AXIS Capital Holdings Limited — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The interim financial statements are unaudited. Unless otherwise noted, amounts below are in U.S. dollars; financial statement amounts are in millions.
Business context
AXIS is a Bermuda-based global specialty insurer and reinsurer, reporting two underwriting segments: Insurance and Reinsurance. Management describes a strategy focused on organic growth, selective expansion into newer geographies and lines, and diversified underwriting.
Financial performance and condition
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net premiums earned | $840.0 | $758.9 | $2,468.2 | $2,190.1 |
| Total revenue | $948.1 | $948.1 | $2,855.5 | $2,608.1 |
| Net income (loss) available to common shareholders | $212.1 | $238.8 | $(70.6) | $555.5 |
| Diluted earnings (loss) per common share | $1.66 | $1.78 | $(0.58) | $4.04 |
| Underwriting income (loss) | $90.0 | $127.4 | $(342.3) | $276.7 |
| Combined ratio | 91.5% | 85.6% | 116.3% | 89.8% |
| Net investment income | $49.4 | $111.8 | $260.1 | $299.0 |
| Net realized investment gains | $57.6 | $76.5 | $125.2 | $117.3 |
| Operating income (loss), non-GAAP | $94.7 | $189.1 | $(221.1) | $428.9 |
- Gross premiums written rose 11% in Q3 to $835.1 million and 10% for the nine-month period to $3.43 billion. Premium growth reflected expansion in Insurance, including accident and health, and Reinsurance, including motor and trade credit and bond.
- Catastrophe losses drove the year-to-date underwriting loss. AXIS reported $792 million of nine-month 2011 pre-tax net catastrophe losses, net of related reinstatement premiums; this included major events in New Zealand, Japan, Australia and the United States. Q3 losses for Hurricane Irene, Tropical Storm Lee and Danish flooding were estimated at $65 million, with a further $26 million aggregate increase in estimates for first-half catastrophes.
- Favorable prior-year reserve development was $78.4 million in Q3 and $179.7 million year to date, versus $71.7 million and $231.8 million, respectively, in 2010.
- Net investment income fell 56% in Q3 and 13% year to date. Management attributed the decline primarily to losses in hedge and credit fund valuations amid market turmoil and lower reinvestment yields. Q3 net realized investment gains were $57.6 million.
- Nine-month operating cash flow was $991.6 million, compared with $866.9 million in 2010. Investing activities used $772.3 million and financing activities used $213.1 million. Cash and cash equivalents were $935.2 million at quarter end; cash plus investments totaled approximately $13.3 billion, including restricted cash.
- At September 30, total assets were $17.94 billion, gross loss reserves $8.33 billion, and reinsurance recoverables $1.76 billion. Shareholders’ equity was $5.36 billion; common shareholders’ equity was $4.86 billion and diluted book value per common share was $37.06.
- Debt was $994.5 million; debt-to-total-capital was 15.7%, up from 15.0% at year-end 2010. Management said financial flexibility remained strong and operating cash flow plus investment-portfolio liquidity should cover expected outflows and commitments for the foreseeable future.
Material changes and unusual items
- Year-to-date results swung from $555.5 million of income available to common shareholders in 2010 to a $70.6 million loss in 2011, primarily reflecting higher catastrophe losses and a weaker underwriting result.
- Q3 common-shareholder income declined 11% year over year, while total revenue was essentially unchanged: increased earned premiums were offset by lower net investment income and realized gains.
- Q3 comprehensive income was $54.1 million, versus $397.8 million in 2010; nine-month comprehensive loss was $168.9 million. Other comprehensive income included investment-value and foreign-currency movements.
- AXIS reported $78.1 million of gross unrealized losses on equity securities at September 30, compared with $4.7 million at December 31, 2010. Management considered the affected holdings temporarily impaired and said it intended and expected to be able to hold them through recovery.
- Warrant exercises during the first nine months resulted in issuance of 11.85 million shares; the remaining 1.73 million warrants were exercised after quarter end, issuing a further 1.04 million shares. The company also paid $93 million of deferred dividends to certain warrant holders.
Outlook, risks and contingencies
- Management sees mixed market conditions across most lines, is “cautiously optimistic” that a gradual positive market-cycle change is gaining momentum, and plans to focus on lines with the best opportunities. No quantified earnings or premium guidance is provided.
- Loss estimates for the New Zealand earthquakes and Japanese earthquake and tsunami remain uncertain; management noted evolving conditions, ongoing loss adjustment, potential difficulty allocating New Zealand claims among events, and coverage and model uncertainties. Actual losses may differ materially from current estimates.
- Key risks include catastrophe severity and frequency, claims exceeding reserves, reinsurance recoverability, market and credit conditions, investment valuations, foreign-exchange and interest-rate movements, competition, regulation, catastrophe-model limitations, and the availability and cost of capital.
- A broker-related antitrust/RICO class action settlement was agreed in principle for an immaterial amount and received preliminary court approval. The filing states routine legal proceedings are not expected to materially affect the company.
- Contractual reinsurance purchase commitments were $74 million at quarter end. The company reported no material off-balance-sheet arrangements and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How catastrophe-loss estimates, especially for New Zealand and Japan, develop as claims mature, and whether the $792 million year-to-date estimate changes.
- Whether favorable prior-year reserve development persists, and the sensitivity of reported earnings to reserve revisions.
- Investment-portfolio exposure to market volatility, unrealized losses, hedge and credit fund liquidity, and Level 3 valuations.
- The drivers and sustainability of premium growth and underwriting profitability, including the reported combined ratio and segment results.
- Capital and liquidity after catastrophe claim payments, dividends, warrant-related share issuance, and the $74 million reinsurance commitment.