AXIS Capital Holdings Limited — 2010 Form 10-K
Business context and reporting period. Bermuda-based global specialty insurer and reinsurer, operating through AXIS Insurance and AXIS Re. This is the annual report for the fiscal year ended December 31, 2010, with 2009 as the primary comparison; it is not a standalone fourth-quarter filing. Figures below are in U.S. dollars.
Financial performance and position
| Metric | 2010 | 2009 | Change or context |
|---|---|---|---|
| Gross premiums written | $3.751bn | $3.587bn | Up 5% |
| Net premiums earned | $2.947bn | $2.792bn | Up 6% |
| Net income available to common shareholders | $820m | $461m | Up 78%; diluted EPS was $6.02 versus $3.07 |
| Operating income, non-GAAP | $627m | $766m | Down 18%; diluted operating EPS was $4.60 versus $5.10 |
| Underwriting income | $409m | $525m | Down 22% |
| Combined ratio | 88.7% | 79.3% | Higher catastrophe losses and expense ratios; below 100% indicates underwriting profit |
| Net investment income | $407m | $464m | Down 12%, principally from lower reinvestment yields |
| Net realized investment gains (losses) | $195m | ($312m) | Recovery in markets and much lower impairment charges helped GAAP results |
| Net cash from operating activities | $1.188bn | $850m | Up $338m |
Net favorable prior-year reserve development was $313m, compared with $423m in 2009. Current-year catastrophe losses included the Chile and New Zealand earthquakes and other weather events. The filing gives differing estimates for the individual earthquake losses: Chile is stated as $110m or $118m, and New Zealand as $136m or $138m; the figures are not fully consistent in the filing text.
At year-end, total assets were $16.446bn, investments were $11.524bn, cash and cash equivalents were $1.045bn, and reinsurance recoverables were $1.578bn. Loss reserves were $7.032bn, up from $6.564bn. Shareholders’ equity was $5.625bn, including $500m of preferred shares; common equity was $5.125bn. Diluted book value per common share was $39.37.
Total debt was $994m, up from $499m after issuance of $500m of 5.875% senior notes due 2020. Debt to total capitalization was 15.0%, versus 8.3%. Operating cash flow was partly offset by $688m used in investing activities and $352m used in financing activities; cash and cash equivalents increased $141m. The company reported $12.6bn of cash and investments, of which $8.9bn was expected to be available within one to three business days. Restricted investments totaled $2.497bn.
Material changes versus 2009
- Common-share net income rose substantially, but operating income fell as catastrophe losses increased, reserve releases declined, and investment income weakened. Positive realized investment gains, versus large losses in 2009, were a major contributor to the improvement in reported net income.
- Insurance underwriting income increased to $210m from $84m; reinsurance underwriting income decreased to $199m from $440m, principally reflecting 2010 catastrophe claims.
- Gross premiums written rose 5%. Insurance premiums grew 8%, including property and professional lines; reinsurance premiums were up 1%.
- The insurance segment ceded a smaller share of premiums after raising property excess-of-loss attachment points and reducing professional-lines quota-share cessions. This supported net premiums but increased retained exposure.
- The company repurchased 21.8m common shares for approximately $699m under its repurchase program. Year-end common shares outstanding fell to 112.4m from 132.1m.
- Fixed-maturity holdings increased in fair value to $10.483bn from $9.718bn. Net investment income declined, while net realized investment results swung from a $312m loss to a $195m gain. OTTI recognized in earnings was $18m in 2010 versus $337m in 2009; accounting changes mean the amounts are not directly comparable.
Outlook, commentary, risks and unusual items
- 2011 outlook: Management expected challenging insurance pricing, with gross premiums written flat to modestly higher, driven by newer products and geographies, including Global Accident & Health. Following January renewals, reinsurance rates were expected to be flat to marginally down. No earnings guidance was provided.
- Catastrophe exposure: Management identified natural catastrophe risk as its largest aggregate exposure. Modeled 1-in-100-year U.S. hurricane net loss was approximately $1.1bn; 1-in-250-year loss was approximately $1.5bn. The U.S. hurricane estimate increased during 2010, largely due to reduced insurance-segment reinsurance protection.
- Reserve uncertainty: Loss reserves require significant judgment and depend partly on industry benchmarks given the company’s limited operating history. Long-tail liability and motor reserves, emerging claims, and recoveries on credit and political risk business are key sensitivities. Favorable reserve development supported results, but management cautioned it may not recur.
- Investment and market risks: Lower rates may continue to pressure reinvestment yields; fixed maturities are exposed to interest rates and credit spreads, and alternative investments to valuation and liquidity risk. The filing estimates a $574m pre-tax fair-value decline under a specified simultaneous 100-basis-point rate rise and 100-basis-point spread widening scenario.
- Other material risks: Competitive and soft pricing conditions, broker concentration (three brokers generated 62% of 2010 gross premiums), reinsurer collectability, ratings downgrades, currency movements, regulatory change, and restricted subsidiary distributions could affect results, capital or liquidity.
- Subsequent events: The company had exposure to January 2011 Australian flooding and February Cyclone Yasi, primarily through reinsurance, but stated information available by February 18, 2011 was insufficient to estimate net exposure.
- Legal and regulatory: An insurance-brokerage antitrust case was remanded on bid-manipulation allegations after appellate dismissal of antitrust and RICO claims related to contingent commissions. Management said it would defend the case and did not expect routine proceedings to have a material effect. Solvency II was scheduled for 2013; management was monitoring Dodd-Frank implementation.
- Capital actions: The company issued $500m of 5.875% senior notes, replaced its prior credit arrangements with a $500m revolving facility and a secured $750m letter-of-credit facility, and had $593m of share-repurchase authorization remaining at year-end.
The financial statements received an unqualified audit opinion, and the independent auditor reported effective internal control over financial reporting as of December 31, 2010.
Important facts for investors to verify
- Reconcile earthquake loss estimates across the filing and monitor development of 2010 catastrophe claims, including the subsequent Australian events.
- Assess reserve adequacy and the sustainability of reserve releases, especially for long-tail lines and credit and political risk recoveries.
- Separate recurring underwriting and investment performance from realized gains, impairment charges, and other items when evaluating earnings.
- Review the effect of reduced ceded reinsurance on retained catastrophe risk and future loss volatility.
- Confirm liquidity availability after restricted collateral, debt service, dividends and planned repurchases, and review subsidiary dividend constraints and facility covenants.
- Track pricing, retention and growth by segment, and assess continued dependence on a small number of brokers.