Business Context and Reporting Period
Company: AXIS Capital Holdings Limited
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2009
Business Overview: AXIS Capital operates two global underwriting platforms: AXIS Insurance and AXIS Re. The company provides insurance and reinsurance products globally. As of October 30, 2009, there were 142,464,979 common shares outstanding.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2009 | Nine Months Ended Sep 30, 2009 |
|---|---|---|
| Net Premiums Earned | $706.0 million | $2,078.2 million |
| Net Investment Income | $134.8 million | $346.3 million |
| Net Realized Investment Losses | ($253.4 million) | ($317.6 million) |
| Net Income (Loss) | ($86.7 million) | $206.6 million |
| Net Income Available to Common Shareholders | ($95.9 million) | $178.9 million |
| Earnings Per Share (Diluted) | ($0.70) | $1.19 |
| Total Assets | $15.92 billion | $15.92 billion |
| Total Shareholders' Equity | $5.40 billion | $5.40 billion |
| Cash and Cash Equivalents | $1.11 billion | $1.11 billion |
| Senior Notes (Debt) | $499.4 million | $499.4 million |
| Combined Ratio (Group) | 73.2% | 80.0% |
Material Changes vs. Prior Comparable Period
- Profitability: The company reported a net loss of $86.7 million for the quarter, a significant improvement from the $240.1 million loss in the same period of 2008. For the nine months, net income was $206.6 million, down 16% from $247.3 million in 2008.
- Underwriting Results: Total underwriting income for the quarter was $71.4 million, compared to an underwriting loss of $186.4 million in Q3 2008. This improvement was driven by lower catastrophe activity (Hurricanes Ike and Gustav impacted 2008) and favorable prior period reserve development of $122.1 million.
- Investment Performance: Net investment income increased 166% to $134.8 million for the quarter, primarily due to strong performance in hedge and credit funds. However, net realized investment losses increased significantly to $253.4 million (from $89.1 million in 2008), driven by $279.3 million in Other-Than-Temporary Impairment (OTTI) charges, largely on medium-term notes (MTNs).
- Derivative Liability: A $136 million increase in the fair value liability of an insurance derivative contract (longevity risk) negatively impacted the Insurance segment's results for the quarter.
- Balance Sheet: Total assets increased to $15.92 billion from $14.28 billion at year-end 2008. Shareholders' equity grew to $5.40 billion, driven by a $793 million reduction in net unrealized losses on the investment portfolio.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects the reinsurance market to remain positive entering 2010, with stable to increasing rates in catastrophe-exposed and trade credit lines. The insurance segment faces competitive pressures in liability and professional lines, though rates are improving in volatile lines like catastrophe and energy.
- Unusual Items:
- OTTI Charges: $279.3 million in OTTI charges were recognized in the quarter, primarily $263.5 million on corporate debt (MTNs) where full recovery of amortized cost is no longer anticipated.
- Derivative Adjustment: A $136 million charge related to a longevity risk derivative contract due to revised life expectancy assumptions.
- Risks: Key risks include natural and man-made disasters, actual claims exceeding loss reserves, credit market conditions, and the failure of loss limitation methods. The company also faces risks related to the valuation of Level 3 assets (e.g., CLO equity tranches) and potential further deterioration in credit spreads.
- Accounting Changes: The company adopted new FASB guidance on OTTI effective April 1, 2009, which changed the recognition of impairment losses for fixed maturities, separating credit losses from non-credit components.
Important Facts for Investor Verification
- Investment Portfolio Quality: Verify the composition of the $293.2 million in credit losses remaining in retained earnings and the specific assumptions used for valuing Level 3 assets, particularly CLO equity tranches and MTNs.
- Derivative Liability: Confirm the stability of the longevity risk derivative liability, as the $136 million charge was based on revised mortality assumptions that may continue to evolve.
- Reserve Development: Assess the sustainability of the $303.2 million in favorable prior period reserve development for the nine months, which significantly boosted underwriting income.
- Credit Exposure: Review the exposure to credit and political risk lines, which saw increased loss activity and reduced premium writing opportunities due to the global economic downturn.
- Liquidity: Note the reduction in securities lending collateral from $412.8 million to $135.1 million as the company winds down the program to reduce counterparty risk.