AXIS Capital Holdings Limited — Q1 2018 Form 10-Q
Business context and period. Bermuda-based specialty insurer and reinsurer reporting unaudited results for the three months ended March 31, 2018, compared with Q1 2017. Operations comprise AXIS Insurance and AXIS Re. Results include Novae, acquired October 2, 2017; accident and health was realigned across both segments effective January 1, 2018.
Financial performance and condition
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total revenue | $1.260 billion | $1.009 billion |
| Net premiums earned | $1.167 billion | $938.7 million; up 24% |
| Net income | $73.2 million | $19.9 million |
| Net income available to common shareholders; diluted EPS | $62.5 million; $0.75 | $5.0 million; $0.06 |
| Operating income; diluted operating EPS (non-GAAP) | $122.6 million; $1.46 | $51.0 million; $0.59 |
| Underwriting income; combined ratio | $143.7 million; 90.8% | $16.4 million; 102.1% |
| Net investment income / net investment losses | $101.0 million / $14.8 million loss | $98.7 million / $25.1 million loss |
| Operating cash flow | $87.9 million used | $36.3 million used |
| Cash, cash equivalents and restricted cash | $1.645 billion | $1.364 billion at Dec. 31, 2017 |
| Total investments; total cash and investments | $13.776 billion; approximately $15.4 billion | Investments were $14.784 billion at year-end |
| Total debt; debt to total capital | $1.377 billion; 20.7% | $1.377 billion; 20.5% at year-end |
| Shareholders’ equity; diluted book value per common share | $5.264 billion; $52.57 | Equity was $5.341 billion at year-end; book value was $58.89 at March 31, 2017 |
Q1 operating cash use reflected, among other items, increases in unearned premiums and balances receivable/payable. Cash flow from investing activities was $418.4 million provided; financing activities used $53.1 million. The company declared a $0.39 common dividend per share.
Material changes and notable items
- Gross premiums written rose 39% to $2.663 billion and net premiums written rose 32% to $1.986 billion. Growth included Novae and varied by line; management noted timing effects in some reinsurance lines. Ceded premiums were 25% of gross premiums, versus 21% a year earlier.
- Combined ratio improved 11.3 percentage points. Current accident-year loss ratio declined to 61.3% from 67.3%; net favorable prior-year reserve development increased to $54.3 million from $24.8 million. Catastrophe and weather losses were $35 million in both periods.
- Q1 net income included $13.1 million of reorganization costs and $59.9 million of amortization of acquired business value and intangibles, largely associated with Novae. Foreign-exchange losses increased to $37.9 million from $21.5 million.
- Net unrealized losses on available-for-sale investments reduced other comprehensive income by $110.1 million after tax; management attributed the fixed-income portfolio decline principally to rising U.S. Treasury rates. Fixed-maturity unrealized losses were $97 million at quarter-end, compared with $11 million of net unrealized gains at year-end.
- The Syndicate 2007 reinsurance-to-close transaction transferred $819 million of reserves; consideration was $688 million, including $513 million settled by transferring securities, with $131 million payable.
- On April 16, 2018, the company entered a retroactive reinsurance agreement expected to add $108 million of reinsurance recoverable on unpaid losses.
Outlook, risks and contingencies
Management expects further profitable growth opportunities in 2018 but did not provide numerical earnings or revenue guidance. It expects net premiums written to grow less than gross premiums written as it shares more risk with strategic capital partners. Management said pricing had generally improved, especially in catastrophe-exposed property, while market conditions remain mixed and could vary through the year. It cited an enterprise-wide transformation program targeting approximately $100 million of annual run-rate cost savings from 2020, with approximately $100 million of cumulative pre-tax charges expected by 2020.
Key uncertainties include catastrophe severity and reserve adequacy, including estimates for 2017 hurricanes, Mexico earthquakes and California wildfires; reinsurance recoverability and counterparty performance; underwriting-cycle and pricing volatility; foreign-exchange and investment-market movements; and execution of Novae integration and transformation plans. Some alternative investments have limited redemption terms, and the company reported unfunded investment commitments. Management stated it expects operating cash flows and investment liquidity to cover foreseeable cash needs and commitments. No material legal proceedings outside the ordinary course were reported; the filing noted no material premium allocated to Iran-related activities for the quarter.
Important facts for investors to verify
- How much premium growth reflects Novae, currency and timing, versus recurring organic expansion—and how increased cessions affect net growth and risk.
- Whether favorable prior-year reserve development persists and whether catastrophe loss estimates, including 2017 events, remain adequate.
- Progress toward the targeted $100 million annual savings, and the timing and total cost of transformation and integration charges.
- Investment portfolio sensitivity to interest rates and equity markets, and liquidity/valuation assumptions for less-liquid fund investments.
- Drivers of negative operating cash flow and the adequacy and collectability of reinsurance recoverables and other funding sources.