AXIS Capital Holdings Limited — FY2015 Form 10-K
Business context and reporting period. Bermuda-based global specialty insurer and reinsurer, operating through AXIS Insurance and AXIS Re. This annual filing covers the year ended December 31, 2015; figures are in U.S. dollars unless noted. Financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Key financial metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Gross premiums written | $4.604 billion | $4.712 billion |
| Net premiums earned | $3.686 billion | $3.871 billion |
| Total revenues | $4.130 billion | $4.347 billion |
| Net income available to common shareholders | $602 million; $6.04 diluted EPS | $771 million; $7.29 diluted EPS |
| Operating income (non-GAAP) | $401 million; $4.02 diluted EPS | $563 million; $5.32 diluted EPS |
| Underwriting income (non-GAAP) | $302 million | $462 million |
| Combined ratio | 94.7% | 91.6% |
| Net investment income / realized investment result | $305 million / $(138) million | $343 million / $132 million |
| Operating cash flow | $791 million | $862 million |
| Total assets / common shareholders’ equity | $19.982 billion / $5.239 billion | $19.956 billion / $5.193 billion |
| Debt / total capital | $992 million / 14.5% | $991 million / 14.5% |
At year-end, cash and investments totaled approximately $14.55 billion; loss reserves were $9.646 billion and reinsurance recoverables were $2.096 billion. Total capital was $6.859 billion. Diluted book value per common share was $54.08, up from $50.63; common dividends declared were $1.22 per share versus $1.10.
Material changes versus the prior comparable period
- Net income available to common shareholders fell 22%; operating income fell 29%. Underwriting income declined 35%, and the combined ratio worsened by 3.1 percentage points.
- Net premiums earned fell 5%, while gross premiums written fell 2% (flat on a constant-currency basis). Insurance gross premiums grew 2%; reinsurance gross premiums declined 7%, affected by foreign exchange and fewer multi-year treaty premiums.
- The current accident-year loss ratio rose to 65.6% from 63.2%. Catastrophe and weather-related net losses were $100 million, compared with $93 million in 2014. Favorable prior-year reserve development decreased to $243 million from $259 million.
- Net investment income declined 11%. Net realized investment results swung from gains of $132 million to losses of $138 million, including $73 million of other-than-temporary impairment charges, principally associated with high-yield corporate debt and other investments.
- Operating cash flow declined to $791 million, primarily reflecting higher claim payments and increased reinsurance purchases, partly offset by the PartnerRe payment. The company received $315 million upon termination of its proposed PartnerRe amalgamation: a $280 million termination fee and $35 million reimbursement of merger expenses.
Outlook, management commentary, risks and unusual items
- Management expected gross premiums written to increase overall in 2016, subject to line-specific market conditions and opportunities. It described competitive pricing pressure, particularly in catastrophe-exposed property and some global specialty and reinsurance lines, and expected pressure to continue in the short term.
- Management said it would prioritize adequately priced business, profitable growth, smaller and less volatile risks, and additional reinsurance or retrocessional protection. It also cited opportunities from cedants reducing reinsurer panels and Solvency II-related demand.
- Profitability initiatives generated $46 million of reorganization and related expenses plus $5 million of additional corporate expenses. The initiatives included winding down Australian retail insurance operations; the Australian branch ceased new and renewal underwriting and entered run-off in October 2015. AXIS also acquired Ternian Insurance Group in April 2015.
- Key risks include underwriting-cycle and pricing pressure, catastrophe accumulation, uncertainty in long-tail reserves, investment and credit-market volatility, foreign exchange, reinsurance-counterparty collectability, broker concentration, and regulatory change. The filing cautions that reserve estimates and catastrophe models are uncertain. A modeled 1-in-250-year Southeast U.S. hurricane loss was approximately $907 million net of reinsurance; actual losses could differ materially.
- Liquidity was supported by a high-quality investment portfolio and committed facilities. Management estimated approximately $12.5 billion of cash and invested assets could be available within one to three business days under normal conditions, including $3.9 billion of restricted assets. At year-end, $341 million of letters of credit were outstanding and reported available facility capacity was $409 million, before a potential facility increase.
- The board authorized up to $750 million of common-share repurchases through December 31, 2016; remaining authorization was $654 million at February 24, 2016. Share repurchases are discretionary. The company also early adopted a consolidation accounting update and deconsolidated Ventures Re effective January 1, 2015.
Most important facts for investors to verify
- How much FY2015 earnings depended on the nonrecurring PartnerRe termination fee, favorable foreign-exchange results, and prior-year reserve releases; compare GAAP net income with non-GAAP operating income.
- Whether the worsening current-year loss ratio and combined ratio persist, including loss trends in reinsurance credit and surety, marine, and liability business.
- The adequacy and sensitivity of long-tail and catastrophe reserves, and the collectability of reinsurance recoverables; favorable reserve development is not necessarily repeatable.
- Investment portfolio performance and risk, including the impact of higher rates, wider credit spreads, impaired securities, alternative investments, and unrealized losses.
- Execution of the 2016 premium-growth outlook under continued pricing competition, and the financial and operational effects of Australia run-off and the Ternian acquisition.
- Availability of subsidiary distributions and liquidity after restricted assets, claims payments, capital requirements, dividends, and share repurchases.