AXIS Capital Holdings Limited — Q3 2022 Form 10-Q
Business and period: Global specialty insurer and reinsurer reporting for the quarter and nine months ended September 30, 2022. Unless noted, amounts are U.S. dollars; financial figures below are rounded to millions. AXIS operates through Insurance and Reinsurance segments.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net premiums earned | $1,285m | $1,211m | $3,820m | $3,472m |
| Total revenue | $1,228m | $1,337m | $3,688m | $3,928m |
| Net income (loss) | $(9)m | $55m | $175m | $414m |
| Net income (loss) attributable to common shareholders | $(17)m | $47m | $152m | $391m |
| Diluted earnings (loss) per common share | $(0.20) | $0.56 | $1.77 | $4.59 |
| Operating income, non-GAAP | $3m | $1m | $331m | $254m |
| Net investment income | $88m | $107m | $272m | $326m |
| Net investment gains (losses) | $(146)m | $11m | $(414)m | $114m |
Premiums earned increased 6% in the quarter and 10% year to date. Lower investment income and substantial investment losses more than offset that premium growth in reported total revenue and weighed on GAAP earnings. Foreign-exchange gains were $136m in Q3 and $237m year to date, primarily reflecting U.S.-dollar strengthening against sterling- and euro-denominated insurance liabilities.
Underwriting: Consolidated underwriting loss was $29m in Q3, with a 104.3% combined ratio, versus a $59m loss and 107.4% ratio a year earlier. For nine months, underwriting income was $226m and the combined ratio was 96.4%, compared with $130m and 99.1%. Ratios below 100% indicate underwriting profit. Q3 segment combined ratios were 98.0% for Insurance and 109.1% for Reinsurance; nine-month ratios were 91.2% and 99.1%, respectively.
Q3 net catastrophe and weather losses were $212m, or 16.6 combined-ratio points, primarily from Hurricane Ian. Nine-month catastrophe and weather losses were $339m, versus $389m in 2021. Net favorable prior-year reserve development was $5m in Q3 and $18m year to date; favorable development included adverse movements in liability and professional-lines reserves.
Financial position, cash flow and capital
- Cash and investments: $15.6bn at September 30, 2022. Cash, short-term investments and fixed maturities made up most of the portfolio; the filing reports an average credit rating of AA- for those holdings. Operating cash flow was $917m for the first nine months, compared with $1,010m in 2021.
- Investment valuation and equity: Available-for-sale fixed maturities had $1.074bn of gross unrealized losses at quarter-end, compared with $94m at December 31, 2021; management attributed the losses mainly to higher yields and wider credit spreads and said it did not intend, and was not more likely than not required, to sell the securities before recovery. Nine-month other comprehensive loss was $1.099bn. Shareholders’ equity was $4.343bn, including $3.793bn of common equity, down from $5.411bn and $4.861bn, respectively, at year-end 2021.
- Reserves and recoverables: Gross loss and loss expense reserves were $14.652bn; reinsurance recoverables on paid and unpaid losses totaled about $5.683bn. Reserve estimates for major events, including Hurricane Ian and the Russia-Ukraine war, remain uncertain.
- Debt and liquidity: Debt was $1.313bn. The debt-to-total-capital ratio rose to 23.2% from 19.5% at year-end; debt plus preferred equity was 32.9% of total capital. AXIS also had $81m of FHLB advances, maturing in 2023 and secured by investments valued at $90m. Management said operating cash flows and portfolio liquidity should cover cash outflows and contractual commitments for the foreseeable future.
- Shareholder returns: Common dividends declared were $0.43 per share in Q3. The company repurchased $35m of shares in the open market during the first nine months and reported $65m remaining under its 2022 authorization at September 30.
Changes, outlook and risks
- In June 2022, AXIS announced it would exit catastrophe and property reinsurance to reduce exposure to volatile catastrophe risk. Reinsurance gross written premiums fell 17% in Q3 and 9% year to date, with non-renewals and reduced line sizes in catastrophe and property business among the drivers. Insurance gross written premiums rose 12% and 16%, respectively.
- Reorganization expenses related mainly to the exit, including employee termination costs and software impairments, were $6m in Q3 and $22m year to date.
- Management reported generally rising, though moderated, insurance pricing and expected pricing improvements to continue into 2023. It saw reinsurance rate and terms improvements, with potentially stronger opportunities in catastrophe and property markets, and opportunities for profitable growth in specialty and casualty reinsurance. This is qualitative commentary, not quantified earnings guidance.
- Estimated pre-tax net losses from the Russia-Ukraine war were $33m at September 30. The company said its loss estimate and related credit allowances could change materially as information develops; it reported no direct Russia or Ukraine investment exposure.
- Material risks include catastrophe severity and climate-related exposure, inflation and social inflation, reserve adequacy, reinsurance recoverability, market and interest-rate movements, foreign-exchange exposure, geopolitical and sanctions developments, and liquidity and credit-market conditions. The filing reported no material change to the previously disclosed risk factors and no material legal proceedings outside the ordinary course.
Important facts for investors to verify
- How Hurricane Ian and other catastrophe claims develop relative to current loss estimates and reinsurance recoveries.
- Whether adverse reserve trends in liability and professional lines offset favorable development elsewhere.
- How investment portfolio valuations, realized losses, interest rates and credit spreads affect equity, book value and future investment income.
- Execution and profitability effects of exiting catastrophe and property reinsurance, including the pace and quality of replacement business.
- Liquidity, collateral requirements and capital ratios, including use and repayment of FHLB advances; the filing provides no quantified full-year earnings guidance.