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. Some of the measurements we use are considered non-GAAP financial measures under SEC rules and regulations. In this report, we present consolidated underwriting income (loss), operating income (loss) (in total and on a per share basis), annualized operating return on average common equity (“operating ROACE”), ex-PGAAP operating income (loss) (in total and on a per share basis), annualized ex-PGAAP operating ROACE, ex-PGAAP combined ratio and pre-tax total return on cash and investments excluding foreign exchange movements, which are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. We believe that these non-GAAP financial measures, which may be defined and calculated differently by other companies, better explain and enhance the understanding of our results of operations. However, these measures should not be viewed as a substitute for those determined in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Consolidated underwriting income (loss) is a pre-tax measure of underwriting profitability that takes into account net premiums earned and other insurance-related income (losses) as revenues and net losses and loss expenses, acquisition costs and underwriting-related general and administrative expenses as expenses. While this measure is presented in the Segment Information note to our Consolidated Financial Statements, it is considered a non-GAAP financial measure when presented elsewhere on a consolidated basis.
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 this measure is presented in the Segment Information note to our Consolidated Financial Statements, it is considered a non-GAAP financial measure when presented elsewhere on a consolidated basis.
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 expenses are not incremental and/or directly attributable to our individual underwriting operations, these expenses are excluded from underwriting-related general and administrative expenses and, therefore, consolidated underwriting income (loss). General and administrative expenses, the most comparable GAAP financial measure to underwriting-related general and administrative expenses, also includes corporate expenses.
We evaluate our underwriting results separately from the performance of our investment portfolio. As such, we believe it is appropriate to exclude net investment income and net investment gains (losses) from our underwriting profitability measure.
Foreign exchange losses (gains) in our Consolidated Statement of Operations primarily relate to the impact of foreign exchange rate movements on our net insurance-related liabilities. However, we manage our investment portfolio in such a way that unrealized and realized foreign exchange 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; therefore, foreign exchange losses (gains) are excluded from consolidated underwriting income (loss).
Interest expense and financing costs primarily relate to interest payable on our senior notes and notes payable. As these expenses are not incremental and/or directly attributable to our individual underwriting operations, these expenses are excluded from underwriting-related general and administrative expenses, and therefore consolidated underwriting income (loss).
Termination fee received represents the break-up fee paid by PartnerRe Ltd. following the cancellation of the amalgamation agreement with the Company and is not indicative of future revenues; therefore, this revenue is excluded from consolidated underwriting income (loss).
Bargain purchase gain, recognized upon the acquisition of Compagnie Belge d’Assurances Aviation NV/SA (“Aviabel”), reflects the excess of the fair value of the net identifiable assets acquired over the fair value of consideration transferred and is not indicative of future revenues of the company; therefore, this revenue is excluded from consolidated underwriting income (loss).
Transaction and reorganization expenses are primarily driven by business decisions, the nature and timing of which are not related to the underwriting process; therefore, these expenses are excluded from consolidated underwriting income (loss).
Amortization of intangible assets including VOBA arose from business decisions, the nature and timing of which are not related to the underwriting process; therefore, these expenses are excluded from consolidated underwriting income (loss).
We believe that presentation of consolidated underwriting income (loss) provides investors with an enhanced understanding of our results of operations, by highlighting the underlying pre-tax profitability of our underwriting activities. The reconciliation of consolidated underwriting income (loss) to income (loss) before income taxes and interest in income (loss) of equity method investments, the most comparable GAAP financial measure, is presented in the Non-GAAP Financial Measures Reconciliation section of this report.
Operating income (loss) represents after-tax operational results exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), termination fee received, transaction and reorganization expenses, revaluation of net deferred tax asset, bargain purchase gain, and loss on repurchase of preferred shares.
Although the investment of premiums to generate income and 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 primarily relate to 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 (loss) and foreign exchange losses (gains) realized upon the sale of these investments in net investment gains (losses). These unrealized and realized foreign exchange losses (gains) generally offset a large portion of the foreign exchange losses (gains) reported separately in net income (loss) available (attributable) to common shareholders, thereby minimizing the impact of foreign exchange rate movements on total shareholders’ equity. As a result, the foreign exchange losses (gains) in our Consolidated Statement of Operations in isolation are not a fair representation of the performance of our business.
Termination fee received represents the break-up fee received on the cancellation of the amalgamation agreement between PartnerRe Ltd. and the Company and is not indicative of future revenues of company; therefore, this revenue is excluded from operating income (loss).
