AXIS Capital Holdings Ltd. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Interim financial statements are unaudited. AXIS is a Bermuda-based specialty insurer and treaty reinsurer operating through Insurance and Reinsurance segments.
Financial performance and position
- Q3 revenue and earnings: Total revenue was $1.045 billion, up 3% year over year; net premiums earned rose 10% to $945 million. Net income was $151 million versus $232 million, and net income available to common shareholders was $137 million, or $1.23 per diluted share, versus $223 million, or $1.82.
- Nine-month results: Net premiums earned increased 8% to $2.765 billion. Net income was $546 million versus $557 million; income available to common shareholders was $512 million versus $514 million. Diluted EPS was $4.41 versus $4.11.
- Underwriting: Q3 underwriting income was $153 million versus $155 million; combined ratio was 86.3% versus 85.3%. Nine-month underwriting income was $334 million versus $337 million; combined ratio improved to 90.5% from 90.8%. Ratios below 100% indicate underwriting profit.
- Investments: Net investment income was $103 million in Q3 and $295 million for nine months, broadly unchanged year over year. Net realized investment losses were $5 million in Q3, compared with gains of $51 million; nine-month gains were $56 million versus $96 million. Q3 foreign-exchange losses rose to $57 million from $24 million.
- Cash flow and liquidity: Nine-month operating cash flow was $889 million, essentially unchanged from 2012. Cash and investments totaled approximately $14.8 billion at quarter-end; cash and cash equivalents were $1.050 billion, plus $60 million restricted cash. Total assets were $19.9 billion and shareholders’ equity $5.8 billion.
- Debt and capital: Senior notes were approximately $996 million; debt-to-total-capital was 14.7%, and debt plus preferred equity to total capital was 23.9%. No credit-facility borrowings were outstanding; $468 million of letters of credit were outstanding under the separate LOC facility. The company reported covenant compliance.
- Shareholder measures: Diluted book value per common share was $44.60 versus $43.57 a year earlier. The declared common dividend was $0.25 per share for Q3. The company repurchased no shares under its public program during the quarter; approximately $409 million of authorization remained at October 30.
Material changes versus comparable periods
- Q3 common earnings fell 39%, largely amid sharply lower realized investment results and higher foreign-exchange losses; operating income, a non-GAAP measure, was $197 million versus $201 million. Nine-month operating income increased to $474 million from $449 million.
- Premium growth was broad: gross premiums written increased 7% in Q3 and 14% for nine months. Nine-month growth included expansion in agriculture reinsurance and accident-and-health insurance.
- Q3 catastrophe and weather-related net losses were $51 million, versus $32 million in Q3 2012; nine-month losses were $203 million versus $132 million. Q3 favorable prior-year reserve development increased to $80 million from $60 million; nine-month development was $177 million versus $180 million.
- The portfolio’s net unrealized investment gains declined during the first nine months as yields rose. Accumulated other comprehensive income fell to $130 million from $363 million at year-end 2012.
- AXIS issued $225 million of 5.50% Series D preferred shares and redeemed $100 million of 7.25% Series A shares, reducing the weighted-average preferred dividend rate by 57 basis points. A.M. Best upgraded the principal operating subsidiaries to A+ (Stable).
Outlook, commentary and risks
- Management gave no specific earnings or premium guidance. It said insurance markets were improving on average but unevenly, with price increases slowing; U.S. catastrophe reinsurance faced substantial new capacity and downward rate pressure. Management described overall reinsurance profitability as generally adequate and planned selective growth, including in agriculture and accident and health.
- AXIS obtained $200 million of catastrophe protection for three years through Northshore Re; Q3 ceded premium was $14 million. The company also amended its credit facility to permit weather-derivative transactions.
- Management expects operating cash flows and the investment portfolio to meet foreseeable cash needs, while cautioning that catastrophe-related paid losses could rise. Estimates for events including Storm Sandy, the Japan and New Zealand earthquakes, and Canadian, European and Argentinian floods remain uncertain and may change materially.
- Reserve estimates, reinsurance recoverables, catastrophe-model assumptions, investment valuations and foreign-exchange movements are key risks. The filing also notes illiquid investments, including $98 million of hedge-fund holdings within lockup periods and unfunded investment commitments.
- The $750 million LOC facility was due to expire December 31, 2013; management was evaluating renewal alternatives. Routine ordinary-course legal proceedings were disclosed, with no material proceedings outside the ordinary course and no material changes to previously reported risk factors.
Important facts for investors to verify
- Whether favorable prior-year reserve releases and updated liability-reinsurance actuarial methods remain supportable, and how catastrophe losses develop.
- The effect of further catastrophe events, reinsurance recoverability, and changes in reserve estimates on future underwriting results.
- Investment portfolio sensitivity to interest rates, credit spreads, market values and currency movements, including the valuation and liquidity of Level 3 and fund investments.
- Renewal and availability of the LOC facility, covenant headroom, and the implications of capital returns and preferred dividends.
- Changes in pricing and capacity across insurance and reinsurance markets, particularly U.S. catastrophe reinsurance.