Albert A. Benchimol
President and Chief Executive Officer
AXIS made significant progress in 2018 in accelerating our strategy to be a profitable leader in specialty insurance and global reinsurance. We did so amid a difficult backdrop — one of a challenging market, changing regulatory environments, and significant property and catastrophe losses.
AXIS’ results showed steady progress in the year, and we delivered improved full-year underwriting performance, both with and without the impact of catastrophes. Our fourth quarter results, which were impacted by elevated losses in property, marred an otherwise positive year.
I am confident the fourth quarter experience reflected volatility inherent in our industry and does not represent a slowdown in our momentum to improve underwriting performance and reduce volatility. We are committed to continuing on this critical path and delivering an improved financial result in 2019 and beyond.
While our full year financial results fell short of our goal, given the fourth quarter losses, I hope they will not overshadow the important and significant improvements achieved in the year to strengthen our business and better position AXIS for relevance, leadership and profitable growth in our chosen insurance and reinsurance markets.
Notably, in 2018 we proudly strengthened our competitive position as a Top 10 or Top 15 player in many of our chosen markets, and — as a result of the integration of Novae Group plc (“Novae”) — advanced our position in several lines. Novae elevated our status in the London market, made us a Top 10 insurer at Lloyd’s and a Top 5 player in many important and high-growth lines. Of course, achieving a top industry ranking is not an end in itself — such leadership brings more and better opportunities, more successful outcomes, and the resources to invest in the people, technology, analytics and R&D needed to excel.
In addition, through both the Novae integration and our transformation initiatives, we are on track to achieve significant cost savings — allowing for higher efficiency, profitability and investment in growth. We expect that by the end of 2020, we will reach our target of $100 million in net savings compared with 2017 expense levels.
Though AXIS operates in an environment with considerable challenges, including emerging risks, climate change, geopolitical uncertainties, increasing regulatory pressures, potentially disruptive technology, and the presence of excess capital in the market, we are excited about our long-term opportunities. Our Company plays an essential role in enabling organizations around the world to manage risk. We are well-positioned to fulfill that role and to perform in a challenging environment. Moreover, we continue to build on our strengths: leadership in chosen markets and a focus on attractive specialty lines, strategic investments in innovation, strong relationships with distribution partners and, most of all, a talented and energetic team dedicated to driving our success.
Despite a challenging fourth quarter, our results showed progress. Gross premiums written increased by $1.4 billion, or 24%, to $6.9 billion, with an increase of 35% in the Insurance segment, primarily attributable to the acquisition of Novae, and an increase of 14% in the Reinsurance segment. Adjusting for the impact of the Novae acquisition, gross premiums written increased by $331 million, or 6%, with an increase of $60 million in the Insurance segment, and an increase of $271 million in the Reinsurance segment. Net premiums written increased by 16% to $4.7 billion. Net income for 2018 was $0.4 million, while operating income was $161 million, reversing a prior-year operating loss.
Our reported combined ratio improved from 113.1% in 2017 to 99.9% in 2018. The timing of the Novae acquisition in 2017 and the associated purchase GAAP (“PGAAP”) accounting entries complicate a like-for-like, year-over-year comparison. We believe the best perspective on improvements in underlying performance is on an ex-PGAAP basis, excluding catastrophes and weather-related losses, and the impact of prior year reserve development. On that basis, the combined ratio improved from 98.5% in 2017 to 97.7% in 2018.
I am proud of our progress in becoming an increasingly relevant specialty insurer and global reinsurer, well-positioned for future growth and performance.
In particular, we are pleased with the success of the Novae acquisition. The combined organization is functioning well and beginning to deliver the expected benefits. The portfolio repositioning has been underway since the acquisition closed, and continues to this day, such that 2018 results do not yet reflect the full potential benefits of the acquisition. For example, we integrated the AXIS international specialty insurance business at Lloyd’s with Novae, and are now providing our customers with a diversified and balanced portfolio of specialist classes. The synergies are already yielding substantial run-rate cost savings. We eventually expect our combined specialty business to provide a platform for growth, particularly in such lines as Cyber Risk, Political Risk, Renewable Energy and Marine. We are excited by the potential to leverage Novae’s distribution relationships, and to increase our relevance to brokers.
In 2018, we also accelerated our transformation program and made significant enhancements to our operating model. This included realigning our insurance and reinsurance Accident & Health (A&H) business units into our Insurance and Reinsurance segments. Additionally, we introduced new integrated service models for our IT and Finance functions. These actions help to improve agility, efficiency, data sharing and customer-centricity. As part of our transformation program, we also invested in innovation initiatives, and in fostering an agile and high-performance culture.
We launched our Global Underwriting and Analytics office (GUA) to improve our ability to leverage data and analytics and optimize our portfolio for better results. As part of our ongoing effort to drive relevance and profitability, the GUA is starting to provide more unified enterprise-wide views relating to underwriting policy and risk appetite, and bringing consistency across our global portfolio.
