related to natural
disasters. These statements involve risks, uncertainties and
assumptions. Actual events or results may differ materially from our
expectations. Important factors that could cause actual events or
results to be materially different from our expectations include (1) the
occurrence and magnitude of natural and man-made disasters, (2) actual
claims exceeding our loss reserves, (3) general economic, capital, and
credit market conditions, (4) the failure of any of the loss limitation
methods we employ, (5) the effects of emerging claims, coverage and
regulatory issues, including uncertainty related to coverage
definitions, limits, terms and conditions, (6) the failure of our
cedants to adequately evaluate risks, (7) inability to obtain additional
capital on favorable terms, or at all, (8) the loss of one or more key
executives, (9) a decline in our ratings with rating agencies, (10) the
loss of business provided to us by our major brokers, (11) changes in
accounting policies or practices, (12) the use of industry catastrophe
models and changes to these models, (13) changes in governmental
regulations, (14) increased competition, (15) changes in the political
environment of certain countries in which we operate or underwrite
business, (16) fluctuations in interest rates, credit spreads, equity
prices and/or currency values, and (17) the other factors set forth in
our most recent report on Form 10-K, Form 10-Q and other documents on
file with the Securities and Exchange Commission. We undertake no
obligation to update or revise publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
Non-GAAP Financial Measures
In this release, we present operating income, consolidated underwriting
income and underwriting-related general and administrative expenses,
which are “non-GAAP financial measures” as defined in Regulation G.
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 operating
earnings per share and operating return on average common equity
("operating ROACE"), which are derived from the non-GAAP operating
income measure. Reconciliations of operating income, diluted operating
earnings per share and 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 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 (the nearest GAAP financial measure) is
included in the 'Consolidated Segmental Data' section of this
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 are
separately presented in the 'Consolidated Segmental Data' section
of this release.
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 “operating income” (in total and on a per
share basis), “annualized operating ROACE” (which is based on the
“operating income” measure) and "consolidated underwriting income",
which incorporates "underwriting-related general and administrative
expenses".
Operating Income
Although the investment of premiums to generate income and realized
investment gains (or losses) is an integral part of our operations, the
determination to realize investment gains (or 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 (or 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 (or 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 (re)insurance 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 gains (losses) 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.
Copyright Business Wire 2014