AXS

Business Context and Reporting Period

Company: AXIS Capital Holdings Limited
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2009
Business Overview: AXIS Capital is a Bermuda-based holding company operating two global underwriting platforms: AXIS Insurance (specialty insurance) and AXIS Re (treaty reinsurance). The company operates in Bermuda, the U.S., Europe, Singapore, Canada, and Australia. In 2009, the company expanded its footprint by acquiring Dexta Corporation in Australia and establishing a new Global Accident & Health line of business.

Key Financial Metrics

Material Changes vs. Prior Period

• Underwriting Performance: Total underwriting income increased 71% to $525 million, driven primarily by a benign North Atlantic hurricane season in 2009 compared to significant losses from Hurricanes Ike and Gustav in 2008. The combined ratio improved by 10.5 points to 79.3%.
• Segment Results:
  • Reinsurance: Underwriting income surged 269% to $440 million due to lower catastrophe losses and $38 million in additional favorable prior-year reserve development.
  • Insurance: Underwriting income declined 55% to $84 million. This was negatively impacted by a $133 million loss on a cancelled insurance derivative contract and higher loss activity in the credit and political risk line due to the global financial crisis.
• Investment Results: Net investment income rose 88% to $464 million, aided by a recovery in alternative investments (hedge and credit funds). However, net realized investment losses widened to $312 million, largely due to $337 million in other-than-temporary impairment (OTTI) charges, primarily on medium-term notes and corporate debt.
• Reserve Development: The company recorded $423 million in net favorable prior-year reserve development, compared to $376 million in 2008.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continued growth in the reinsurance segment, projecting over 7% premium growth for the first quarter of 2010 treaty renewals. The insurance segment faces competitive pressure in the U.S. admitted markets, though professional lines pricing remains favorable.
• Capital Management: The company repurchased 5.85 million shares for $170 million in 2009. In December 2009, the Board approved an additional $500 million share repurchase authorization. Total liquidity available within one to three business days was approximately $4.2 billion.
• Key Risks:
  • Catastrophe Exposure: Modeled 1-in-250 year probable maximum loss for U.S. hurricanes is approximately $1.3 billion (net of reinsurance).
  • Financial Crisis Impact: Ongoing economic uncertainty affects credit and political risk lines and the ability of cedants to pay premiums.
  • Reserving Uncertainty: Significant judgment is required for long-tail liability lines and emerging claims related to the financial crisis.
  • Investment Volatility: Exposure to credit spreads, equity prices, and foreign currency fluctuations remains a primary market risk.

Investor Verification Checklist

• Derivative Contract Settlement: Verify the details and final impact of the $133 million loss on the insurance derivative contract (longevity risk) settled in Q4 2009.
• OTTI Charges: Review the composition of the $337 million in other-than-temporary impairment charges, specifically the $263 million charge on medium-term notes, to assess future credit risk exposure.
• Credit & Political Risk Reserves: Examine the adequacy of reserves for the credit and political risk line, which saw increased loss activity due to the global economic downturn.
• Reinsurance Recoverables: Assess the $1.4 billion in reinsurance recoverable balances and the associated $23 million valuation provision for uncollectible amounts.
• Share Repurchase Program: Monitor the execution of the new $500 million share repurchase authorization approved in December 2009.