Our Insurance business, under the direction of CEO Peter Wilson, continued to strengthen its focus. We made changes in our organizational design to advance that goal — for example, we created a consolidated Global Cyber and Technology unit to deepen our leadership position in this key market. We are also continuing to invest in enhanced underwriting — both by leveraging the tools and technology we have developed in past years, such as our Future Insurance Platform, and by making additional investments in data and analytics-focused initiatives. Similarly, a key 2019 priority is to leverage technology to make our specialty underwriting expertise more efficiently available, in particular for small and medium sized enterprise (SME) accounts. The business is also enhancing its distribution function — maintaining its focused approach on working with key broker partners while creating more specialized resources to support business growth through new and emerging distribution channels.
In Reinsurance, we took decisive steps in 2018 to advance our global leadership position. Under our new Reinsurance CEO Steve Arora, the business is focused on driving greater client satisfaction and employee interaction, while introducing new products and gaining share in under-penetrated markets. Toward that end, Reinsurance launched a new client engagement model, including the formation of AXIS Re Strategic Partners, a unit that takes a more consultative approach to bolstering our value to key clients.
The success of our recent initiatives will rely on the talents of our team to lead, embrace excellence and drive innovation. We recruited outstanding new talent and promoted rising stars from within to put the right people in important roles, strengthen our service to our customers and partners in distribution, elevate our leadership and grow our potential. We welcomed Group Chief Information Officer Keith Schlosser and Chief Data Officer Michael Stege. We promoted long-standing existing executives, including Chief Strategy Officer Linda Ventresca, Group Chief Underwriting Officer Eric Gesick and Chief Financial Officer Peter Vogt. I can unreservedly affirm that our leadership team is the strongest we have ever had, and is the right team for this critical juncture in the history of our industry. Our shared commitment to customer-centricity, improved underwriting and superior results gives me great confidence.
AXIS is executing a strategic plan designed to realize our vision — to be a leading specialty insurer and global reinsurer — with a target of achieving annual revenue of at least $10 billion and top-quintile profitability
With significant advancements achieved over the past year, in 2019 our focus is on implementation. AXIS is executing a strategic plan designed to realize our vision — to be a leading specialty insurer and global reinsurer — with a target of achieving annual revenue of at least $10 billion and top-quintile profitability.
We will focus on key elements that we believe will accelerate our path to our strategic goals.
Looking at the forces that will affect our future, we are encouraged by the trend toward price increases in many lines. We are also witnessing signs of greater discipline in the Lloyd’s market, with the closure of syndicates, significant reductions in capacity announced by market participants and a focus on expense controls. These trends will be positive for our business, and we intend to push hard for reasonable pricing that properly reflects risks and delivers appropriate returns.
As AXIS evolves, we never forget our responsibility to our communities and society. Insurance is the safety net for a thriving economy. As long as people and businesses have assets and income to protect, there will be a need for insurance to reduce the negative impact of risks. We serve a unique societal purpose: we give people the confidence to take necessary risks in the pursuit of their goals and ambitions. We see our claims service as the delivery of our promise — when things go wrong, we help people when they are down. One manifestation of our social purpose is the annual AXIS Day of Giving Rally, our global employee volunteer program.
Further, we continually seek to bolster our culture of diversity, inclusion and equity, and in 2019 this will remain a top priority. At AXIS, we believe we owe our teammates an equitable and supportive work environment. In turn, as a global enterprise, we benefit from a diversity of thought and perspectives.
Much of the credit for our work in 2018 belongs to our team of talented and committed employees. In a year marked by many challenges and changes, our team worked tirelessly to advance our business, serve our clients and communities and establish a platform for long-term performance. We also must express our undying appreciation to our customers and distribution partners, for whom we come to work energized every day. We thank you for your trust, and for the opportunity to serve you and contribute to your success.
Thank you also to Chairman Michael Butt, and to our Board of Directors for the sage advice and guidance, as well as to our shareholders for their confidence and support. In this regard, I want to thank Cheryl-Ann Lister, who retired from our Board after 10 years of service. I welcome three new Board members: Barbara Yastine, the former CEO of Ally Bank and a leader in the financial services and risk management sectors; Elanor Hardwick, an innovation leader bringing a range of experience from FinTechs to UBS; and, most recently, Lizabeth Zlatkus, a respected insurance industry leader. They join a distinguished Board.
AXIS moved forward in 2018 toward our vision to be a leading specialty insurer and global reinsurer. We have made great progress in creating an enterprise that is differentiated by its specialized underwriting expertise, attention to client service, strong distribution partner relationships, and talented team members. We are working relentlessly to build on this strong platform, to achieve industry leadership and to drive profitable growth.