AXIS Capital Holdings Limited — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet figures are as of March 31, 2019, compared with December 31, 2018. AXIS is a global specialty insurer and reinsurer, operating through Insurance and Reinsurance segments. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Net premiums earned | $1.134 billion | $1.167 billion; down 3% |
| Total revenue | $1.261 billion | $1.260 billion |
| Net income | $108.8 million | $73.2 million |
| Net income available to common shareholders | $98.1 million; $1.17 per share, $1.16 diluted | $62.5 million; $0.75 per share, diluted |
| Operating income (non-GAAP) | $104.6 million; $1.24 per diluted share | $122.6 million; $1.46 per diluted share |
| Underwriting income (non-GAAP) | $77.8 million | $143.7 million; down 46% |
| Combined ratio | 96.9% | 90.8% |
| Net investment income / gains | $107.3 million / $12.8 million | $101.0 million / losses of $14.8 million |
| Operating cash flow | $(57.7) million | $(87.9) million |
Gross premiums written were $2.583 billion, down 3%; net premiums written were $1.777 billion, down 11%. The Insurance segment earned $20.9 million underwriting income (combined ratio 96.6%); Reinsurance earned $56.9 million (91.0%).
Financial position and liquidity
- Total assets were $25.6 billion; shareholders’ equity was $5.30 billion, including $4.53 billion of common equity. Book value per diluted common share was $52.84.
- Investments totaled $13.55 billion. Cash and cash equivalents were $1.15 billion and restricted cash was $455 million; cash and investments together were approximately $15.2 billion. The fixed-maturity portfolio’s average credit rating was AA-.
- Loss reserves were $12.28 billion, with $3.88 billion of reinsurance recoverables on paid and unpaid losses. Management notes that catastrophe reserves involve significant judgment and could differ materially from ultimate losses.
- Senior notes were $1.342 billion; debt-to-total-capital was 20.2%, versus 21.1% at year-end 2018. On April 1, 2019, the company repaid $250 million of 2.65% senior notes.
- Cash, cash equivalents and restricted cash ended the quarter at $1.606 billion, down $223.8 million from year-end. Investing cash flow was $(102.8) million and financing cash flow was $(55.9) million. The company said operating cash generation and portfolio liquidity should cover foreseeable cash needs.
Material changes and management commentary
- GAAP net income improved, supported by investment gains versus losses a year earlier, lower foreign-exchange losses, and sharply lower amortization of value of business acquired. In contrast, operating income fell 15% and underwriting income fell 46%, reflecting weaker underwriting results.
- The combined ratio rose 6.1 points. The current accident-year loss ratio excluding catastrophe losses increased to 58.9% from 58.3%; catastrophe and weather losses declined to $11 million from $35 million. Favorable prior-year reserve development was $14.7 million, versus $54.3 million.
- Acquisition-cost ratio increased to 23.0% from 19.6%, principally due to Insurance business mix associated with Novae. General and administrative expense ratio rose to 15.4% from 14.5%.
- Net investment income rose 6%, mainly as higher fixed-maturity yields lifted income; returns from other investments fell, including lower direct-lending-fund returns. Investment gains included $27.4 million of unrealized equity-security gains. Fixed-maturity unrealized gains improved by $220.7 million, primarily as credit spreads tightened, contributing to comprehensive income of $315.0 million.
- Management described improving rates in many specialty insurance lines and increased reinsurance-market rate momentum, but emphasized competitive and mixed market conditions. It is targeting adequately priced business and will trade growth for profitability in some areas. No specific earnings or premium guidance was provided.
- The transformation program had achieved $69 million in annualized pretax cost savings against a $100 million target by the end of 2020. Q1 transformation-related transaction and reorganization expenses were $14.8 million.
- Leasing standard adoption added approximately $144 million of right-of-use assets and lease liabilities, with no impact on earnings, retained earnings or liquidity. A new 15-year Alpharetta office lease begins in January 2020 and has total contractual costs of $40 million.
Risks, contingencies and unusual items
- Loss estimates for major prior-year catastrophes—including California wildfires, Hurricanes Michael and Florence, Typhoons Jebi and Trami, and earlier events—remain uncertain and may change as claims information develops. Q1 included adverse prior-year property development, notably $29 million in Reinsurance property and other.
- Insurance and reinsurance results are exposed to catastrophe severity and frequency, reserve-estimation risk, pricing cycles, reinsurance collectability, competition, regulation, market movements, foreign exchange and execution of the Novae integration and transformation program.
- Other investments include less-liquid funds and unfunded commitments: $200 million for direct lending, $53 million for multi-strategy funds, $115 million for real estate, and $16 million for private equity, among other commitments. Some fund valuations rely on lagged manager information; 62% of other investments were reported on a lag.
- A $750 million secured letter-of-credit facility supports reinsurance obligations and is subject to collateral and other covenants. The $250 million component was extended to March 31, 2020; the additional $500 million component expires December 31, 2019.
- The company reported no material legal proceedings outside the ordinary course and no material changes to its previously disclosed risk factors. It reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether underwriting margins recover, particularly given the combined-ratio deterioration, lower premium volume and higher acquisition costs.
- How catastrophe claims and adverse property reserve development evolve, and whether current reserve estimates prove adequate.
- Whether the $69 million of transformation savings translate into sustainable profitability and the $100 million target is achieved by the end of 2020.
- The durability of investment income and gains, including private-fund liquidity, lagged valuations, unfunded commitments and sensitivity to market conditions.
- The post-repayment debt and capital ratios, and renewal or replacement of expiring letter-of-credit capacity.