Business Context and Reporting Period
Company: AXIS Capital Holdings Limited
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: AXIS Capital operates two global underwriting platforms: AXIS Insurance and AXIS Re. The company provides specialty insurance and reinsurance products globally. As of July 27, 2009, there were 142,370,593 common shares outstanding.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2009 | Six Months Ended June 30, 2008 |
|---|---|---|
| Net Premiums Earned | $1,372,129 | $1,338,925 |
| Net Investment Income | $211,512 | $222,666 |
| Net Realized Investment Gains (Losses) | ($64,275) | $37,237 |
| Net Income | $293,278 | $487,427 |
| Net Income Available to Common Shareholders | $274,840 | $468,989 |
| Diluted Earnings Per Share | $1.84 | $2.95 |
| Total Assets | $15,378,885 | $14,282,834 |
| Total Shareholders' Equity | $4,909,119 | $4,461,041 |
| Cash and Cash Equivalents | $1,264,043 | $1,697,581 |
| Senior Notes (Debt) | $499,422 | $499,368 |
| Combined Ratio | 83.4% | 81.2% |
Material Changes vs. Prior Period
- Profitability Decline: Net income available to common shareholders decreased 41% year-over-year to $274.8 million, driven by higher investment losses and increased underwriting costs in the insurance segment.
- Investment Performance: The company recorded net realized investment losses of $64.3 million, compared to gains of $37.2 million in the prior year. This was primarily due to $51.4 million in other-than-temporary impairment (OTTI) charges and a $27.1 million loss on derivative instruments.
- Underwriting Results:
- Insurance Segment: Underwriting income fell 54% to $52.0 million. The current year loss ratio increased to 73.6% (from 70.3%) due to higher claims activity in credit and political risk lines.
- Reinsurance Segment: Underwriting income increased 13% to $185.7 million, benefiting from lower catastrophe losses and $98.3 million in favorable prior period reserve development.
- Reserve Development: The company recognized $181.1 million in net favorable prior period reserve development, an increase of $6.2 million compared to the prior year.
- Accounting Changes: Effective April 1, 2009, the company adopted FSP FAS 115-2 and FAS 124-2 regarding OTTI. This resulted in a $38.3 million net after-tax increase to retained earnings and a corresponding increase to accumulated other comprehensive loss.
Guidance, Outlook, and Risks
- Outlook: Management anticipates reinsurance underwriting year premium to be up approximately 19% for the July renewal period. Rates in targeted reinsurance lines are stable to increasing. However, opportunities in credit and political risk insurance remain limited due to weak global lending activity.
- Investment Strategy: The company is actively managing its portfolio to maximize total return. It has reduced holdings in U.S. agency pass-throughs and commercial MBS to reduce extension risk, reallocating to high-grade corporate debt.
- Key Risks:
- Credit and Political Risk: Continued economic downturn and credit crisis are driving higher loss ratios in this line of business.
- Investment Impairments: Significant exposure to CLO equity tranches and structured securities. Management revised default and recovery rate assumptions for CLO equities, leading to a $26 million decrease in fair value in the quarter.
- Legal Proceedings: The company is defending a putative class action lawsuit regarding antitrust and RICO violations filed in 2005; management believes the suit is without merit.
- Market Risk: Sensitivity analysis indicates a 100 basis point widening in credit spreads could reduce the fair value of fixed maturities by approximately $270 million.
Investor Verification Checklist
- OTTI Methodology: Verify the assumptions used for credit loss calculations on fixed maturities and the intent to sell securities triggering full impairment charges under the new FASB guidance.
- CLO Equity Valuation: Review the internal models and sensitivity analysis regarding default and recovery rates for Collateralized Loan Obligation (CLO) equity tranches, which represent a significant Level 3 fair value measurement.
- Credit Risk Exposure: Assess the concentration of credit and political risk premiums and the adequacy of reserves given the 100% current year loss ratio in this specific line for the six-month period.
- Reserve Adequacy: Monitor the sustainability of favorable prior period reserve development ($181 million) and whether it masks emerging loss trends in professional lines.
- Liquidity Position: Confirm the impact of the winding down of the securities lending program ($146 million outstanding) on overall liquidity and counterparty risk.