EX-99.1 2 balancesheetofnovaegroup.htm EXHIBIT 99.1 Exhibit


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AXIS Capital Holdings Limited

Acquisition of Novae Group plc


Novae Balance Sheet Information including Details of Fair Value Adjustments at October 2, 2017




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AXIS Capital Holdings Limited
Novae Group plc
Acquisition of Novae Group plc

Basis of Presentation
The acquisition of Novae Group plc ("Novae") was accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification ("ASC") Topic 805, Business Combinations ('ASC 805') with AXIS Capital Holdings Limited ("AXIS Capital" or the "Company") as the acquiring entity.

Under ASC 805, all of the Novae assets acquired and liabilities assumed in this business combination were recognized at the acquisition date fair value, while transaction costs and restructuring costs associated with the business combination were expensed as incurred. The excess of the acquisition consideration over the fair value of assets acquired and liabilities assumed was allocated to goodwill. Subsequent to the acquisition, the integration plan may affect how the assets acquired, including intangible assets, will be utilized by the combined company.

Unless otherwise noted, dollar amounts are in thousands of U.S. dollars. Amounts may not reconcile exactly due to rounding differences.

Acquisition Consideration and Consideration Allocation
On October 2, 2017 (the "closing date" or the "acquisition date"), AXIS Specialty UK Holdings Limited, a wholly owned subsidiary of the Company, acquired all of the issued and to be issued share capital of Novae for an aggregate purchase price of $616.9 million. The results of Novae are included in the results of the Company's insurance and reinsurance segments from that date. The acquisition of Novae was undertaken to accelerate the growth strategy of the Company's international insurance business, and to significantly scale up its capabilities to enable the Company to even better serve its clients and brokers.

The purchase price was allocated to the assets acquired and liabilities assumed of Novae based on estimated fair values at the closing date. The Company recognized goodwill of $54 million.

The allocation of the purchase price is based on information included in Novae's unaudited financial statements at October 2, 2017. The allocation is subject to change if additional information becomes available within the measurement period, which cannot exceed 12 months from the acquisition date. The fair values of the assets acquired and liabilities assumed may be subject to adjustments, which may impact the amounts recorded for the assets acquired and liabilities assumed as well as the goodwill.

The Company identified Value of Business Acquired ("VOBA") which represents the present value of the expected underwriting profit within policies that were in-force at the closing date of the transaction, of $257 million, pre-tax and finite lived other intangible assets primarily related to distribution networks of $128 million, pre-tax.The Company also identified indefinite lived intangible assets related to Lloyd’s of London (“Lloyds”) syndicate capacity of $95 million, pre-tax.


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Adjustments to the fair value of the assets acquired and liabilities assumed at October 2, 2017 are summarized in the following table:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Assets of Novae

 
Fair Value Adjustments

 
Total Assets Acquired and Total Liabilities Assumed

 
Select Deferred Tax Adjustments

 
Adjusted Total Assets Acquired and Total Liabilities Assumed

 
 
 
(in thousands)
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Investments
$
1,733,611

 
$
—

 
$
1,733,611

 
$
—

 
$
1,733,611

 
 
Cash and cash equivalents
191,337

 
—

 
191,337

 
—

 
191,337

 
 
Insurance and reinsurance premium balances receivable
472,180

 
—

 
472,180

 
—

 
472,180

 
 
Reinsurance recoverable on unpaid and paid losses
787,907

 
—

 
787,907

 
—

 
787,907

 
 
Deferred acquisition costs
208,745

 
(208,745
)
 
—

 
—

 
—

 
 
Prepaid reinsurance premiums
175,052

 
22,855

 
197,907

 
—

 
197,907

 
 
VOBA
—

 
256,942

 
256,942

 
(48,992
)
 
207,9501

 
 
Goodwill
—

 
54,047

 
54,047

 
—

 
54,047

 
 
Intangible assets
3,154

 
220,057

 
223,211

 
(37,946
)
 
185,2662

 
 
Other assets
62,600

 
(19,904
)
 
42,696

 
—

 
42,696

 
 
