AXIS Capital Holdings Limited — Q2 2016 Form 10-Q
Business context and reporting period
AXIS Capital is a Bermuda-based specialty insurer and treaty reinsurer operating through its Insurance and Reinsurance segments. This unaudited filing covers the quarter and six months ended June 30, 2016; comparisons are with the corresponding 2015 periods.
Financial performance and position
- Second-quarter results: Net premiums earned were $947.0 million, up 1%. Net income available to common shareholders was $119.5 million, or $1.30 per diluted share, versus $63.3 million, or $0.63, a year earlier. Non-GAAP operating income fell to $47.5 million, or $0.51 per diluted share, from $93.6 million, or $0.93.
- First-half results: Net premiums earned were $1.849 billion, essentially flat. Net income available to common shareholders was $157.9 million, or $1.69 per diluted share, versus $219.2 million, or $2.17. Non-GAAP operating income was $148.8 million versus $229.7 million.
- Underwriting: Second-quarter underwriting income was $9.9 million versus $56.8 million; the combined ratio was 102.2% versus 96.9%. First-half underwriting income was $108.8 million versus $157.6 million, with a 97.2% combined ratio versus 95.3%. The quarter included $109 million of catastrophe and weather losses, net of reinstatement premiums, versus $39 million in Q2 2015. Favorable prior-year reserve development was $77.7 million in Q2 and $148.1 million in the first half.
- Revenue and investment items: Gross premiums written rose 11% in Q2 and 14% in the first half; net premiums written increased 6% and 12%, respectively. Management attributed some reinsurance growth to multi-year contracts, while cessions also increased. Net investment income was $91.7 million in Q2, up 4%, but $140.9 million for the first half, down 22%, chiefly reflecting weak hedge-fund performance in Q1. Net realized investment gains were $21.0 million in Q2; first-half net realized losses were $45.5 million.
- Cash flow and liquidity: First-half operating cash flow was $62.5 million versus $115.6 million in 2015. Cash and cash equivalents ended June at $792.9 million; total cash and investments were approximately $14.5 billion. Total assets were $21.25 billion and shareholders’ equity $5.96 billion.
- Debt and capital: Senior notes were $992.4 million; debt to total capital was 14.3%, compared with 14.5% at year-end 2015. Diluted book value per common share was $57.62. The company declared $0.35 per common share for Q2 and repurchased 2.3 million common shares during the quarter.
Material changes versus prior periods
- Q2 GAAP earnings increased year over year, but operating income and underwriting income declined. The reported GAAP improvement reflected $56.6 million of foreign-exchange gains and $21.0 million of realized investment gains, compared with Q2 2015 foreign-exchange and realized investment losses.
- Underwriting results weakened as catastrophe and weather losses rose. Excluding those losses, management reported lower current accident-year loss ratios for the group in both Q2 and the first half, while noting adverse rate and loss trends in some business.
- First-half net investment income and operating income declined; the first-half net realized investment loss improved modestly from 2015.
- Net unrealized investment gains improved substantially: accumulated other comprehensive income was $63.1 million at June 30, compared with a loss of $188.5 million at December 31, 2015.
Outlook, risks and unusual items
- Management expected gross premiums written to increase in 2016, with much of the increase offset by greater cessions to reinsurers and third-party capital partners. It described competitive pricing pressure, particularly in catastrophe-exposed property and certain specialty lines, and expected near-term pressure to continue.
- Management said it was emphasizing adequately priced business, smaller and less volatile risks, underwriting discipline, and use of reinsurance and third-party capital. Reinsurance markets remained challenging amid excess capacity, though management cited some signs of moderating pressure and potential opportunities.
- The company entered a quota-share and adverse-development-cover reinsurance agreement in April, accounted for as retroactive reinsurance; related recoverables included $159 million. Loss estimates for events including the Fort McMurray wildfires and other catastrophes remain uncertain and may change materially.
- Other risks include claims exceeding reserves, catastrophe severity, investment and currency volatility, credit-market conditions, competitive pressure, regulatory changes, and uncertainty around coverage interpretations. The filing states there were no material changes to previously disclosed risk factors and no material legal proceedings outside the ordinary course.
- Management stated that operating cash flows and investment-portfolio liquidity were expected to cover required cash outflows and contractual commitments for the foreseeable future. The board-approved share repurchase authorization had $500 million remaining as of July 27, 2016.
Investor facts to verify
- How much of premium growth reflects durable new business versus multi-year contract timing, currency effects, and increased ceded reinsurance?
- Whether catastrophe-loss estimates and the $148.1 million of favorable prior-year reserve development remain supportable as claims develop.
- Whether weak hedge-fund performance and first-half operating-income pressure persist, and how alternative investments affect returns and liquidity.
- The terms, recoverability, and earnings treatment of the retroactive reinsurance agreement and related recoverables.
- Whether pricing competition, share repurchases, dividends, and investment commitments remain consistent with capital and liquidity needs.