AXIS Capital Holdings Limited — 2017 Q3 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited interim results; amounts below are U.S. dollars unless stated otherwise. AXIS is a Bermuda-based specialty insurer and treaty reinsurer, reporting Insurance and Reinsurance segments.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net premiums earned | $1,017m | $934m | $2,937m | $2,784m |
| Total revenue | $1,124m | $1,062m | $3,233m | $3,006m |
| Net income (loss) attributable to common shareholders | $(468)m | $177m | $(378)m | $335m |
| Diluted earnings (loss) per common share | $(5.61) | $1.96 | $(4.47) | $3.61 |
| Underwriting income (loss) | $(513)m | $104m | $(439)m | $213m |
| Combined ratio | 152.9% | 92.6% | 118.1% | 95.7% |
| Net investment income | $95m | $117m | $300m | $258m |
Q3 catastrophe and weather-related losses were estimated at $617m pre-tax, net of reinstatement premiums, versus $22m in Q3 2016. Nine-month losses were $702m versus $145m. Excluding catastrophe and weather losses, the current accident-year loss ratio was 64.8% for Q3 and 64.1% for the nine-month period. Net favorable prior-year reserve development was $48m in Q3 and $143m for nine months, lower than the respective $76m and $224m in 2016.
For nine months, operating cash flow was $312m (prior year $265m); investing cash flow was $769m (prior year $117m), and financing cash flow was $(787)m (prior year $(523)m). Cash and cash equivalents ended the period at $1.351bn.
Financial position and capital
- Total assets were $21.82bn at September 30, 2017, compared with $20.81bn at year-end 2016. Total investments were $13.06bn; cash and investments together were approximately $14.7bn.
- Loss and loss expense reserves were $10.79bn, versus $9.70bn at year-end; reinsurance recoverables were $2.36bn. Management cautioned that catastrophe loss estimates remain uncertain.
- Total shareholders’ equity was $5.45bn, down from $6.27bn; common equity was $4.68bn. Diluted book value per common share was $55.33, versus $59.77 a year earlier.
- Senior notes were approximately $994m. Debt to total capital was 15.4%, compared with 13.7% at year-end 2016; debt plus preferred equity to total capital was 27.4%, versus 29.2%.
- The company redeemed $351m of Series C preferred shares in April and repurchased $286m of common shares during the nine months. Open-market repurchases were suspended following the Novae offer.
Material changes and unusual items
- Gross premiums written increased 24% in Q3 to $1.186bn; net premiums written rose 40% to $833m. For nine months, gross premiums written increased 5% to $4.460bn, while net premiums written were broadly flat at $3.298bn. Growth varied by line and included Aviabel aviation business; Q3 reinsurance premium growth also reflected reinstatement premiums and timing effects.
- Both segments reported Q3 underwriting losses: Insurance $(282)m and Reinsurance $(231)m. Their combined ratios were 156.9% and 143.7%, respectively. Catastrophe losses were the primary driver of the deterioration.
- AXIS acquired Aviabel on April 1, 2017, expanding aviation operations; it recognized a $15m bargain purchase gain. A $9m impairment of an equity-method investment was recorded during the nine months.
- Foreign exchange losses were $33m in Q3 and $90m for nine months, mainly from remeasurement of insurance liabilities denominated in sterling and euros. The nine-month amount included a $24m translation adjustment reclassified following the wind-down of AXIS Specialty Australia.
- Net realized investment gains were $15m in Q3; nine-month realized losses were $15m. Fixed-income and equity unrealized investment gains contributed to other comprehensive income.
Outlook, risks and contingencies
- Management provided no numerical earnings or premium guidance. It expects opportunities in 2018 but said market conditions remain uncertain. Competitive pressure has reduced pricing across many lines, particularly catastrophe-exposed property and some international specialty business.
- Management expects industry catastrophe losses to support improved pricing in upcoming reinsurance renewals, with differences by line and region. The company plans to focus on adequately priced business, manage volatility, and share more risk with strategic capital partners; net premium growth may therefore lag gross premium growth.
- AXIS completed its acquisition of Novae on October 2, 2017, after the reporting date, for £462.9m (approximately $615.6m). Management expects most integration costs in 2018 and expects to begin realizing cost savings in 2018. S&P affirmed ratings but revised AXIS Capital’s outlook to negative in connection with the planned acquisition.
- For the October 2017 California wildfires, AXIS disclosed a preliminary pre-tax net loss estimate of $35m–$45m; the filing warns the ultimate amount may differ materially.
- Key risks include catastrophe severity and reserve-estimation uncertainty, changing claims and coverage conditions, reinsurance recoverability, competitive pricing, currency and investment-market movements, and the integration and expected benefits of acquisitions. Management said operating cash flows and investment liquidity should cover foreseeable cash needs. A $250m letter-of-credit facility expires March 31, 2018; the existing $500m facility remains in place.
Most important facts for investors to verify
- How ultimate losses from Hurricanes Harvey, Irma and Maria, the Mexico earthquakes, and the California wildfires develop relative to current estimates.
- Whether underlying attritional loss trends and pricing improve, especially after excluding catastrophe losses and considering the Ogden rate change’s effect on UK motor claims.
- The quality and adequacy of loss reserves and the sustainability of favorable prior-year reserve development.
- Novae’s final purchase accounting, integration costs, cost savings, and effect on capital, ratings and future underwriting results.
- Liquidity and capital after preferred-share redemption, buyback suspension, acquisition funding and committed investment-fund contributions; also monitor the 2018 letter-of-credit facility expiry.