AXIS Capital Holdings Limited — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited interim results. AXIS is a Bermuda-based specialty insurer and treaty reinsurer, reporting Insurance and Reinsurance segments. Unless noted otherwise, amounts below are in U.S. dollars.
Financial results and position
| Metric | Q2 2015 | Q2 2014 | H1 2015 | H1 2014 |
|---|---|---|---|---|
| Total revenue | $1.022bn | $1.150bn | $1.983bn | $2.193bn |
| Net premiums earned | $941m | $1,000m | $1,845m | $1,946m |
| Net investment income | $89m | $115m | $181m | $198m |
| Net realized investment gains (losses) | $(11)m | $33m | $(54)m | $44m |
| Net income | $73m | $202m | $239m | $351m |
| Net income available to common shareholders | $63m | $191m | $219m | $328m |
| Diluted EPS | $0.63 | $1.79 | $2.17 | $3.03 |
| Operating income (non-GAAP) | $94m | $173m | $230m | $310m |
| Operating income per diluted share (non-GAAP) | $0.93 | $1.63 | $2.27 | $2.86 |
Q2 underwriting income was $57m, versus $127m a year earlier; the combined ratio rose to 96.9% from 90.8%. For H1, underwriting income was $158m versus $235m, and the combined ratio was 95.3% versus 91.3%. Q2 segment combined ratios were 100.1% for Insurance and 89.0% for Reinsurance. The company reported $65m of favorable prior-year reserve development in Q2 and $121m for H1.
- Cash flow: H1 operating cash flow was $116m, down from $392m in H1 2014. Investing activities provided $62m versus using $377m; financing activities used $102m versus providing $100m. Cash and cash equivalents ended at $989m, excluding $191m of restricted cash.
- Balance sheet and capital: Total assets were $20.7bn and shareholders’ equity $5.95bn at June 30. Loss reserves were $9.69bn, with $2.06bn of reinsurance recoverables. Senior notes were $991m; debt to total capital was 14.3%. Common equity was $5.32bn and diluted book value per common share was $51.81.
- Investments and liquidity: Investments totaled $13.63bn; total cash and investments were reported at $14.8bn. Fixed maturities, cash and short-term securities represented 89% of total cash and investments and had an average credit rating of AA-. The secured letter-of-credit facility limit was reduced from $750m to $500m; $351m of letters of credit were outstanding.
- Shareholder returns: Common dividends declared were $0.29 per share in Q2 and $0.58 per share for H1. Open-market repurchases were suspended following the PartnerRe agreement; remaining authorization was approximately $749m at July 29, 2015.
Changes versus comparable periods
- Q2 net income available to common shareholders fell 67%; H1 fell 33%. Lower underwriting income, reduced investment income, and the shift from prior-year realized investment gains to losses were important factors.
- Gross premiums written declined 3% in Q2 and 6% in H1; net premiums written declined 5% and 10%, respectively. Reinsurance premiums were weaker, while Insurance gross premiums grew 1% in both periods. Management attributed Reinsurance declines partly to prior-year multi-year treaties, foreign exchange, competitive conditions, and non-renewals or restructurings.
- Q2 current accident-year loss ratio increased to 68.5% from 65.1%; H1 increased to 65.7% from 63.7%. Management cited business mix and lower rates. Catastrophe and weather losses were estimated at $39m in Q2, compared with $36m a year earlier.
- Net investment income declined 23% in Q2 and 9% in H1. Q2 net realized investment results were a loss of $11m versus a gain of $33m; H1 was a loss of $54m versus a gain of $44m. H1 included $30m of other-than-temporary impairment charges, compared with $3m in H1 2014.
- H1 foreign exchange results were a $41m gain, versus a $14m loss in H1 2014; Q2 itself recorded a $22m foreign exchange loss. The company’s stated operating income measure excludes realized investment results and foreign exchange results.
Outlook, commentary, risks and unusual items
- Management described insurance and reinsurance markets as competitive, with price reductions across many lines and continued pressure from excess capacity. It expected near-term rate declines but identified selected opportunities for profitable growth, including U.S. casualty and certain professional, property and marine business; U.S. catastrophe pricing showed signs of approaching a bottom.
- Management said it was rebalancing toward less-volatile business, purchasing more reinsurance and retrocessional protection, and targeting attractive risk-adjusted returns. It expected operating cash flows and the investment portfolio to cover foreseeable cash requirements and contractual commitments.
- The proposed merger of equals with PartnerRe remained subject to shareholder approval, remaining regulatory clearances and customary conditions, with closing then expected in H2 2015. The July 15 amendment increased PartnerRe’s proposed special dividend to $17.50 per share and provided for an exchange offer for PartnerRe preferred shares, subject to an IRS ruling. AXIS could owe a $55m no-approval fee or, in specified circumstances, a $280m termination fee, plus up to $35m of expenses; a $20m financial-adviser fee is payable if the transaction closes.
- AXIS completed its Ternian Insurance Group acquisition on April 1, recognizing $13m of intangible assets. It also early adopted revised consolidation guidance and ceased consolidating Ventures Re effective January 1, 2015; the adoption did not affect cumulative retained earnings.
- Reserve estimates remain judgmental. Management noted uncertainty around complex catastrophe losses, including Storm Sandy, the Japanese earthquake and tsunami, and New Zealand earthquakes. Favorable prior-year development was partly offset by adverse development in certain liability and credit/political-risk claims, including a specific credit and political-risk claim.
- Investment risks include foreign-exchange and credit-spread movements, valuation uncertainty in Level 3 assets, and liquidity constraints in some funds. Hedge-fund lockups covered $98m of holdings; the company also disclosed unfunded investment commitments, including commitments to direct-lending and real-estate funds.
- No material change to previously disclosed risk factors or material legal proceedings outside the ordinary course was reported. Management concluded disclosure controls were effective as of June 30, 2015.
Investor facts to verify
- Whether the PartnerRe transaction received required shareholder and regulatory approvals, closed on the expected terms, and triggered related fees, dividends or preferred-share exchanges.
- Whether underwriting performance, pricing and premiums stabilize, particularly in Reinsurance, and how much future results depend on favorable prior-year reserve releases.
- Whether catastrophe reserves and reinsurance recoverables remain adequate as claims develop, including for the events identified by management.
- Whether lower investment income, impairment charges, credit-spread and foreign-exchange movements, and Level 3 or less-liquid investments affect future earnings or liquidity.
- Whether operating cash generation supports dividends, contractual commitments and capital needs, given H1 operating cash flow of $116m and the reduced letter-of-credit facility capacity.