AXIS Capital Holdings Limited — Q2 2019 Form 10-Q
Business context and reporting period. AXIS is a global specialty insurer and reinsurer, reporting through Insurance and Reinsurance segments. This unaudited filing covers the three and six months ended June 30, 2019; comparisons are with the same 2018 periods. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $1.286bn | $1.254bn | $2.547bn | $2.514bn |
| Net premiums earned | $1.124bn | $1.186bn | $2.258bn | $2.353bn |
| Net income | $177m | $104m | $286m | $177m |
| Net income available to common shareholders | $166m | $93m | $265m | $155m |
| Diluted EPS | $1.97 | $1.11 | $3.14 | $1.85 |
| Net investment income | $138m | $110m | $245m | $211m |
| Net investment gains (losses) | $21m | $(45)m | $34m | $(60)m |
| Underwriting income | $79m | $116m | $156m | $259m |
| Combined ratio | 96.1% | 93.1% | 96.5% | 92.0% |
- Underwriting and premiums: Q2 gross premiums written were $1.648bn, roughly flat year over year; net premiums written rose 7% to $1.070bn, while net premiums earned fell 5%. For the first half, gross premiums written declined 2%, net premiums written 5%, and net premiums earned 4%.
- Segment results: Q2 Insurance underwriting income fell to $11m from $56m, with its combined ratio rising to 97.8% from 90.4%. Reinsurance underwriting income increased to $67m from $59m, and its combined ratio improved to 89.1% from 90.7%. Insurance’s higher acquisition costs and expenses weighed on results.
- Cash flow: Net cash used in operating activities was $17m in the first half, versus $42m used in 2018. Cash, cash equivalents and restricted cash ended June at $1.095bn, down from $1.830bn at year-end 2018; investing activities used $666m.
- Balance sheet and capital: Total assets were $25.9bn and shareholders’ equity $5.57bn at June 30. Total cash and investments were approximately $15.4bn. Debt was $1.388bn; debt to total capital was 20.0%, down from 21.1% at year-end. Common shareholders’ equity was $4.79bn and book value per diluted common share was $55.99.
- Reserves and investments: Loss reserves were $12.25bn, with $3.93bn recoverable from reinsurers on paid and unpaid losses. The first half included $38m of favorable prior-year reserve development, versus $114m in 2018. Fixed maturities had an AA- average credit rating; unrealized gains increased substantially, contributing to higher equity and comprehensive income.
Material changes versus the prior comparable period
- Q2 common net income and diluted EPS increased, aided by higher investment income and a swing from investment losses to gains; underwriting income declined 32% and the combined ratio worsened by 3.0 points.
- First-half underwriting income decreased 40%, reflecting lower earned premiums, higher acquisition-cost and expense ratios, and less favorable reserve development. Catastrophe and weather losses were lower: $36m for the first half versus $73m in 2018.
- Net investment income grew 25% in Q2 and 16% in the first half, primarily from higher fixed-maturity yields and portfolio allocation, as well as stronger returns on certain private investments. Investment gains also benefited from equity-market appreciation.
- Accumulated other comprehensive income improved; first-half net-of-tax other comprehensive income was $333m, versus a loss of $188m in 2018, mainly reflecting available-for-sale investment valuation changes.
Outlook, commentary and risks
- Management said pricing generally improved across many insurance lines, with rate momentum in U.S. casualty, catastrophe-exposed property and selected U.K. professional lines; reinsurance rates and terms were also improving. The company emphasized underwriting discipline and prioritizing adequate pricing over growth in some areas. No specific earnings or premium guidance was provided.
- The transformation program had achieved $60m in annualized pre-tax cost savings against a $100m target by the end of 2020. Q2 transaction and reorganization costs were $3m, versus $19m a year earlier.
- Loss reserves for past catastrophe events—including 2017–2018 wildfires, hurricanes and typhoons—remain estimates subject to material uncertainty. First-half reserve development included adverse prior-year development in property and other business, partly offset by favorable development in other classes.
- Investment risks include illiquid private funds and valuation estimates: 64% of other investments were based on funds reporting with a lag. The company disclosed unfunded investment commitments and potential redemption restrictions.
- Debt actions included repayment of $250m of 2.65% notes at maturity and issuance of $300m of 3.90% notes due 2029. The company said operational cash flows and portfolio liquidity should cover foreseeable requirements. Its $750m secured letter-of-credit facility supports reinsurance obligations and is subject to collateral and covenant requirements.
- Management cited industry capacity and competition, catastrophe severity, reserve uncertainty, reinsurance recoverability, financial-market movements, foreign exchange and execution of transformation and integration initiatives as risks. No material change to previously reported risk factors or material legal proceedings outside the ordinary course was disclosed.
Important facts for investors to verify
- Whether Insurance-segment underwriting margins recover after the increase in acquisition and expense ratios, and whether premium growth remains selective.
- How the adverse property reserve development and estimates for prior catastrophe events evolve as claims information develops.
- Whether investment income growth is sustainable and how unrealized investment gains, private-asset valuations and illiquidity affect reported equity and liquidity.
- Progress toward the $100m transformation savings target and the related implementation costs.
- Debt, collateral and liquidity requirements, including the new notes, letter-of-credit facilities and unfunded investment commitments.