Total assets acquired
$
3,634,586

 
$
325,252

 
$
3,959,838

 
$
(86,938
)
 
$
3,872,900

 
 
 
 
 
 
 


 
 
 


 
 
Liabilities
 
 
 
 

 
 
 

 
 
Reserve for losses and loss expenses
$
2,222,261

 
$
(96,627
)
 
$
2,125,634

 
$
—

 
$
2,125,634

 
 
Unearned premiums
697,278

 
20,164

 
717,442

 
—

 
717,442

 
 
Insurance and reinsurance balances payable
273,405

 
—

 
273,405

 
—

 
273,405

 
 
Senior notes
101,846

 
—

 
101,846

 
—

 
101,846

 
 
Other liabilities
40,808

 
83,777

 
124,585

 
(86,938
)
 
37,647

 
 
Total liabilities assumed
$
3,335,598

 
$
7,314

 
$
3,342,912

 
$
(86,938
)
 
$
3,255,974

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets and goodwill, after-tax
 
 
 
 
 
 
 
 
$
239,313

 
 
 
 
 
 
 
 
 
 
 
 
 
1VOBA, after-tax is a non-GAAP financial measure as defined in SEC Regulation G. The reconciliation to VOBA, the most comparable GAAP financial measure, included deferred tax liability of $48,992 at October 2, 2017.  
2Intangible assets, after-tax is a non-GAAP financial measure as defined in SEC Regulation G. The reconciliation to intangible assets, the most comparable GAAP financial measure, included deferred tax liability of $37,946 at October 2, 2017.  



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Significant fair value adjustments are explained as follows:

•
Deferred acquisition costs: To eliminate Novae's deferred acquisition costs;

•
Prepaid reinsurance premiums: To reflect adjustments to align premium recognition accounting policies;

•
VOBA: To establish the fair value of VOBA identifiable intangible assets related to the acquisition of Novae;

•
Goodwill: To establish the fair value of goodwill related to the acquisition of Novae;

•
Indefinite lived and finite lived intangible assets: To establish the fair value of identifiable intangible assets related to the acquisition of Novae and to eliminate Novae's pre-existing intangible assets;

•
Other assets: To reflect an investment at fair value and deferred tax assets on fair value adjustments;

•
Reserves for losses and loss expenses: To reflect adjustments arising from the alignment of premium recognition accounting policies and reserving methodologies, as well as the price associated with the sale of the Novae legacy business;

•
Unearned premiums: To reflect adjustments to align premium recognition accounting policies; and

•
Other liabilities: To reflect deferred tax liabilities on fair value adjustments.



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Intangible assets identified at October 2, 2017 are shown in the following table:
 
 
 
 
 
 
 
 
 
 
 
Intangible Assets, Pre-tax

 
Deferred Tax

 
Intangible Assets, After-tax

 
Economic Useful Life
 
Indefinite lived intangible assets
 
 
 
 
 
 
 
 
Lloyd's syndicate capacity
94,748

 
(16,107
)
 
78,641

 
Indefinite
 
 
 
 
 
 
 
 
 
 
Finite lived other intangible assets
 
 
 
 
 
 
 
 
Distribution networks:
 
 
 
 
 
 
 
 
Coverholders
63,565

 
(10,806
)
 
52,759

 
12 years
 
Large brokers
46,641

 
(7,929
)
 
38,712

 
15 years
 
Small & Mid-sized Enterprise ("SME") brokers
14,126

 
(2,401
)
 
11,725

 
12 years
 
 
 
 
 
 
 
 
 
 
Managing General Agent ("MGA") contract
4,131

 
(702
)
 
3,429

 
7 years
 
 
128,463

 
(21,839
)
 
106,625

 
 
 
 
 
 
 
 
 
 
 
 
Intangible assets at October 2, 2017
$
223,211

 
$
(37,946
)
 
$
185,266

 
 
 
 
 
 
 
 
 
 
 

Intangible assets are explained as follows:

