AXIS Capital Holdings Ltd. — Q3 2010 Form 10-Q
Business context and period. Bermuda-based specialty insurer and treaty reinsurer, operating through AXIS Insurance and AXIS Reinsurance. This unaudited filing covers the quarter and nine months ended September 30, 2010; balance-sheet comparisons are to December 31, 2009. Amounts below are U.S. dollars.
Key financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net premiums earned | $758.9m | $706.0m | $2,190.1m | $2,078.2m |
| Total revenues | $948.1m | $451.7m | $2,608.1m | $1,947.4m |
| Net income (loss) | $248.1m | ($86.7m) | $583.2m | $206.6m |
| Net income available to common shareholders | $238.8m | ($95.9m) | $555.5m | $178.9m |
| Diluted EPS | $1.78 | ($0.70) | $4.04 | $1.19 |
| Operating income (non-GAAP) | $163.6m | $151.6m | $439.4m | $490.0m |
| Net investment income | $111.8m | $134.8m | $299.0m | $346.3m |
| Net realized investment gains (losses) | $76.5m | ($253.4m) | $117.3m | ($317.6m) |
| Underwriting income | $127.4m | $71.4m | $276.7m | $309.1m |
| Combined ratio | 85.6% | 73.2% | 89.8% | 80.0% |
| Operating cash flow | — | $866.9m | $893.7m |
Financial position and liquidity
- At September 30, total assets were $16.85bn, total investments $11.58bn, cash and cash equivalents $1.06bn, and shareholders’ equity $5.85bn. The company reported common equity of $5.35bn and diluted book value per common share of $39.01.
- Gross loss reserves were $6.93bn, with $1.55bn of reinsurance recoverables on paid and unpaid losses. Unearned premiums were $2.61bn.
- Senior notes totaled $994m, up from $499m at year-end 2009. Debt-to-total-capital increased to 14.5% from 8.3%; debt plus preferred equity-to-total-capital was 21.8%.
- Cash from operations was $866.9m; investing activities used $545.6m and financing activities used $43.8m. Cash and cash equivalents increased $269.3m during the nine months.
- Management cited approximately $4bn of cash and investments expected to be available within one to three business days. The company had $500m of undrawn syndicated credit capacity, with no borrowings outstanding; letters of credit were supported by collateral.
Changes versus prior comparable periods
- Q3 net income swung to profit from a prior-year loss, and nine-month common net income rose to $555.5m from $178.9m. The comparison was materially affected by 2009 investment impairment charges: net realized investment losses were $253.4m in Q3 2009 and $317.6m for the first nine months, versus gains in 2010. In 2009, OTTI charges included a $263m impairment on medium-term notes.
- Q3 operating income rose 8% to $163.6m, but nine-month operating income fell 10% to $439.4m. Catastrophe losses and lower favorable reserve development contributed to weaker year-to-date underwriting and higher combined ratios.
- Net investment income fell 17% in Q3 and 14% year to date, primarily due to lower reinvestment yields and lower alternative-fund returns relative to 2009.
- Net premiums earned grew 7% in Q3 and 5% year to date. Gross premiums written fell 3% in Q3 but rose 3% year to date; lower reinsurance-segment writings offset insurance-segment growth in the quarter.
- Q3 underwriting income improved from 2009, partly because the prior-year period included a $136m loss on a longevity-risk insurance derivative, cancelled in Q4 2009. This item did not recur in 2010.
Outlook, commentary, risks and unusual items
- No specific company-wide earnings or premium guidance was provided. Management expected modest pricing declines across most reinsurance lines at the January 1 renewal, with minor exceptions. Insurance pricing was described as generally experiencing low-single-digit rate decreases; offshore energy was an exception following Deepwater Horizon.
- Catastrophes were a significant current-period item: the company recorded $85m of estimated pre-tax net losses for the September 2010 New Zealand earthquake, and $121m for the February 2010 Chile earthquake. Other first-quarter events generated $49m of estimated pre-tax net losses. Estimates may change as claims information develops.
- Favorable prior-year reserve development was $71.7m in Q3 and $231.8m for the nine months, below the comparable 2009 amounts of $122.1m and $303.2m. The company cautioned that historical reserve trends may not continue.
- Investment valuations improved: fixed-maturity gross unrealized losses declined to $49m from $134m at year-end 2009. Management considered securities in loss positions temporarily depressed, while noting valuation judgments and structured-credit exposures. Alternative investments included $533m of Level 3 assets, primarily hedge and credit funds and CLO equity securities; some holdings have redemption restrictions.
- The company issued $500m of 5.875% senior notes due 2020 and replaced its former $1.5bn facility with a $750m secured letter-of-credit facility and a $500m revolving credit facility. It was in compliance with applicable covenants at quarter-end.
- Share repurchases totaled $432.4m during the nine months. A new $750m repurchase authorization was approved in September; total remaining authorization was about $870m at quarter-end. The quarterly common dividend was $0.21 per share.
- A class action concerning insurance brokerage practices remained pending: the Third Circuit affirmed dismissal of antitrust and RICO claims but remanded insurance-bid-manipulation allegations. The company said it considered the suit without merit and was defending it. Other routine proceedings were not expected by management to materially affect results.
- Principal disclosed risks include natural and man-made catastrophes, reserve inadequacy, reinsurance recoverability, market and credit conditions, pricing and competition, investment-value and currency fluctuations, ratings changes, and regulatory or coverage developments. Management reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much of reported earnings depends on realized investment gains, and how operating income is reconciled to GAAP results.
- Subsequent loss emergence and reserve adequacy for the Chile and New Zealand earthquakes, and the sustainability of favorable prior-year reserve development.
- Portfolio performance, liquidity and valuation assumptions for Level 3 investments and other funds with redemption restrictions.
- Whether lower investment yields and anticipated insurance and reinsurance pricing declines affect future earnings and underwriting margins.
- Debt and collateral requirements, covenant headroom, and the capital impact of further share repurchases and dividends.
- Developments in the remanded insurance-bid allegations and any potential financial exposure.