AXIS Capital Holdings Limited — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited, U.S. GAAP interim results. AXIS is a Bermuda-based specialty insurer and treaty reinsurer, reporting Insurance and Reinsurance segments. Comparisons are with Q1 2016 unless otherwise noted. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Gross premiums written | $1,911.9 | $1,959.2 | Down 2% |
| Net premiums written | $1,509.0 | $1,685.8 | Down 10%; ceded share rose to 21% from 14% |
| Net premiums earned | $938.7 | $902.3 | Up 4% |
| Underwriting income | $16.4 | $99.0 | Down 83% |
| Combined ratio | 102.1% | 91.9% | Above 100% indicates an underwriting loss overall |
| Net investment income | $98.7 | $49.2 | Up 101%, principally as alternative investments moved to a gain |
| Net realized investment losses | $(25.1) | $(66.5) | Losses narrowed |
| Net income | $19.9 | $48.4 | Down 59% |
| Net income available to common shareholders | $5.0 | $38.4 | Down 87%; preferred dividends increased |
| Diluted EPS | $0.06 | $0.41 | |
| Non-GAAP operating income | $51.0 | $101.3 | Down 50%; $0.59 per diluted share versus $1.07 |
| Operating cash flow | $(36.3) | $(14.3) | Cash used in operations |
Underwriting and material period changes
- Reinsurance underwriting income fell to $3.4 million from $81.5 million; its combined ratio rose to 98.5% from 82.3%. Favorable prior-year development declined to $16.2 million from $68.0 million, while current-year losses and catastrophe losses increased.
- Insurance underwriting income was $13.0 million, down from $17.4 million; its combined ratio was 97.2% versus 96.1%.
- Catastrophe and weather-related net losses, net of reinstatement premiums, were $35 million versus $14 million. The current accident-year loss ratio increased to 67.3% from 63.1%; excluding catastrophe and weather losses, it was 63.6% versus 61.5%.
- Net favorable prior-year reserve development was $24.8 million versus $70.4 million. A $22 million adverse development in reinsurance motor reserves reflected the U.K. Ogden discount-rate change, from +2.5% to −0.75%; favorable development in professional and liability classes partly offset it.
- Net investment income benefited from a $19 million gain on other investments, compared with a $27 million loss a year earlier. Corporate expenses increased to $39.5 million from $26.3 million, including senior executive severance and technology project costs.
Financial condition, liquidity and capital
- At March 31, total assets were $21.25 billion, total liabilities $15.02 billion and shareholders’ equity $6.23 billion. Loss reserves were $9.54 billion and reinsurance recoverables were $2.07 billion.
- Total investments were $13.09 billion. Cash and cash equivalents, including restricted cash, totaled $1.45 billion; cash and investments together were approximately $14.5 billion. The filing reports operating cash outflow of $36.3 million, investing cash inflow of $357.5 million and financing cash outflow of $197.2 million.
- Senior notes were $993 million; debt-to-total-capital was 13.7%. Debt plus preferred equity was 29.3% of total capital at quarter-end. The company said this ratio fell to 24% after the April 17 redemption of $351 million of Series C preferred shares.
- Common shareholders’ equity was $5.10 billion; diluted book value per common share was $58.89. AXIS repurchased 2.2 million common shares for $151 million during the quarter. Remaining board authorization was reported as $816 million at May 5.
- Fixed maturities, cash and short-term securities represented 87% of total cash and investments and had an average credit rating of AA−. Total debt and liquidity appear manageable on the figures presented, although the filing provides no single current ratio or other consolidated liquidity ratio.
Outlook, risks and unusual items
- Outlook: Management expects opportunities for profitable growth in 2017, but provided no quantified earnings or premium guidance. It expects net premiums written to grow less than gross premiums written as more risk is shared with strategic capital partners. Management described continued pricing pressure, particularly in catastrophe-exposed property and specialty lines, and plans to focus on adequately priced business and less-volatile risks.
- Strategic developments: AXIS acquired Belgian aviation insurer Aviabel on April 1, 2017. Its underwriting results will enter the Insurance segment from that date. AXIS also expanded its secured letter-of-credit capacity by $250 million, principally to support reinsurance obligations; the new facility expires March 31, 2018. A separate $250 million credit facility expired March 27.
- Australia wind-down: Following transfer of AXIS Specialty Australia’s policies, assets and liabilities to a reinsurer, reserves and reinsurance recoverables each decreased by $223 million. Completion of the wind-down led to a $24 million foreign-currency translation adjustment being reclassified to earnings, contributing to $21.5 million of reported foreign-exchange losses.
- Reserving and catastrophe uncertainty: Management cautioned that estimates for significant prior catastrophe events remain subject to material uncertainty and may change as claims information develops. Reserve estimates and reinsurance recoverability are identified as critical accounting estimates.
- Other exposures: Risks include catastrophe severity, adverse reserve development, competitive pricing, market and foreign-exchange movements, reinsurance counterparty risk, and liquidity restrictions in private funds. AXIS disclosed $36 million of outstanding reinsurance purchase commitments due in 2017, alongside investment-fund commitments. No material change to previously disclosed risk factors or material proceedings outside the ordinary course was reported.
- Accounting: Adoption of the share-based compensation standard had no material impact. Management was evaluating a recently issued standard on premium amortization for purchased callable debt securities.
Important facts for investors to verify
- Whether the sharp decline in underwriting income and the 102.1% combined ratio persist, especially in Reinsurance.
- How reserve estimates develop, including the effect of the Ogden rate change and the remaining catastrophe-event exposures.
- Whether investment-income improvement is repeatable, given the large year-over-year swing in alternative-investment results and the level of realized losses.
- The post-redemption preferred-capital structure, dividend burden, and actual pace of common-share repurchases.
- The effect of Aviabel, Harrington-related risk cessions, and other strategic-capital arrangements on future premium growth and underwriting profitability.
- Liquidity and valuation risks in other investments: the filing says 43% of that portfolio used lagged fund valuations, and certain holdings have limited redemption options.