AXIS Capital Holdings Limited — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited interim financial statements, prepared under U.S. GAAP. AXIS is a Bermuda-based specialty insurer and treaty reinsurer, operating through AXIS Insurance and AXIS Re.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net premiums earned | $840 million | $735 million | $1.628 billion | $1.431 billion |
| Total revenue | $978 million | $842 million | $1.907 billion | $1.660 billion |
| Net income (loss) available to common shareholders | $101 million | $205 million | $(283) million | $317 million |
| Basic / diluted EPS | $0.81 / $0.79 | $1.68 / $1.51 | $(2.38) / $(2.38) | $2.53 / $2.28 |
| Underwriting income (loss) | $29 million | $121 million | $(432) million | $149 million |
| Combined ratio | 98.9% | 86.2% | 129.1% | 92.1% |
| Net investment income | $100 million | $83 million | $211 million | $187 million |
| Net realized investment gains | $37 million | $25 million | $68 million | $41 million |
- Gross premiums written rose 11% to $1.046 billion in Q2 and 10% to $2.595 billion in the first half. Net premiums written increased 8% and 11%, respectively.
- Q2 operating income, a non-GAAP measure, was $83 million, or $0.65 per diluted share, versus $153 million, or $1.13, a year earlier. The company changed this measure effective April 1, 2011 to exclude after-tax foreign-exchange gains and losses and restated prior periods.
- Operating cash flow was $592 million in the first half, compared with $538 million in 2010. Cash and cash equivalents ended at $871 million; investing cash outflow was $492 million and financing cash outflow was $176 million.
Balance sheet, liquidity and capital
- At June 30, total assets were $18.197 billion, total investments $12.218 billion, and cash and cash equivalents $871 million, plus $195 million of restricted cash. Management reported total cash and investments of approximately $13.3 billion.
- Loss and loss expense reserves were $8.403 billion, with $1.775 billion of reinsurance recoverables on paid and unpaid losses. Unearned premiums were $2.982 billion.
- Senior notes were $994 million. Shareholders’ equity was $5.333 billion, including $4.833 billion of common equity. Debt-to-total-capital was 15.7%, up from 15.0% at year-end 2010.
- Fixed maturities, cash and short-term securities represented 90% of cash and investments and had an average AA credit rating. Management said 68%, or $9.0 billion, of the portfolio was in investment-grade, short-term and intermediate-maturity fixed income holdings, generally saleable for cash proceeds within one to three business days.
- Common dividends declared were $0.23 per share for Q2, versus $0.21 a year earlier. Diluted book value per common share was $36.78.
Changes and key drivers
- Catastrophe activity drove the sharp deterioration in first-half underwriting results: AXIS recorded $702 million of estimated net catastrophe losses, net of reinstatement premiums, for first-half 2011 events. The largest disclosed event estimates were $323 million for the February Christchurch earthquake, $201 million for the Japanese earthquake and tsunami, and $73 million for Australian weather events.
- For Q2, the company estimated $75 million of net losses for severe U.S. storms and $31 million for the Christchurch aftershock, and increased its first-quarter catastrophe-event estimates by a net $20 million. Q2 underwriting income fell to $29 million from $121 million; first-half underwriting swung to a $432 million loss from $149 million of income.
- First-half segment underwriting losses were $28 million in Insurance and $405 million in Reinsurance. Reinsurance’s first-half combined ratio was 143.0%; Insurance’s was 104.2%.
- Net favorable prior-year reserve development was $52 million in Q2 and $101 million in the first half, below the respective 2010 amounts of $79 million and $160 million. This development partly offset current-year losses.
- Investment income increased, mainly due to stronger alternative-investment returns and higher average invested assets. Fixed-income yields declined; the company also reported $68 million of first-half realized investment gains.
- Foreign-exchange results reversed: Q2 included $19 million of FX losses versus $27 million of gains in 2010; the first-half amounts were $34 million of losses versus $35 million of gains. Management attributed the 2011 losses primarily to Euro appreciation and remeasurement of Euro-denominated insurance liabilities.
Outlook, risks and unusual items
- Management described the industry as being in the early stages of a gradual pricing-cycle turn. It expected modest pricing improvement in substantially all lines by 2012; improvement could accelerate if industry capital eroded materially during the rest of 2011. This is management’s outlook, not a quantified earnings forecast.
- Catastrophe estimates remain uncertain. Management highlighted evolving New Zealand damage conditions, the proposed Christchurch “red zone,” difficulty allocating losses between the February earthquake and June aftershock, and uncertainty over Japanese coverage, business-interruption losses and mutual insurers’ share. Actual losses could differ materially from current estimates.
- Management expected catastrophe-related paid losses to increase in future quarters, but believed operating cash flows and investment-portfolio liquidity would cover cash outflows and contractual commitments for the foreseeable future.
- Other disclosed items: founding shareholders exercised warrants on a cashless basis, resulting in 11.85 million shares issued; $93 million of deferred dividends was paid to warrant holders electing the deferred-cash option. A brokerage antitrust case was preliminarily approved for settlement for an amount described as immaterial. The company disclosed a $114 million outstanding reinsurance-purchase commitment.
- Management reported no material changes to previously disclosed risk factors, no material changes in internal control over financial reporting, and effective disclosure controls. Adoption of revised insurance-acquisition-cost guidance had no reported impact on results, financial condition or liquidity.
Important facts for investors to verify
- How the Christchurch, Japan and other catastrophe loss estimates develop as claims data and coverage determinations mature, and the resulting reserve and cash-payment impacts.
- Whether favorable prior-year reserve development persists; the filing cautions that past reserve trends may not continue.
- Whether pricing improvement materializes as management expects, and whether premium growth is achieved without weakening underwriting quality.
- Alternative-investment valuations, liquidity restrictions and performance: other investments were $624 million, including hedge and credit funds and CLO equity securities; some redemptions are subject to notice periods or other limits.
- The effects of currency movements, investment yields and realized gains on reported and operating results; operating income is non-GAAP and excludes specified items.
- Capital and per-share measures after the warrant exercise, dividends and catastrophe losses, including the increase in shares outstanding and the 15.7% debt-to-total-capital ratio.