AXIS Capital Holdings Limited — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; financial statements are unaudited. AXIS is a Bermuda-based specialty insurer and treaty reinsurer operating through AXIS Insurance and AXIS Reinsurance. Amounts below are U.S. dollars.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net premiums earned | $735 million | $707 million | $1.431 billion | $1.372 billion |
| Net investment income | $83 million | $112 million | $187 million | $212 million |
| Net realized investment gains (losses) | $25 million | ($24 million) | $41 million | ($64 million) |
| Net income | $214 million | $168 million | $335 million | $293 million |
| Net income available to common shareholders | $205 million | $159 million | $317 million | $275 million |
| Diluted EPS | $1.51 | $1.06 | $2.28 | $1.84 |
| Operating income, non-GAAP | $180 million | $183 million | $276 million | $338 million |
Q2 common earnings increased 29% year over year, while non-GAAP operating income declined 1%. First-half common earnings rose 15%, but operating income fell 19%, reflecting catastrophe losses and lower investment income. Net realized gains improved significantly versus 2009, partly reflecting securities sales and lower reported impairment charges; impairment comparisons are affected by a 2009 accounting change and are not directly comparable.
Q2 underwriting income was $121 million, down 14%; the combined ratio was 86.2%, versus 80.4%. For the first half, underwriting income was $149 million, down 37%, and the combined ratio was 92.1%, versus 83.4%. Insurance segment Q2 underwriting income improved to $42 million from $16 million, while reinsurance declined to $79 million from $125 million. The Q2 group combined ratio remained below 100%, but worsened year over year.
Financial position, cash flow and capital
- At June 30, total assets were $16.56 billion, total investments $10.94 billion, and shareholders’ equity $5.50 billion, including $500 million of preferred shares. Common equity was approximately $5.00 billion; diluted book value per common share was $36.57.
- Cash and cash equivalents were $1.09 billion, with restricted cash of $105 million. Management reported $4.2 billion of cash and investments expected to be available within one to three business days.
- Six-month operating cash flow was $538 million, compared with $451 million in 2009. Cash and cash equivalents increased $304 million to $1.09 billion. Investing activities used $192 million; financing activities provided $4 million, including senior-note proceeds offset by repurchases and dividends.
- Debt was $994 million, up from $499 million at year-end 2009. Debt to total capitalization increased to 15.3% from 8.3%. In March, the company issued $500 million of 5.875% senior notes due 2020; it reported compliance with the indenture covenants.
- The company repurchased 13.97 million shares for $419 million during the first half, including 13.61 million open-market shares. About $133 million remained authorized at June 30. Common dividends declared were $0.21 per share for Q2, versus $0.20 a year earlier.
Material changes and management commentary
- Gross premiums written rose 3% in Q2 and 6% for the first half. Q2 insurance premiums grew 16%, while reinsurance premiums fell 16%, substantially reflecting renewal-date shifts. Lower insurance ceded-premium ratios followed changes to property and professional-lines reinsurance purchasing.
- First-quarter catastrophe activity weighed on reinsurance results. The company reported an estimated $133 million of net Chile earthquake losses before reinstatement premiums, or $124 million net of related reinstatement premiums, and $49 million net of reinstatement premiums for other notable first-quarter storms. It increased its Chile estimate by $26 million during Q2 and cautioned actual losses could differ materially.
- Q2 net favorable prior-year reserve development was $79 million, compared with $97 million in Q2 2009; first-half development was $160 million versus $181 million. Management attributed favorable development to better-than-expected emergence in several lines and greater use of company-specific claims experience. It cautioned past trends may not continue.
- Net investment income fell 26% in Q2 and 11% in the first half, primarily due to lower reinvestment yields, lower cash yields and weaker alternative-investment returns. Fixed-maturity pre-tax yield was 3.6% in Q2, versus 4.4% a year earlier. Q2 alternative investments recorded a $2 million loss.
- Management described insurance pricing as generally declining modestly and expected that trend to continue absent a significant industry event; offshore energy pricing had strengthened following Deepwater Horizon. The company estimated July 1 reinsurance renewals were up 3% over expiring premiums, or 5% currency-adjusted, while noting competitive market conditions and pricing pressure in some lines. No formal earnings guidance was provided.
Risks, contingencies and unusual items
The company identifies catastrophe events, reserve adequacy, cedant performance, reinsurance recoveries, investment-market movements, foreign exchange, competition, ratings and access to capital among its risks. Investment assets included $553 million classified as Level 3, requiring significant unobservable inputs; hedge and credit fund redemptions may be restricted. Management considered securities in unrealized loss positions temporarily depressed and said it did not expect to need to sell them before recovery, but that assessment depends on estimates and market conditions.
A putative insurance-brokerage antitrust/RICO class action against U.S. subsidiaries had been dismissed with prejudice at the district court; plaintiffs appealed. The filing says the company believes the action is without merit; claimed damages are unspecified. The company also reported a $90 million outstanding reinsurance-purchase commitment. It reported no material changes to previously disclosed risk factors, no material off-balance-sheet arrangements, and effective disclosure controls.
Most important facts for investors to verify
- How Chile and other catastrophe claims develop, and whether favorable prior-year reserve releases remain sustainable.
- Reinsurance recoverable collectability and the assumptions underlying loss reserves and cedant estimates.
- Investment income trends, portfolio credit quality, Level 3 valuations and liquidity or redemption restrictions on alternative investments.
- Whether premium growth and renewal pricing can offset competitive rate pressure, catastrophe exposure and lower investment yields.
- Debt-service and collateral requirements, capital effects of share repurchases, and the status and potential exposure of the pending lawsuit.