AXIS Capital Holdings Limited — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019 unless otherwise noted. AXIS is a global specialty insurer and treaty reinsurer, reporting Insurance and Reinsurance segments. Amounts below are U.S. dollars.
Financial results and condition
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Gross premiums written | $2.431 billion | $2.583 billion, down 6% |
| Net premiums written | $1.679 billion | $1.777 billion, down 6% |
| Net premiums earned | $1.089 billion | $1.134 billion, down 4% |
| Total revenues | $1.110 billion | $1.261 billion |
| Net income (loss) | $(178) million | $109 million |
| Net loss attributable to common shareholders | $(185) million; $(2.20) per diluted share | $98 million; $1.16 per diluted share |
| Operating loss (non-GAAP) | $(164) million; $(1.94) per diluted share | $105 million; $1.24 per diluted share |
| Net investment income | $93 million | $107 million |
| Net investment gains (losses) | $(63) million | $13 million |
| Operating cash flow | $(50) million | $(58) million |
Underwriting: Underwriting loss was $197 million versus income of $78 million. The consolidated combined ratio rose to 119.8% from 96.9% (above 100% indicates an underwriting loss). Insurance reported a $123 million underwriting loss and a 121.9% combined ratio; Reinsurance reported a $74 million loss and a 112.3% ratio. The current accident-year loss ratio excluding catastrophe and weather losses improved to 57.1% from 58.9%, but catastrophe losses materially outweighed that improvement.
Balance sheet and liquidity at March 31: Total assets were $25.9 billion; total investments were $14.0 billion and cash, cash equivalents and restricted cash totaled $1.241 billion. Loss reserves were $13.1 billion, with $4.5 billion of reinsurance recoverables on paid and unpaid losses. Debt was $1.809 billion; debt to total capital was 27.2%, compared with 24.6% at year-end 2019. Shareholders’ equity was $4.840 billion, down from $5.544 billion; common equity was $4.290 billion. Book value per diluted common share was $49.78. Fixed maturities, cash and short-term securities represented 88% of total cash and investments and had an average credit rating of AA-.
Material changes and notable items
- Q1 catastrophe and weather-related losses, net of reinstatement premiums, were estimated at $300 million, including $235 million related to COVID-19 and $65 million from other weather events. The COVID estimate assumed, where relevant, shelter-in-place measures through July 31, 2020.
- Investment results weakened: net investment losses were driven mainly by $61 million of unrealized equity-security losses and a $20 million expected-credit-loss allowance on fixed maturities. Fixed-maturity net unrealized positions shifted from $205 million of gains at December 31 to $90 million of losses at March 31; this also contributed to lower equity through other comprehensive loss.
- Insurance gross premiums written rose 11% to $941 million, while Reinsurance gross premiums written fell 14% to $1.490 billion. Management attributed the Reinsurance decline partly to non-renewals, reduced line sizes and timing of an agriculture renewal.
- Net favorable prior-year reserve development was $6 million, down from $15 million. Favorable development included $17 million of adverse development in Reinsurance liability reserves, partly offset by favorable development in other classes.
- On January 17, AXIS redeemed all Series D preferred shares for $225 million. Common dividends declared were $0.41 per share. The 150,000 common shares repurchased during the quarter were employee tax-withholding shares, not open-market buybacks; no common-share repurchase plan was authorized for 2020.
- Accumulated other comprehensive loss was $90 million at quarter-end, versus income of $172 million at year-end, largely reflecting investment-market losses and foreign-currency translation.
Outlook, risks and contingencies
- COVID-19 uncertainty: Management said the $235 million pandemic-loss estimate was highly uncertain and could change materially. Q1 reserves did not include potential indirect pandemic losses, such as economic downturn effects on professional and credit lines; those may emerge over several quarters or years. Coverage interpretations, claim development, pandemic duration and ceded-reinsurance recoveries remain significant uncertainties.
- Management outlook: Management reported improving rates and terms across many specialty insurance lines and increased rate momentum in reinsurance. It emphasized underwriting discipline, selective growth and prioritizing adequately priced business. No quantified earnings or premium guidance was provided.
- Liquidity and debt: Management expected operating cash flows and investment-portfolio liquidity to cover cash outflows and contractual commitments due within one year after the financial statements were issued. It planned to repay $500 million of unsecured senior notes in June 2020; management said no long-term debt would mature thereafter until end-2027. The $250 million secured letter-of-credit facility was extended to March 31, 2021; a separate $500 million facility remained in place. Management also identified approximately $50 million of 2020 expense savings related to COVID-19 measures.
- Ratings: After quarter-end, A.M. Best revised its rating from A+ to A with a stable outlook on May 5, citing operating-performance trends. S&P revised its outlook from stable to negative on May 11. Moody’s rating and outlook were unchanged from the filing’s reported status.
- Other exposures: Key risks include catastrophe severity, reserve adequacy, investment-market and credit volatility, premium collection, reinsurer collectability, potential changes to COVID-related coverage interpretations, and operational/cybersecurity risks from remote work. The company reported no material legal proceedings outside ordinary business and no off-balance-sheet arrangements.
Important facts for investors to verify
- Subsequent COVID-19 claims and reserve revisions versus the $235 million Q1 pandemic estimate, including indirect economic losses and policy-coverage disputes.
- Whether investment values, credit-loss allowances and liquidity are affected further by market conditions; note that $693 million of other investments were in funds and 71% of other investments were reported on a valuation lag.
- Premium trends and underwriting profitability by segment, particularly the Reinsurance premium contraction and both segments’ combined ratios above 100%.
- Completion and funding of the planned June 2020 $500 million note repayment, and the effect of the preferred-share redemption on capital and liquidity.
- Implications of the post-quarter A.M. Best downgrade and S&P negative outlook for ratings, business, and access to capital or reinsurance capacity.