AXIS Capital Holdings Limited — FY 2016 Form 10-K
Reporting period: Year ended December 31, 2016; comparisons are primarily with FY 2015. AXIS is a Bermuda-based global specialty insurer and reinsurer operating through Insurance and Reinsurance segments. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Financial performance and position
| Metric | FY 2016 | FY 2015 | Change / context |
|---|---|---|---|
| Gross premiums written | $4,970 million | $4,604 million | Up 8%; growth included more multi-year reinsurance premiums |
| Net premiums written | $3,753 million | $3,675 million | Up 2%; ceded share rose to 24% from 20% |
| Net premiums earned | $3,706 million | $3,686 million | Up 1% |
| Net income available to common shareholders | $465 million | $602 million | Down 23% |
| Diluted EPS | $5.08 | $6.04 | Down 16% |
| Non-GAAP operating income | $410 million | $401 million | Up 2%; diluted operating EPS was $4.48 versus $4.02 |
| Underwriting income | $279 million | $302 million | Down 8% |
| Combined ratio | 95.9% | 94.7% | Worsened 1.2 percentage points; below 100% indicates underwriting profit |
| Net investment income | $353 million | $305 million | Up 16% |
| Net realized investment losses | $61 million loss | $138 million loss | Losses narrowed; largely reflected foreign-exchange effects and impairment charges |
| Net cash from operating activities | $407 million | $791 million | Down; prior-year PartnerRe termination proceeds and higher 2016 loss payments and reinsurance purchases affected comparison |
Catastrophe and weather-related net losses were an estimated $204 million in 2016, versus $100 million in 2015. Favorable prior-year reserve development was $292 million, versus $243 million. The current accident-year loss ratio, excluding catastrophe and weather losses, improved to 61.8% from 62.9%, but catastrophe losses and higher acquisition costs contributed to the higher combined ratio. Insurance underwriting income was $38 million and Reinsurance underwriting income was $242 million.
At year-end, total assets were $20.8 billion; investments were $13.46 billion and cash and cash equivalents were $1.24 billion, including $202 million of restricted cash. Total cash and investments were $14.7 billion. Loss reserves were $9.70 billion and balance-sheet reinsurance recoverables on paid and unpaid losses were $2.33 billion. Total capital was $7.27 billion, including $993 million of senior notes; debt to total capital was 13.7%, and debt plus preferred equity to total capital was 29.2%. Common shareholders’ equity was $5.15 billion and diluted book value per common share was $58.27, up from $54.08. Common dividends declared were $1.43 per share.
Material changes versus the prior comparable period
- GAAP net income available to common shareholders fell 23%, while non-GAAP operating income rose 2%. The comparison is affected by the $280 million PartnerRe termination fee received in 2015 and $46 million of 2015 reorganization expenses; neither item recurred in 2016.
- Gross premiums grew in both segments, particularly Reinsurance, but net growth was more modest as AXIS increased cessions and retrocessional protection. Management noted that 2016 Reinsurance gross premiums included a greater amount of multi-year contracts.
- Catastrophe and weather losses more than doubled, while net favorable reserve development also increased. Reserve releases therefore remained a material contributor to underwriting results.
- Net investment income improved, including stronger returns from CLO equity investments and contributions from longer-duration fixed maturities and commercial mortgage loans. Net realized investment losses narrowed, and unrealized investment losses decreased.
- AXIS repurchased 10.5 million common shares during 2016 for approximately $512 million and declared higher common dividends. It issued $550 million of 5.50% Series E preferred shares and repurchased approximately $50 million of Series C preferred shares.
Outlook, commentary and risks
- Management said it saw opportunities for profitable growth in 2017 but expected net premiums written to grow less than gross premiums written as the company shared more risk with strategic capital partners. It plans to focus on adequately priced business and shift toward smaller, less volatile accounts where appropriate.
- Management described competitive pressure and price reductions across many markets, particularly catastrophe-exposed property and certain global specialty lines, and expected pressure to continue in the short term. Reinsurance markets remained affected by excess capacity and consolidation of purchasing.
- The Board authorized a common-share repurchase program of up to $1 billion through December 31, 2017; remaining authorization was reported as $963 million at February 24, 2017. Repurchases are discretionary. The company also said it expected to continue cash dividends, subject to Board discretion, earnings, capital needs and restrictions.
- AXIS agreed to acquire Aviabel, an aviation insurer and reinsurer, with closing expected in the first half of 2017 subject to regulatory approval and customary conditions. The transfer of AXIS Specialty Australia’s insurance policies, assets and liabilities to a reinsurer took effect February 13, 2017.
- Liquidity was supported by a high-quality investment portfolio and committed facilities. Approximately $12.5 billion of cash and invested assets was expected to be available within one to three business days under normal conditions, but $4.1 billion was restricted. The $250 million credit facility was due to expire in March 2017; AXIS was evaluating alternatives.
- Key risks include catastrophe accumulation and model uncertainty; reserve adequacy, especially for long-tail liability and professional lines; pricing competition; investment, interest-rate, credit-spread and foreign-currency volatility; reinsurer credit and recoverability; broker concentration (three brokers generated 52% of gross premiums); cyber and operational risks; and regulatory and political uncertainty, including Brexit.
- Management identified loss-reserve estimates as a significant accounting judgment. It reported $292 million of favorable prior-year development but cautioned that past favorable experience may not recur and catastrophe estimates may change as claims information develops. A modeled Southeast U.S. hurricane loss at a 1-in-100-year return period was approximately $534 million net of reinsurance at January 1, 2017.
The financial-statement audit opinion was unqualified, and the auditor reported effective internal control over financial reporting as of December 31, 2016.
Important facts for investors to verify
- How much 2016 underwriting profitability depended on reserve releases, and whether long-tail reserve assumptions and catastrophe-event estimates remain supportable.
- Whether premium growth can be sustained at adequate rates, particularly in competitive property and reinsurance markets, and how multi-year contracts affect reported growth.
- The terms and performance of the Harrington Re and other third-party-capital arrangements, including the associated ceded premiums, recoveries, fees and risk retained by AXIS.
- The renewal or replacement of the credit facility due in March 2017, available unrestricted liquidity, and the effect of regulatory restrictions on subsidiary distributions.
- Completion and financial effect of the Aviabel acquisition, the Australia portfolio transfer and any planned Series C preferred-share redemption or repurchase.
- The effects of the $1 billion buyback authorization and dividends on capital, book value per share and financial flexibility, especially under adverse catastrophe or investment scenarios.