Financial Review

In 2018, we made steady progress in advancing our strategy and strengthening our business, even as the Company faced heightened catastrophe activity and attritional property losses in the fourth quarter.

Our results showed that we delivered improved full-year underwriting performance with and without catastrophe and weather-related claims. Further, we implemented significant initiatives, such as integrating Novae into our London operations and scaling up a global transformation.

Following three consecutive quarters in which AXIS delivered double-digit ex-PGAAP operating return on average common equity (“Ex-PGAAP operating ROACE”), our full-year results were marred by the losses.

For the year, net income available to common shareholders was $0.4 million, compared to net loss of $415.8 million in the prior year. In addition to improved underwriting performance, investment income grew 9% to $439 million and fee income from strategic capital partners rose to $48 million in 2018, compared to $36 million in 2017. Notwithstanding progress along a number of fronts, book value per diluted common share decreased by 7% to $49.93 over the last 12 months, due primarily to the elevated level of catastrophe and weather-related losses as well as the reduction in the market value of our investment portfolio given the rising rate environment. Adjusted for dividends declared, book value per diluted common share decreased by 4% over the last 12 months.

Gross premiums written rose by 24% and net premiums written rose by 16% in the year, associated primarily with the acquisition of Novae. 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.

Our reported combined ratio improved from 113.1% in 2017 to 99.9% in 2018. Adjusting for the impact of catastrophe and weather-related losses, our combined ratio for 2018 was 90.9%.

Given that the reported accident year 2018 results were impacted by PGAAP, and the reported accident year 2017 results only included one quarter of Novae’s results, reviewing accident year 2018 ex-PGAAP and accident year 2017 pro-forma combined results as if the Novae acquisition was effective January 1, 2017 provides a more insightful year-over-year comparison. On that basis, the combined ratio for the full year improved from a pro forma 99.5% in 2017 to an actual 97.7% in 2018, with a 1.4 point reduction in the loss ratio excluding catastrophe and weather-related losses. This reflects the actions that we have taken over the past year to strengthen our portfolio.

During 2018, we continued to deliver operational expense efficiencies related to the Novae integration and our transformation. We are targeting $100 million in net savings compared with 2017 expense levels by the end of 2020. As of fourth quarter of 2018, the Company has achieved $68 million in annualized pre-tax cost savings on a run rate basis.

More broadly, our general and administrative expense ratio decreased to 13.1% from 14%, driven primarily by our transformation initiative and the integration of Novae. We have invested some of our savings back into the Company to enhance our data and analytics and technological capabilities, better enabling AXIS to leverage changes in the transformed insurance marketplace to our advantage.

Our investment portfolio yielded a total return of 0.6% including foreign exchange movements, or 0.9% excluding foreign exchange movements*, in line with our industry peers. Our fixed income portfolio, which represents approximately 76% of total cash and investments, remained highly rated at AA-. At December 31, 2018, the duration of our fixed maturities portfolio was approximately three years, which was lower than the estimated duration of our net insurance liabilities. In our alternative investments portfolio, which represents approximately 5% of total cash and investments, we continued our shift from hedge funds towards direct lending funds and real estate investments, with the expectation of generating better risk-adjusted returns.

We raised our dividend again this year, maintaining our history of increasing dividends every year.

The past year was one we laid the groundwork and strengthened our business and our operational infrastructure. We made progress on many of our financial metrics, but nevertheless fell short of our full-year net income goals. In 2019, we look forward to further improvement and delivering on the expected benefits of this work.

* Pre-tax total return on average cash and investments excluding foreign exchange rate movements is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to pre-tax total return on cash and investments, the most comparable GAAP financial measure, included foreign exchange gains (losses) of $(48) million for the year ended December 31, 2018.