AXIS Capital Holdings Limited — Q3 2019 Form 10-Q
Business and period: Global specialty insurer and treaty reinsurer, operating through AXIS Insurance and AXIS Re. This unaudited report covers the quarter and nine months ended September 30, 2019; comparisons are with the same 2018 periods. Amounts below are U.S. dollars.
Financial results and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $1.289bn | $1.329bn | $3.836bn | $3.844bn |
| Net premiums earned | $1.157bn | $1.224bn | $3.415bn | $3.577bn |
| Net income | $38.4m | $54.1m | $324.2m | $230.8m |
| Net income available to common shareholders | $27.7m | $43.4m | $292.3m | $198.8m |
| EPS, diluted | $0.33 | $0.52 | $3.46 | $2.37 |
| Underwriting income (loss) | $(78.7)m | $59.0m | $77.8m | $318.5m |
| Combined ratio | 109.4% | 97.9% | 100.9% | 94.0% |
| Operating income (loss), non-GAAP | $(32.5)m | $79.1m | $209.1m | $305.0m |
For the nine months, net investment income was $361.0m (up from $325.4m) and net investment gains were $48.5m, versus losses of $77.6m in 2018. Nine-month foreign-exchange gains were $64.9m, compared with losses of $2.1m. These items, along with lower amortization of acquired business value and lower transaction costs, helped lift GAAP net income despite weaker underwriting.
- Premiums: Q3 gross premiums written were $1.407bn (down 1%) and net premiums written $856.1m (down 7%). Nine-month gross and net premiums written were $5.637bn (down 2%) and $3.703bn (down 5%). Insurance premium volume weakened; reinsurance gross premiums grew, but increased ceded premiums reduced net written premiums.
- Underwriting and losses: Q3 catastrophe and weather losses, net of reinsurance and reinstatement premiums, were estimated at $160m, or 14.1 combined-ratio points; nine-month losses were $196m, or 5.9 points. Net favorable prior-year reserve development was $26.7m in Q3 and $65.0m year to date, below the comparable 2018 amounts of $45.7m and $160.1m.
- Cash flow: Nine-month operating cash flow was $241.5m, versus $131.2m. Investing activities used $772.8m, compared with providing $409.1m in 2018; financing activities used $98.6m. Cash, cash equivalents and restricted cash ended at $1.209bn, down from $1.830bn at year-end 2018.
- Balance sheet and capital: Total assets were $25.496bn and shareholders’ equity $5.586bn. Total investments were $14.359bn; cash and restricted cash were $1.209bn. Loss reserves were $12.499bn, with $3.958bn of reinsurance recoverables on paid and unpaid losses. Senior notes were $1.388bn; debt-to-total-capital was 19.9%, down from 21.1%. Common shareholders’ equity was $4.811bn and diluted book value per common share $56.26, versus $52.70 at September 30, 2018.
Material changes and management commentary
- Q3 underwriting swung from income to loss, principally reflecting higher catastrophe losses, lower premiums earned, and less favorable reserve development. The reinsurance segment’s Q3 combined ratio was 109.9%; Insurance’s was 103.5%.
- Year-to-date underwriting income fell to $77.8m from $318.5m. Higher catastrophe losses, reduced favorable reserve development and increased acquisition costs were key factors. The year-to-date combined ratio rose to 100.9% from 94.0%.
- Management said pricing and terms were generally improving in many specialty insurance lines and the reinsurance market, while noting continued competition and uneven market conditions. It said it would prioritize adequately priced business over growth in some areas and continue underwriting discipline.
- The transformation program remained on track, according to management, to deliver $100m of expense savings by the end of 2020. Transaction and reorganization expenses were $29.3m for the first nine months, down from $48.1m.
- The company issued $300m of 3.90% senior notes due 2029 and repaid $250m of 2.65% notes at maturity. It reported strong financial flexibility and expected operating cash flows and investment-portfolio liquidity to cover foreseeable outflows and commitments.
Outlook, risks and unusual items
- Management said fourth-quarter 2019 results would be affected by Typhoon Hagibis and ongoing California wildfires, but the assessment was preliminary and no reliable estimate of the impact was available.
- Catastrophe reserve estimates for events including Hurricane Dorian, Japanese typhoons and prior-year disasters involve significant judgment and may change materially as loss information develops. The company identifies reserve adequacy and reinsurance recoverability as critical estimates and risks.
- Other stated risks include catastrophe frequency and severity, claims exceeding reserves, reinsurance availability and collectability, market and investment volatility, foreign exchange movements, competition, regulatory changes, and execution of the Novae integration and transformation program.
- The company reported no material legal proceedings outside the ordinary course of business and no material change to the risk factors in its 2018 Form 10-K. Its disclosure controls were assessed as effective.
- Lease accounting adoption created operating lease right-of-use assets and liabilities; at September 30, 2019, these were $116.6m and $115.9m. A new 15-year Alpharetta lease, with stated contractual costs of $40m, commenced after the reporting date.
Investor verification priorities
- Track development of Q3 catastrophe estimates and the fourth-quarter effects of Hagibis and California wildfires.
- Review reserve development by segment, especially the $71m adverse nine-month development in reinsurance property and other, and assess reserve adequacy and reinsurance recoverability.
- Reconcile GAAP earnings with non-GAAP operating results; Q3 reported a GAAP profit but a non-GAAP operating loss.
- Monitor premium retention, ceded-reinsurance costs, combined ratios and the sustainability of pricing improvements.
- Assess investment portfolio liquidity and valuation exposures, including fund holdings with reporting lags, redemption limits and unfunded commitments.
- Verify progress toward the $100m expense-savings target, transformation costs, and the company’s debt and letter-of-credit facility terms.