•
Lloyd's syndicate capacity: The value of Lloyd's syndicate capacity, which represents Novae's right to underwrite a certain allocated limit of premium in the Lloyd's market.
•
Distribution network:
•
Coverholders: The value of sales of insurance policies that result directly from relationships with insurance intermediaries who are authorized by Novae's managing agent to enter into contracts of insurance to be underwritten by Novae Syndicate 2007, in accordance with the terms of a binding authority.
•
Large brokers: These relationships include Novae's large brokers and consideration was given to the expectation of the renewal of these relationships and the associated expenses.
•
SME brokers: These relationships consist of Novae's brokers with the exception of the large brokers listed above and consideration was given to the expectation of the renewal of these relationships and the associated expenses.
•
MGA contract: Represents the value of managing agent fees and profit commission Novae earns related to the provision of underwriting services to special purpose syndicate, Lloyd's of London Syndicate 6129.

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Amortization of finite lived other intangible assets
These Intangible assets are amortized over their economic useful lives and the expense is included in amortization of purchased intangibles in the Consolidated Statement of Operations. The amortization of these intangibles will affect the Company’s non-GAAP operating net income, a non-GAAP financial measure but these expenses will not be included in the results of the Company's insurance and reinsurance segments.

The estimated amortization expense for other intangible assets with a finite life is as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Coverholders

 
Large Brokers

 
SME Brokers

 
MGA Contract

 
Total Amortization Expense,
pre-tax

 
 
Q4 2017
$
1,324

 
$
777

 
$
294

 
$
148

 
$
2,543

 
 
2018
5,297

 
3,109

 
1,177

 
590

 
10,173

 
 
2019
5,297

 
3,109

 
1,177

 
590

 
10,173

 
 
2020
5,297

 
3,109

 
1,177

 
590

 
10,173

 
 
2021
5,297

 
3,109

 
1,177

 
590

 
10,173

 
 
2022
5,297

 
3,109

 
1,177

 
590

 
10,173

 
 
2023 and thereafter
35,755

 
30,319

 
7,947

 
1,033

 
75,054

 
 
Finite lived other intangibles, pre-tax
63,565

 
46,641

 
14,126

 
4,131

 
128,463

 
 
Deferred tax
(10,806
)
 
(7,929
)
 
(2,401
)
 
(702
)
 
(21,839
)
 
 
Finite lived other intangibles, after-tax
$
52,759

 
$
38,712

 
$
11,725

 
$
3,429

 
$
106,625

 
 
 
 
 
 
 
 
 
 
 
 
 

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Amortization of VOBA
VOBA is amortized over its economic useful life and the expense is included in amortization of purchased intangibles in the Consolidated Statement of Operations. The amortization of VOBA will affect the Company’s non-GAAP operating net income, a non-GAAP financial measure but these expenses will not be included in the results of the Company's insurance and reinsurance segments.
 
The estimated amortization expense for VOBA with a finite life is as follows:
 
 
 
 
 
 
VOBA - Total Amortization Expense,
pre-tax

 
 
Q4 2017
$
50,104

 
 
2018
171,124

 
 
2019
26,722

 
 
2020
5,139

 
 
2021
3,853

 
 
2022
—

 
 
2023 and thereafter
—

 
 
VOBA
256,942

 
 
Deferred tax
(48,992
)
 
 
VOBA, after-tax1
$
207,950

 
 
 
 
 
As noted above, the purchase price was allocated to the assets acquired and liabilities assumed of Novae based on estimated fair values. This resulted in the write-off of the deferred acquisition cost asset on Novae's balance at the acquisition date as the value of policies in-force on that date are considered within VOBA. Consequently, the expense associated with VOBA is estimated to include all acquisition costs previously paid as well as future profits associated with the policies in-force at acquisition.


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Use of non-GAAP financial measures
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 non-GAAP financial measures under Securities and Exchange Commission ("SEC") rules and regulations. In this document, we present VOBA, after tax and intangible assets, after tax and refer to non-GAAP operating income, which are non-GAAP financial measures as defined in SEC Regulation G. 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 Novae's balance sheet at October 2, 2017. However, these measures should not be viewed as a substitute for those determined in accordance with U.S. GAAP.


 

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