AXIS Capital Holdings Limited — Q1 2012 Form 10-Q
Business context and reporting period. Bermuda-based specialty insurer and treaty reinsurer AXIS reported unaudited results for the three months ended March 31, 2012, with comparison to Q1 2011. Its reportable segments are Insurance and Reinsurance. Amounts below are in U.S. dollars; financial statement figures are generally in millions.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Gross premiums written | $1,525.2 | $1,548.4; down 2% |
| Net premiums written | $1,367.2 | $1,400.8; down 2% |
| Net premiums earned | $846.4 | $788.2; up 7% |
| Net investment income | $116.0 | $110.7; up 5% |
| Net realized investment gains | $14.5 | $30.1 |
| Underwriting income | $62.7 | Underwriting loss of $461.3 |
| Combined ratio | 94.8% | 161.3% |
| Net income (loss) | $135.8 | $(374.5) |
| Net income available to common shareholders | $122.0; $0.97 basic and $0.96 diluted per share | $(383.8); $(3.39) per share |
| Operating income, a non-GAAP measure | $135.7; $1.07 diluted per share | $(398.9); $(3.52) diluted per share |
| Operating cash flow | $175.5 | $277.7 |
Q1 2012 underwriting results included $45.2 of favorable prior-year reserve development. The current accident-year loss ratio was 65.7%, compared with 135.7% in Q1 2011. Acquisition costs rose to $168.4 from $135.4; general and administrative expense was $123.7, including $18.4 of corporate expense.
At March 31, total assets were $19.0 billion, total liabilities $13.1 billion, and shareholders’ equity $5.9 billion, including $750 million of preferred shares. Cash and cash equivalents were $1.02 billion; total investments were $13.02 billion. Loss and loss expense reserves were $8.60 billion, with $1.77 billion of reinsurance recoverables. Senior notes were $994.8 million. Debt to total capital was 14.4%; debt plus preferred equity to total capital was 25.3% before the subsequent Series B tender-offer settlement.
Cash and investments totaled approximately $14.2 billion, including restricted cash. Management reported an AA- average credit rating for fixed maturities, cash and short-term securities. Diluted book value per common share was $39.53; the declared common dividend was $0.24 per share.
Material changes versus the prior comparable period
- Underwriting returned to profitability, chiefly because Q1 2012 had substantially lower catastrophe losses. Q1 2011 included approximately $577 million of pre-tax net catastrophe losses from the Japan and New Zealand earthquakes and Australian weather events.
- Insurance gross premiums written increased 23% to $524.7 million, led by accident and health, marine, property, and professional lines. Reinsurance gross premiums written fell 11% to $1.00 billion, principally because AXIS reduced catastrophe capacity and managed European credit and bond exposure.
- Net investment income increased, with stronger hedge fund returns offsetting lower fixed-maturity income. Fixed-maturity pre-tax yield declined to 2.9% from 3.4%; net realized investment gains fell to $14.5 million from $30.1 million.
- Investment market appreciation lifted other comprehensive income by $150.0 million and contributed to higher shareholders’ equity. The quarter’s net unrealized gains on fixed maturities rose to $226 million from $119 million at year-end 2011.
- Operating cash flow was lower year over year. Investing activities used $449.4 million, while financing activities provided $305.9 million, including $394.0 million net proceeds from the Series C preferred issuance.
Outlook, commentary, risks, and unusual items
- Management said rate improvements were visible in many lines and geographies, but rates had not improved enough to justify a dramatic increase in underwriting activity. AXIS intended to assess conditions and pursue selected attractive business; no numerical earnings or premium guidance was provided.
- Management said catastrophe loss estimates for prior events had no material aggregate change in the quarter, but estimates for Japan, New Zealand, and Thailand remained uncertain and could differ materially from ultimate losses. Q1 included $45.2 million of favorable prior-year reserve development, less than the $49.7 million in Q1 2011.
- In March, AXIS issued $400 million of 6.875% Series C preferred shares and gave notice to redeem $150 million of 7.25% Series A shares. The Series A redemption closed April 18. A $4.6 million loss on the Series A repurchase reduced income available to common shareholders in Q1.
- On April 10, AXIS completed a tender offer for most Series B preferred shares, paying approximately $253 million; the company expected to record a $9 million redemption loss in Q2. Management stated that the reported increase in debt-and-preferred-equity capitalization was expected to be temporary after this transaction.
- AXIS repurchased 1.47 million common shares for $47.7 million during Q1. At April 26, $504.7 million remained under the common-share repurchase authorization.
- Alternative investments totaled $769.6 million. Some fund holdings had redemption restrictions; $37 million was in funds not accepting redemption requests, and management could not estimate when certain liquidating or side-pocketed investments would be distributed. Level 3 fair-value measurements included $425.7 million of other investments.
- Management expected operating cash flows and investment portfolio liquidity to cover foreseeable cash outflows and commitments. It identified catastrophe occurrence, reserve adequacy, reinsurance recoverability, investment valuations and market movements, competition, ratings, and regulatory changes among relevant risks. The filing reported no material risk-factor changes, no material market-risk changes, and no off-balance-sheet arrangements.
- The brokerage antitrust litigation was settled for an immaterial amount and closed by final court order on March 30, 2012. Routine insurance and reinsurance legal proceedings remained part of ordinary operations.
Important facts for investors to verify
- Whether catastrophe losses, especially for prior-year events, develop consistently with the company’s estimates and reinsurance recoverables.
- Whether underwriting profitability persists after the unusually high catastrophe losses in the 2011 comparison period, and how pricing and business mix affect each segment’s combined ratio.
- How the Series A and Series B redemptions affect Q2 earnings, preferred dividends, total capital, and leverage after settlement.
- The liquidity and valuation assumptions for restricted hedge, credit, and CLO investments, including Level 3 inputs and timing of distributions.
- Whether lower fixed-income yields are offset by investment returns without increasing portfolio risk, and how currency movements affect earnings and equity.