AXIS Capital Holdings Limited — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Financial statements are unaudited and prepared under U.S. GAAP. Amounts below are in U.S. dollars; figures are rounded.
Business context
AXIS is a Bermuda-based specialty insurer and treaty reinsurer, reporting Insurance and Reinsurance segments. During the quarter it acquired Aviabel, a Belgian aviation insurer and reinsurer, to expand its aviation business.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Gross premiums written | $1.36B | $1.32B | $3.27B | $3.28B |
| Net premiums written | $956M | $1.01B | $2.46B | $2.69B |
| Net premiums earned | $981M | $947M | $1.92B | $1.85B |
| Net investment income | $106M | $92M | $205M | $141M |
| Net income | $96M | $129M | $116M | $178M |
| Net income available to common shareholders | $85M | $119M | $90M | $158M |
| Diluted EPS | $1.01 | $1.29 | $1.05 | $1.69 |
| Underwriting income | $57M | $10M | $73M | $109M |
| Combined ratio | 97.6% | 102.2% | 99.8% | 97.2% |
| Net cash from operating activities | — | $149M | $63M |
Q2 underwriting improved year over year, largely because catastrophe and weather losses were lower: $50M versus $109M. Net favorable prior-year reserve development was $71M in the quarter. For the first half, catastrophe and weather losses were $85M versus $124M, while favorable reserve development declined to $96M from $148M. Excluding catastrophe and weather losses, management reported a higher current-year loss ratio year over year for both the quarter and first half.
Reported common earnings fell year over year, while non-GAAP operating income rose to $110M in Q2 from $47M and to $161M for the first half from $149M. The company’s non-GAAP measure excludes realized investment gains or losses, foreign exchange gains or losses, and the Aviabel bargain purchase gain.
Financial position, debt and liquidity
- At June 30, total assets were $21.5B, total liabilities $15.6B, and shareholders’ equity $5.9B.
- Total investments were $13.45B; cash and cash equivalents were $729M and restricted cash was $287M. Management reported total cash and investments of approximately $14.5B.
- Loss and loss expense reserves were $9.88B; reinsurance recoverables on paid and unpaid losses were approximately $2.18B.
- Senior notes were $994M. Debt to total capital was 14.4%, compared with 13.7% at year-end 2016. The notes’ fair value was about $1.1B.
- Six-month cash flow was $149M provided by operations, $272M provided by investing activities, and $741M used in financing activities. Cash and cash equivalents decreased by $311M to $729M.
- AXIS repurchased 4.2M common shares for $282M and redeemed the remaining $351M of its 6.875% Series C preferred shares. Common dividends declared were $0.38 per share for Q2.
Material changes and notable items
- Q2 net premiums earned increased 4%, but net premiums written fell 5%; first-half net premiums written declined 8%, partly reflecting increased ceded premiums and retrocessional protection, including arrangements with Harrington Re.
- Q2 Insurance segment underwriting recorded a $0.5M loss; Reinsurance segment underwriting income was $57M. For the first half, Insurance underwriting income was $12M and Reinsurance income was $61M.
- Foreign exchange losses were $36M in Q2 and $58M in the first half, versus gains in the comparable 2016 periods. First-half results included a $24M reclassification of cumulative translation losses related to the wind-down of AXIS Specialty Australia.
- Aviabel acquisition accounting produced a $15M bargain purchase gain; its purchase price allocation remained subject to adjustment. AXIS also recorded a $9M impairment of an equity-method investment.
- The UK Ogden discount-rate change contributed $20M of adverse prior-year motor reinsurance reserve development in the first half.
- After quarter-end, AXIS announced a recommended cash offer for Novae Group plc at 700 pence per share, valuing the equity at approximately £468M ($604M). Completion was expected in Q4 2017 and remained subject to shareholder, court, regulatory and other conditions. S&P affirmed ratings but revised AXIS’s outlook to negative, citing the planned acquisition.
Outlook, commentary and risks
Management expected opportunities for profitable growth in 2017 but gave no specific numerical earnings or premium guidance. It anticipated that net premiums written would grow less than gross premiums written as AXIS shared more risk with strategic capital partners. Management described competitive pressure and price reductions across many insurance markets, especially catastrophe-exposed property and some specialty lines, and said it would emphasize adequately priced business, smaller and less volatile risks, and portfolio profitability.
Key risks include catastrophe severity and reserve uncertainty; claims emerging above estimates; reinsurance collectability and counterparty performance; pricing and capacity cycles; foreign-exchange, interest-rate and investment-market movements; and acquisition execution, integration, approvals and expected synergies. AXIS specifically cautioned that estimates for certain catastrophe events could change materially. Some alternative-investment valuations rely on manager-provided NAVs, and 50% of other investments had valuation reporting lags.
The company said its financial flexibility remained strong and expected operating cash flows and portfolio liquidity to cover foreseeable cash needs and contractual commitments. A $250M secured letter-of-credit facility was added to the existing $500M facility; the additional facility expires March 31, 2018. The filing reported no material change in controls and procedures and no material legal proceedings outside the ordinary course.
Important facts for investors to verify
- How much of reported underwriting performance depends on favorable prior-year reserve development, and whether current-year loss trends persist.
- Whether catastrophe, weather and Ogden-rate loss estimates develop adversely, and the adequacy and collectability of reinsurance recoverables.
- The sustainability and risk profile of alternative-investment returns, including funds with redemption limits or lagged valuations.
- Final Aviabel purchase accounting and the conditions, financing, ratings implications and integration risks for the proposed Novae acquisition.
- How continued share repurchases, dividends and risk cessions affect capital, liquidity and net premium growth.