AXIS Capital Holdings Limited — Q2 2014 Form 10-Q
Business context and period. Bermuda-based specialty insurer and treaty reinsurer, operating through AXIS Insurance and AXIS Re. This unaudited quarterly report covers the three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods unless noted. Dollar amounts below are in millions unless stated otherwise.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenues | $1,150 | $1,046 | $2,193 | $2,074 |
| Net premiums earned | $1,000 | $946 | $1,946 | $1,820 |
| Net investment income | $115 | $83 | $198 | $192 |
| Underwriting income | $127 | $10 | $235 | $181 |
| Combined ratio | 90.8% | 101.7% | 91.3% | 92.7% |
| Net income available to common shareholders | $191 | $72 | $328 | $375 |
| Diluted earnings per common share | $1.79 | $0.62 | $3.03 | $3.19 |
| Operating income, non-GAAP | $173 | $50 | $310 | $278 |
| Operating income per diluted share, non-GAAP | $1.63 | $0.43 | $2.86 | $2.36 |
| Operating cash flow | Not presented by quarter | $392 | $457 |
Q2 income before tax was $212 million, versus $79 million. Six-month income before tax declined to $364 million from $401 million. Q2 net income attributable to AXIS Capital was $201 million; six-month net income attributable to the company was $348 million.
Financial position, liquidity and capital
- At June 30, total assets were $21.4 billion, total liabilities $15.4 billion and total shareholders’ equity $6.0 billion. Common shareholders’ equity was $5.3 billion; diluted book value per common share was $49.69.
- Total cash and investments were $15.7 billion, including $1.044 billion of cash and cash equivalents and $145 million of restricted cash. Fixed maturities, cash and short-term securities represented 89% of cash and investments; the reported average credit rating was AA-.
- Gross loss and loss expense reserves were $9.8 billion, with approximately $2.0 billion of reinsurance recoverables on paid and unpaid losses.
- Senior notes carrying value was $1.490 billion, up from $996 million at year-end 2013. Debt to total capital was 20.0%, compared with 14.6% at year-end. The company reported no borrowings under its $250 million credit facility and $470 million of letters of credit outstanding under its LOC facility.
- Operating cash flow was $392 million for the first half, down from $457 million. Investing activities used $377 million; financing activities provided $100 million. Cash and cash equivalents ended the period at $1.044 billion.
Material changes and performance drivers
- Q2 underwriting income rose sharply, led by lower catastrophe and weather losses and increased favorable prior-year reserve development. Q2 net catastrophe and weather losses were estimated at $36 million, versus $140 million in Q2 2013. First-half losses were $50 million, versus $153 million.
- Favorable prior-year reserve development was $85 million in Q2 and $129 million in the first half, compared with $42 million and $97 million, respectively, in 2013. Management said most development related to short-tail business and better-than-expected loss emergence.
- Six-month underwriting income improved to $235 million. Insurance moved to $29 million of underwriting income from a $14 million loss; reinsurance income increased to $206 million from $195 million.
- Premium growth was uneven: first-half gross premiums written rose 3% to $3.053 billion, while net premiums written rose 4% to $2.665 billion. Reinsurance gross premiums rose 7%; insurance gross premiums fell 2%. Reinsurance growth included $90 million of written premium relating to future underwriting years under multi-year contracts.
- Despite higher six-month underwriting income and operating income, common-shareholder net income declined 13%, reflecting substantially lower foreign-exchange gains and realized investment gains, as well as higher corporate and financing expenses. Six-month realized investment gains were $44 million, versus $61 million.
- Investment portfolio fair values improved: fixed maturities increased to $12.599 billion from $11.986 billion at year-end, and total investments rose to $14.488 billion from $13.780 billion. Six-month other comprehensive income was $155 million, versus a $338 million loss in 2013, primarily reflecting investment valuation movements.
Outlook, risks and unusual items
- No numerical earnings or premium guidance was provided. Management described insurance markets as increasingly competitive, with pricing improvements leveling off and modest decreases in some lines. It identified relatively better opportunities in U.S. insurance markets.
- Management expects global reinsurance competition to continue, with abundant traditional and alternative capital pressuring rates and some contract terms. The company said it would emphasize client value and acceptable profitability.
- In March 2014, the company issued $250 million of 2.65% senior notes due 2019 and $250 million of 5.15% senior notes due 2045. Proceeds were intended to repay $500 million of 5.75% notes due December 1, 2014. The reported debt increase and higher debt-to-capital ratio were expected to be temporary; completion of the planned repayment should be verified.
- The company repurchased 3.1 million common shares for $139 million in Q2 and 7.1 million shares for $318 million in the first half. Remaining board authorization was $450 million at July 30, 2014. The quarterly common dividend declared was $0.27 per share.
- Management cautioned that estimates for complex catastrophe losses, including Storm Sandy and the 2010–2011 New Zealand and 2011 Japan earthquakes, remain uncertain and could differ materially from current reserves. First-half favorable reserve releases also warrant attention when assessing underlying earnings.
- Investment risks include market sensitivity and less observable valuations: $636 million of assets measured at Level 3 fair value, including hedge funds, direct lending funds and CLO equity investments. Some fund investments have redemption restrictions or lockups. The filing also reports $77 million of unfunded direct-lending commitments and a $131 million commitment for reinsurance purchases.
- Management stated that operating cash flows and the investment portfolio should cover foreseeable cash outflows and commitments. No material change in previously disclosed risk factors was reported; routine legal proceedings were disclosed, with no material proceedings outside the ordinary course.
Most important facts for investors to verify
- Whether favorable prior-year reserve development and low catastrophe losses are sustainable, and how estimates for major historical events evolve.
- Whether pricing pressure—especially in reinsurance—and changes in business mix affect renewal volumes, margins and combined ratios.
- Whether the $500 million of notes due December 2014 is repaid as planned, and how debt, interest expense and capital ratios change afterward.
- How much of reported investment income and book-value growth depends on market performance, unrealized gains and less-liquid or Level 3 investments.
- Whether share repurchases, dividends and remaining authorization are consistent with liquidity needs, capital requirements and underwriting opportunities.