Transaction and reorganization expenses are primarily driven by business decisions, the nature and timing of which are not related to the underwriting process, therefore; these expenses are excluded from operating income (loss).
The revaluation of net deferred tax asset (“DTA”) represents a tax expense recognized in the fourth quarter of 2017 related to the revaluation of our net DTA, following the reduction in the U.S. corporate income tax rate from 35% to 21% enacted as part of the Tax Cuts and Jobs Act of 2017 (“U.S. Tax Reform”). The nature and timing of the tax expense associated with the U.S. Tax Reform is not related to the underwriting process; therefore, this expense is excluded from operating income (loss).
Bargain purchase gain, recognized upon the acquisition of Aviabel, reflects the excess of the fair value of the net identifiable assets acquired over the fair value of consideration transferred and is not indicative of future revenues of the company; therefore, this revenue is excluded from operating income (loss).
Loss on repurchase of preferred shares arose from capital transactions that are not reflective of underlying business performance; therefore, is excluded from operating income (loss).
Certain users of our financial statements evaluate performance excluding after-tax net investment gains (losses), foreign exchange losses (gains), termination fee received, transaction and reorganization expenses, revaluation of net deferred tax asset, bargain purchase gain, and loss on repurchase of preferred shares to understand the profitability of recurring sources of income.
We believe that showing net income (loss) available (attributable) to common shareholders exclusive of after-tax net investment gains (losses), foreign exchange losses (gains), termination fee received, transaction and reorganization expenses, revaluation of net deferred tax asset, bargain purchase gain, and loss on repurchase of preferred shares 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. The reconciliation of operating income (loss) to net income (loss) available (attributable) to common shareholders, the most comparable GAAP financial measure, is presented in the Non-GAAP Financial Measures Reconciliation section of this report.
We also present operating income (loss) per diluted common share and annualized operating ROACE, which are derived from the operating income (loss) measure and are reconciled to the most comparable GAAP financial measures, earnings per diluted common share and annualized return on average common equity (“ROACE”), respectively, in the Non-GAAP Financial Measures Reconciliation of this report.
Ex-PGAAP operating income (loss) represents operating income (loss) exclusive of amortization of VOBA and intangible assets, net of tax and amortization of acquisition costs, net of tax associated with Novae’s balance sheet at October 2, 2017 (the “closing date” or “acquisition date”). The reconciliation of ex-PGAAP operating income (loss) to net income (loss) available (attributable) to common shareholders, the most comparable GAAP financial measure, is presented in the Non-GAAP Financial Measures Reconciliation of this report.
We also present ex-PGAAP operating income (loss) per diluted common share, and, annualized ex-PGAAP operating ROACE, which are derived from the ex-PGAAP operating income (loss) measure, as well as ex-PGAAP combined ratio all of which are reconciled to the most comparable GAAP financial measures, earnings per diluted common share and annualized ROACE and combined ratio, respectively, in the Non-GAAP Financial Measures Reconciliation of this report.
We believe the presentation of ex-PGAAP operating income (loss), ex-PGAAP operating income (loss) per diluted common share, annualized ex-PGAAP operating ROACE and ex-PGAAP combined ratio enables investors and other users of our financial information to better analyze the performance of our business.
On October 2, 2017, AXIS Capital acquired Novae. The Company identified VOBA which represents the present value of the expected underwriting profit within policies that were in-force at the closing date of the transaction. In addition, the allocation of the acquisition price to the assets acquired and liabilities assumed of Novae based on estimated fair values at the acquisition date, resulted in the write-off of the deferred acquisition cost asset on Novae’s balance sheet at the acquisition date as the value of policies in-force on that date are considered within VOBA.
Consequently, underwriting income (loss) in the three months and year ended December 31, 2018 included the recognition of premium attributable to Novae’s balance sheet at the acquisition date without the recognition of the associated acquisition costs.
Pre-tax total return on cash and investments excluding foreign exchange movements measures net investment income (loss), net investments gains (losses), interest in income (loss) of equity method investments, and change in unrealized investment gains (losses) generated by average cash and investment balances. The reconciliation of pre-tax total return on cash and investments excluding foreign exchange movements to pre-tax total return on cash and investments, the most comparable GAAP financial measure, is presented in the Financial Highlights in this report.
We believe this presentation enables investors and other users of our financial information to analyze the performance of our investments.