AXIS Capital Holdings Limited — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. AXIS Capital is a Bermuda-based specialty insurer and treaty reinsurer, reporting Insurance and Reinsurance segments. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net premiums earned | $1.157 billion | $1.104 billion | $2.261 billion | $2.193 billion |
| Total revenues | $1.341 billion | $1.204 billion | $2.591 billion | $2.314 billion |
| Net income (loss) | $235 million | $120 million | $359 million | $(58) million |
| Net income (loss) available to common shareholders | $228 million | $112 million | $344 million | $(73) million |
| Diluted EPS | $2.67 | $1.33 | $4.04 | $(0.87) |
| Operating income, non-GAAP | $171 million | $72 million | $253 million | $(93) million |
| Underwriting income | $148 million | $87 million | $189 million | $(109) million |
| Combined ratio | 90.6% | 94.7% | 94.7% | 107.1% |
Q2 net investment income was $105 million, versus $45 million; net investment gains were $73 million, versus $53 million. For the first half, net investment income was $219 million, up 58%, and net investment gains were $103 million versus a $10 million loss. The six-month improvement also reflected lower catastrophe losses and better underwriting results.
Financial position, cash flow and liquidity
- At June 30, total assets were $27.6 billion, total liabilities $22.2 billion, and shareholders’ equity $5.4 billion. Common shareholders’ equity was $4.8 billion; book value per diluted common share was $55.50.
- Total cash and investments were approximately $16.1 billion, including $590 million of restricted cash. Fixed maturities, cash and short-term securities had an average credit rating of AA-; fixed-maturity duration was 3.1 years.
- Debt was $1.31 billion. Debt to total capital was 19.6%, down from 19.8% at year-end 2020. Debt fair value was $1.47 billion compared with its $1.31 billion carrying value.
- Six-month operating cash flow was $535 million, compared with $106 million in 2020. Investing activities used $347 million and financing activities used $99 million. Cash, cash equivalents and restricted cash ended at $1.59 billion.
- Gross loss reserves were $14.16 billion; reinsurance recoverables on paid and unpaid losses totaled about $5.09 billion. Management said operating cash flows and the investment portfolio should cover foreseeable cash needs.
Material changes versus the prior comparable period
- Gross premiums written rose 13% in Q2 to $1.94 billion; net premiums written increased 14% to $1.20 billion. Insurance gross premiums grew 22%, while Reinsurance gross premiums declined 1%. First-half gross premiums rose 8% overall.
- Q2 combined ratio improved 4.1 percentage points to 90.6%. First-half combined ratio improved to 94.7% from 107.1%, with underwriting income recovering to $189 million from a $109 million loss.
- Q2 catastrophe and weather losses, net of reinsurance, were $29 million (2.5 combined-ratio points), compared with $36 million in Q2 2020. First-half losses were $139 million versus $336 million, primarily reflecting a lower catastrophe burden than the prior-year period.
- Net favorable prior-year reserve development was $7 million in Q2 and $12 million for the first half, versus $3 million and $9 million, respectively, in 2020. Favorable property development was partly offset by adverse development in professional lines and liability.
- Available-for-sale fixed-maturity unrealized gains fell to $260 million from $475 million at year-end, mainly due to higher yields; accumulated other comprehensive income declined by $188 million during the first half.
- Management transferred securities with a fair value of $405 million from available-for-sale to held-to-maturity on March 1, 2021, to align classification with its investment strategy.
Outlook, commentary and risks
Management reported improving rates, terms and conditions across nearly all insurance lines and geographies, and expected further pricing improvement in many specialty segments during 2021. In both segments it emphasized underwriting discipline, portfolio management, and selective growth only where pricing supports adequate returns; it said some lines still required further rate increases. No specific earnings or revenue guidance was provided.
- Management’s strategy included growing selected specialty lines, focusing distribution, shifting toward less volatile business with attractive rates, improving operating efficiency, and investing in data and technology.
- Key uncertainties include COVID-19 claims and coverage interpretations, natural catastrophe and climate-related losses, reserve adequacy, social inflation, reinsurance availability and collectability, pricing-cycle changes, financial-market movements, foreign exchange, and regulatory or sanctions compliance.
- Q2 foreign-exchange losses were $20 million; first-half losses were $24 million. Tax expense included remeasurement of UK deferred tax liabilities following the enacted increase in the UK tax rate from 19% to 25%, effective 2023.
- Some alternative investments are valued using NAVs reported on a lag; Level 3 investments and underwriting-related derivatives rely on significant unobservable assumptions. The company also disclosed $248 million of unfunded direct-lending commitments, $224 million of real-estate commitments, and $177 million of private-equity commitments.
- The secured letter-of-credit facility’s maximum aggregate utilization capacity was reduced from $750 million to $650 million, with part of the facility extended to March 2022. No material out-of-ordinary-course legal proceedings, off-balance-sheet arrangements, or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether favorable pricing and lower catastrophe experience persist, particularly in the Reinsurance segment and catastrophe-exposed lines.
- Reserve development by line and accident year, especially professional lines and liability, and the ultimate costs of COVID-19 and major catastrophe events.
- How much reported earnings depend on investment gains and alternative-asset returns, including the impact of NAV reporting lags and less-observable valuations.
- The quality and collectability of reinsurance recoverables, and the availability of liquid assets after accounting for restricted cash and investment commitments.
- Whether management’s selective-growth strategy produces sustained underwriting profitability and book-value growth as market conditions and loss trends evolve.