AXIS Capital Holdings Limited — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 27, 2020. AXIS is a Bermuda-based specialty insurer and global reinsurer, reporting Insurance and Reinsurance segments. Amounts below are U.S. dollars.
Financial performance and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Gross premiums written | $6.90 billion | $6.91 billion |
| Net premiums written | $4.49 billion | $4.66 billion |
| Net premiums earned | $4.59 billion | $4.79 billion |
| Net income available to common shareholders | $282.4 million | $0.4 million |
| Operating income (non-GAAP) | $213.4 million | $160.7 million |
| Underwriting income (pre-tax, non-GAAP) | $28.5 million | $123.8 million |
| Combined ratio | 102.6% | 99.9% |
| Net investment income / gains (losses) | $478.6 million / $91.2 million | $438.5 million / $(150.2) million |
| Operating cash flow | $199.0 million | $10.8 million |
FY2019 diluted earnings were $3.34 per share; operating earnings were $2.52 per diluted share. Operating ROACE was 4.7%, versus 3.6% in 2018. Common book value per diluted share rose to $55.79 from $49.93; book value growth adjusted for dividends was $7.47 per share.
At year-end, total assets were $25.6 billion, shareholders’ equity $5.54 billion, and common shareholders’ equity $4.77 billion. Cash and investments totaled $15.9 billion, including $12.47 billion in fixed maturities; the fixed-maturity portfolio had an average AA- credit rating. Loss reserves were $12.75 billion, with $4.21 billion in reinsurance recoverables on paid and unpaid losses. Debt was $1.81 billion, and debt to total capital was 24.6%, up from 21.1%.
Operating cash flow improved year over year, but investing activities used $774.3 million and financing activities provided $277.5 million. Cash and cash equivalents, including restricted cash, declined by $253.6 million to $1.58 billion. Management said approximately $13.6 billion of cash and invested assets could be available within one to three business days under normal conditions; $5.3 billion was restricted.
Changes versus the prior year
- Gross premiums written were nearly flat, while net premiums earned fell 4%. Insurance gross premiums declined 3%; Reinsurance gross premiums increased 4%.
- Underwriting income fell by $95 million and the combined ratio worsened 2.7 points. The Reinsurance segment moved from $46.5 million underwriting income to a $15.5 million loss; Insurance underwriting income declined 43% to $44.0 million.
- Catastrophe and weather-related losses were $336 million, net of reinsurance and reinstatement premiums, versus $430 million in 2018. The current accident-year loss ratio excluding catastrophe losses improved to 60.6% from 61.7%, but acquisition and general and administrative expense ratios increased.
- Favorable prior-year reserve development was $78.9 million, down from $199.7 million. Reinsurance property and other reserves had $133 million adverse development, primarily reflecting updated estimates for prior catastrophe events and reserve strengthening; this was partly offset by favorable development in motor, credit and surety, and other classes.
- Net investment gains swung to $91.2 million from a $150.2 million loss, reflecting equity-security gains and realized gains on sales of U.S. government and agency mortgage-backed securities. Higher fixed-maturity income supported the 9% increase in net investment income.
Outlook, commentary and risks
- Management expected improving insurance rates and terms across most lines in 2020, with growth focused on attractive specialty markets. Reinsurance pricing was mixed; renewed treaty premiums at January 1, 2020 were lower in aggregate than expiring premiums. Management anticipated rate increases in Japanese catastrophe renewals and sought increases in Florida catastrophe and U.S. casualty renewals, with volume dependent on rate adequacy. No formal earnings or revenue guidance was provided.
- Management said it did not then anticipate a material COVID-19 impact, but could not estimate potential insurance exposures or indirect effects given the outbreak’s uncertainty.
- Key exposures include natural and man-made catastrophes, uncertain loss reserves (particularly long-tail casualty and catastrophe claims), climate-related risks, cyber claims, inflation, competition, market and credit risks, and reliance on reinsurance counterparties. The filing identifies dependence on three brokers for 47% of gross premiums written.
- Interest-rate and credit-spread sensitivity: an instantaneous 100-basis-point rate increase combined with 100-basis-point spread widening was estimated to reduce fixed-maturity fair value by $697 million before tax. A 20% decline in equity-market prices would reduce equity securities’ value by an estimated $60 million before tax.
- Transformation and Novae integration costs continued: $37 million of reorganization expenses in 2019, down from $67 million. Syndicate 2007 ceased writing new business and entered run-off effective January 1, 2019. Effective 2020, AXIS said it would stop underwriting and investing in companies primarily engaged in thermal coal mining or power generation, or tar sands extraction.
- Debt financing included $300 million of 3.9% senior notes and $425 million of 4.9% junior subordinated notes issued in 2019; $250 million of 2.65% senior notes was repaid. $500 million of senior notes was scheduled to mature in 2020. The Series D preferred shares, with a $225 million liquidation preference, were redeemed on January 17, 2020.
- The auditor issued unqualified opinions on the financial statements and internal control. Loss reserves were identified as a critical audit matter because their estimation relies on significant actuarial assumptions and management judgment.
Important facts for investors to verify
- Whether loss-reserve adequacy holds, particularly for long-tail liability lines and adverse development in reinsurance property reserves; catastrophe estimates remain subject to change.
- Whether underwriting profitability improves despite the 2019 combined ratio above 100%, lower favorable reserve development, and rising acquisition costs.
- Reinsurance recoverable quality and counterparty concentration, including collection risk and the effect of increased ceded premiums.
- Liquidity and capital after the 2020 debt maturity and Series D redemption, including restricted assets, subsidiary dividend limits, and the terms and availability of letter-of-credit facilities.
- How 2020 rate changes, COVID-19-related claims and indirect effects, Brexit-related operating arrangements, and the coal and tar-sands underwriting policy affect results.