AXIS Capital Holdings Limited — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Comparisons are with Q1 2015 unless stated otherwise. Amounts are U.S. dollars.
Business context and reporting period
AXIS is a Bermuda-based specialty insurer and treaty reinsurer operating through AXIS Insurance and AXIS Re. The company reported growth in written premiums while continuing to shift its portfolio toward less-volatile business and use additional reinsurance protection.
Financial performance and position
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Gross premiums written | $1.96 billion | $1.68 billion; up 17% |
| Net premiums written | $1.69 billion | $1.46 billion; up 16% |
| Net premiums earned | $902 million | $904 million; essentially flat |
| Underwriting income | $99 million | $101 million |
| Combined ratio | 91.9% | 93.7% |
| Net investment income | $49 million | $92 million |
| Net realized investment losses | $67 million | $43 million |
| Net income | $48 million | $166 million |
| Net income available to common shareholders | $38 million; $0.41 diluted EPS | $156 million; $1.54 diluted EPS |
| Operating income (non-GAAP) | $101 million; $1.07 diluted per share | $136 million; $1.35 diluted per share |
| Operating cash flow | $(14) million | $(28) million |
| Cash and investments | $14.6 billion | $14.5 billion at December 31, 2015 |
| Total assets / shareholders’ equity | $21.0 billion / $5.95 billion | $20.0 billion / $5.87 billion at December 31, 2015 |
| Senior notes | $992 million carrying value | $992 million at December 31, 2015 |
| Debt to total capital | 14.3% | 14.5% at December 31, 2015 |
The favorable combined-ratio comparison reflected $70 million of favorable prior-year reserve development, versus $56 million in Q1 2015, and lower general and administrative expenses. Fixed maturities, cash and short-term securities represented 88% of cash and investments and had an average credit rating of AA-. Diluted book value per common share was $56.04; the declared common dividend was $0.35 per share.
Material changes versus the prior comparable period
- Net income available to common shareholders fell 75%, mainly reflecting substantially lower foreign-exchange gains, lower investment income and higher realized investment losses. The prior-year quarter included a $63 million foreign-exchange gain; Q1 2016 recorded a $1 million loss.
- Net investment income declined 47%. Other investments produced a $27 million loss, compared with $31 million of income in Q1 2015; management attributed this largely to poor hedge-fund performance amid volatile global equity markets.
- Written premiums grew, particularly in reinsurance. Management noted that multi-year contracts added $86 million to the year-over-year premium comparison; foreign-exchange movements reduced it by $48 million.
- Insurance underwriting income increased to $17 million from $10 million, while reinsurance underwriting income decreased to $82 million from $91 million. Reinsurance’s higher acquisition costs and current-year loss ratio, and lower weather/commodity derivative income, weighed on results.
- Net unrealized investment gains improved materially: accumulated other comprehensive income moved to positive $18 million from a loss of $188 million at year-end. The company cited lower sovereign yields and tighter credit spreads.
- The company repurchased 3.9 million common shares for $196 million, including shares delivered under an accelerated share repurchase agreement. Remaining board-authorized repurchase capacity was $625 million at April 28, 2016.
Outlook, commentary, risks and unusual items
- Outlook: Management described insurance and reinsurance markets as highly competitive, with pricing pressure especially pronounced in catastrophe-exposed property and certain specialty lines. It reported some moderation in price declines and expressed optimism that pricing in many markets may approach a floor; no quantified earnings or premium guidance was provided.
- Reserves: Favorable prior-year reserve development was concentrated in reinsurance, especially property, motor and liability. Management cautioned that past development trends may not continue and that estimates for Storm Sandy, the 2011 Japan earthquake and tsunami, New Zealand earthquakes and the Tianjin port explosion remain uncertain and may change materially.
- Investment and market risks: Results are exposed to catastrophe losses, claims exceeding reserves, investment-market movements, interest rates, credit spreads and currency fluctuations. The company reported a net-long foreign-currency exposure of $572 million; a hypothetical 10% currency move implied a $57 million pre-tax equity impact.
- Liquidity and commitments: Management expected operating cash flows and investment-portfolio liquidity to cover foreseeable cash outflows and contractual commitments. Reported commitments include $36 million of minimum reinsurance premiums, a $20 million commercial mortgage-loan purchase commitment, and additional unfunded fund commitments. Some alternative investments have limited redemption availability or long investment terms.
- Unusual items: Q1 included $10 million of other-than-temporary investment impairment charges and $70 million of favorable prior-year reserve development. The prior-year comparison included non-recurring PartnerRe transaction and lease-cancellation expenses, contributing to lower corporate expenses in 2016.
- The filing reported no material change in previously disclosed risk factors, no material legal proceedings outside the ordinary course, and no off-balance-sheet arrangements. Management concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether favorable reserve development is sustainable, and the sensitivity of catastrophe-event reserves to new claims information.
- Whether written-premium growth—particularly multi-year reinsurance business—translates into earned premiums and attractive underwriting returns.
- Whether hedge-fund and other-investment performance recovers, given the $27 million quarterly loss in other investments and related valuation and liquidity considerations.
- The drivers and persistence of realized investment losses, foreign-exchange effects and the improvement in unrealized investment values.
- The capital impact of continued share repurchases, dividends and outstanding investment commitments, alongside the company’s stated liquidity expectations.