Business context and reporting period
AXIS Capital Holdings Limited is a Bermuda-based specialty insurance and treaty reinsurance group operating through AXIS Insurance and AXIS Re. This unaudited Form 10-Q covers the three and six months ended June 30, 2020; financial amounts below are U.S. dollars unless noted.
Financial performance and condition
| Metric | Q2 2020 | First half 2020 | Comparable 2019 |
|---|---|---|---|
| Net premiums earned | $1.104 billion | $2.193 billion | $1.124 billion and $2.258 billion |
| Net income (loss) attributable to common shareholders | $112 million; $1.33 per diluted share | ($73 million); ($0.87) per diluted share | $166 million and $265 million; $1.97 and $3.14 per diluted share |
| Operating income (loss), non-GAAP | $72 million; $0.84 per diluted share | ($93 million); ($1.11) per diluted share | $137 million and $242 million; $1.62 and $2.86 per diluted share |
| Underwriting income (loss), non-GAAP | $87 million | ($109 million) | $79 million and $156 million |
| Combined ratio | 94.7% | 107.1% | 96.1% and 96.5% |
| Net investment income | $45 million | $138 million | $138 million and $245 million |
| Net investment gains (losses) | $53 million | ($10 million) | $21 million and $34 million |
Q2 total revenue was $1.204 billion versus $1.286 billion a year earlier. First-half revenue was $2.314 billion versus $2.547 billion. Q2 underwriting profitability and investment gains supported positive quarterly earnings, but the first-half underwriting loss, lower investment income, investment losses, and equity-method investment losses contributed to the year-to-date net loss.
First-half operating cash flow was $106 million, compared with cash used of $17 million in the 2019 period. Investing activities provided $803 million, while financing activities used $822 million, including repayment of $500 million of senior notes, $225 million to redeem Series D preferred shares, and dividends.
At June 30, total assets were $26.4 billion, total liabilities $21.1 billion, and shareholders’ equity $5.3 billion. Total investments were $13.9 billion; cash and cash equivalents were $1.087 billion, plus $562 million of restricted cash. Management reported total cash and investments of $15.2 billion. Debt was $1.309 billion, down from $1.808 billion at year-end; debt to total capital fell to 19.8% from 24.6%. Common shareholders’ equity was $4.748 billion and book value per diluted common share was $55.09.
Material changes versus the prior comparable period
- Q2 net income to common shareholders fell 32% year over year, while the combined ratio improved to 94.7% from 96.1%. First-half results reversed from profit to loss, and the combined ratio worsened to 107.1% from 96.5%.
- First-half net premiums earned declined 3%. Insurance premiums earned grew 4%, but reinsurance premiums earned declined 10%; reinsurance gross premiums written fell 10%, reflecting portfolio optimization and non-renewals.
- Net investment income declined 67% in Q2 and 44% in the first half. Other investments generated losses of $38 million in Q2 and $40 million in the first half, versus income in the prior-year periods, primarily reflecting negative returns from direct lending and real estate funds.
- First-half catastrophe and weather-related losses, net of reinstatement premiums, were $336 million versus $36 million in 2019. The first-half combined ratio increase was largely driven by these losses.
- Fixed-maturity unrealized gains helped lift Q2 comprehensive income to $492 million and supported book value per diluted common share, which increased during Q2 from $49.78 to $55.09. For the first half, book value decreased from $55.79 to $55.09.
Outlook, risks and unusual items
- COVID-19: Management estimated $235 million of net pandemic losses at June 30, unchanged from the prior quarter. The estimate includes property-related, event cancellation, and accident and health exposures; it excludes an explicit estimate for possible indirect economic effects, which may emerge over several quarters or years. Management emphasized significant estimation uncertainty and warned actual losses could differ materially.
- Q2 catastrophe and weather-related losses were $36 million; first-half losses were $336 million. The first-half total included $235 million attributed to COVID-19 and $101 million from other catastrophe and weather events.
- Management described improving rates, terms, and conditions across many insurance and reinsurance lines, with reinsurance conditions improving quickly. It said it would prioritize adequately priced business and trade growth for profitability in some areas. No quantified earnings or full-year financial guidance was provided.
- The company reduced its 2020 expense budget by approximately $50 million in response to the pandemic, with savings realized in Q2 through deferred hiring, delayed projects, and lower travel and entertainment spending.
- Management expected operating cash flows and investment-portfolio liquidity to cover outflows and contractual commitments due within one year. It reported capital above the Bermuda Monetary Authority’s required level.
- Rating developments were adverse: A.M. Best lowered its rating from A+ negative to A stable in May 2020; S&P changed its outlook from stable to negative. Moody’s rating and negative outlook were unchanged.
- Other risks include possible adverse pandemic effects on claims, coverage interpretations, premium collections, reinsurance recoveries, investment values, liquidity, and operations. The filing also notes routine litigation, no material proceedings outside ordinary business, and no off-balance-sheet arrangements.
- Unusual accounting item: the company adopted the expected-credit-loss standard on January 1, 2020, with no stated adoption impact. At June 30 it reported allowances of $6 million on available-for-sale fixed maturities, $10 million on premium receivables, and $21 million on unpaid-loss reinsurance recoverables.
Important facts for investors to verify
- How the $235 million COVID-19 loss estimate develops, including indirect economic exposures and potential changes in coverage interpretation.
- Whether catastrophe losses, recent-year reserve strengthening in liability and professional lines, and the elevated first-half combined ratio lead to further reserve adjustments.
- Whether investment income and returns from direct lending, real estate, and other alternative investments recover, and how valuation estimates for less liquid holdings perform.
- Whether improving market pricing translates into profitable growth, particularly as reinsurance premiums and earned premiums have declined.
- Whether liquidity, capital, and financial-strength ratings remain resilient amid pandemic claims, debt repayment, and rating-agency concerns.