AXIS Capital Holdings Limited — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; this is an annual report, not a standalone fourth-quarter filing. AXIS is a Bermuda-based global specialty insurer and reinsurer operating through its Insurance and Reinsurance segments. Financial statements were audited under U.S. GAAP; the auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Key financial results
| Metric | 2013 | 2012 |
|---|---|---|
| Gross premiums written | $4.697 billion | $4.140 billion |
| Net premiums written | $3.928 billion | $3.337 billion |
| Net premiums earned | $3.707 billion | $3.415 billion |
| Net income available to common shareholders | $684 million | $495 million |
| Diluted earnings per common share | $5.93 | $4.00 |
| Underwriting income; combined ratio | $428 million; 91.0% | $263 million; 96.2% |
| Net investment income; realized investment gains | $409 million; $76 million | $381 million; $127 million |
| Operating cash flow | $1.097 billion | $1.121 billion |
- Profitability: The 2013 loss ratio was 57.6%, acquisition cost ratio 17.9%, and general and administrative expense ratio 15.5%. ROACE was 13.1%, versus 9.7%; operating ROACE, a non-GAAP measure, was 12.1%, versus 8.2%. Management’s full-cycle ROACE target is 15%.
- Year-end position: Total assets were $19.6 billion, total cash and investments $14.8 billion, common shareholders’ equity $5.2 billion, and total capital $6.8 billion. Diluted book value per common share was $45.80, up from $42.97.
- Debt and liquidity: Senior notes were $996 million; debt to total capital was 14.6%. Cash and cash equivalents were $988 million. Management reported approximately $13.1 billion of cash and invested assets potentially available within one to three business days under normal conditions, including $3.1 billion of restricted assets. Operating cash flow remained above $1 billion.
Changes versus prior periods
- Gross premiums written rose 13% year over year, and net premiums earned rose 9%, with growth in both segments. Insurance gross premiums increased 11%; reinsurance gross premiums increased 17%, notably reflecting expansion in agriculture, professional lines and property.
- Underwriting income improved by $165 million and the combined ratio improved by 5.2 percentage points. Lower catastrophe and weather-related losses were the principal drivers: estimated aggregate pre-tax net losses, net of reinstatement premiums, were $198 million in 2013 versus $436 million in 2012. Favorable prior-year reserve development was $219 million, down from $245 million.
- Common-shareholder income increased 38%. Net investment income rose 7%, aided by stronger hedge-fund returns, while fixed-maturity income fell as reinvestment yields declined. Realized investment gains fell to $76 million from $127 million.
- Higher interest rates reduced unrealized investment values: the portfolio’s net unrealized change on available-for-sale investments was a $223 million loss, compared with a $232 million gain in 2012. Gross unrealized losses on fixed maturities increased to $180 million from $18 million; management said it did not expect to be required to sell the securities before recovery.
- AXIS repurchased 10.8 million common shares for $472 million and declared common dividends of $1.02 per share, compared with $0.97 in 2012. It issued $225 million of 5.50% Series D preferred shares and redeemed the remaining $100 million of Series A preferred shares.
Outlook, risks and notable items
- 2014 outlook: Management expected gross premiums written to increase in both segments, while pursuing diversification and opportunities with attractive returns. It noted slowing favorable pricing in primary insurance and competitive pressure in reinsurance from alternative capacity and strong incumbent capital. No specific earnings, margin or premium-growth target was provided.
- Underwriting and reserves: AXIS highlighted catastrophe exposure, uncertainty in modeled loss estimates, long-tail reserve risk, and potential changes in claim severity, inflation, law and coverage interpretation. It reported adverse prior-year development in insurance professional lines, including U.S. D&O and global-financial-crisis-related claims; current-year professional-lines and agriculture loss experience also weakened relative to expectations. Gross loss reserves were $9.6 billion, including $6.1 billion of IBNR.
- Catastrophe exposure: The modeled net probable maximum loss for a 1-in-250-year single Southeast U.S. hurricane was approximately $887 million. Estimates depend on model assumptions and may differ materially from actual losses.
- Investments and liquidity: Low reinvestment yields may constrain investment income; rising rates and credit-spread widening may reduce portfolio values. Alternative investments can be volatile and some have redemption restrictions. A modeled 100-basis-point rate increase plus 100-basis-point spread widening implied a $618 million pre-tax decline in fixed-maturity fair value.
- Concentration and contingencies: Three brokers generated 61% of gross premiums written. Reinsurance recoverables were $1.9 billion, with 98.8% of gross recoverables due from reinsurers rated A− or better; collection, coverage disputes and counterparty failure remain risks. The filing reported no material legal proceedings outside the ordinary course and no material off-balance-sheet arrangements.
- Other developments: AXIS formed a fully collateralized reinsurance vehicle, Ventures Re, with $50 million of third-party noncontrolling interests, and established Lloyd’s Syndicate 1686, which began operations January 1, 2014. A $500 million 5.75% senior note is scheduled to mature in December 2014. A new $750 million share-repurchase authorization became effective January 1, 2014.
Most important facts for investors to verify
- Whether the 2013 combined-ratio improvement persists when catastrophe losses normalize, and how much earnings depend on favorable prior-year reserve development.
- Reserve adequacy, especially professional/D&O, liability and catastrophe claims, and changes in loss estimates as new claim information emerges.
- 2014 renewal pricing, premium growth, and profitability in agriculture and other expanding lines amid competitive pressure.
- Investment portfolio exposure to rates, credit spreads, equities and less-liquid alternatives; also the scale and duration of unrealized losses.
- Availability of holding-company cash from regulated subsidiaries, collateral and letter-of-credit needs, and the plan for the 2014 debt maturity.
- Execution and capital implications of the Lloyd’s syndicate and Ventures Re, alongside the pace of share repurchases and dividends.