AXIS Capital Holdings Limited — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited consolidated financial statements prepared under U.S. GAAP. Comparisons are with Q1 2010 unless otherwise noted. Dollar amounts are in U.S. dollars.
Business context and results
AXIS is a Bermuda-based specialty insurer and reinsurer operating through AXIS Insurance and AXIS Re. The quarter’s results were dominated by severe catastrophe losses, while written and earned premiums grew.
| Metric | Q1 2011 | Q1 2010 / change |
|---|---|---|
| Gross premiums written | $1.548 billion | $1.425 billion; +9% |
| Net premiums written | $1.401 billion | $1.244 billion; +13% |
| Net premiums earned | $788 million | $696 million; +13% |
| Total revenues | $930 million | $818 million |
| Net income (loss) | $(375) million | $121 million |
| Net income (loss) available to common shareholders | $(384) million | $112 million |
| Basic and diluted EPS | $(3.39) | $0.87 basic; $0.79 diluted |
| Operating loss, a non-GAAP measure | $(414) million; $(3.65) per diluted share | Operating income $96 million; $0.67 per diluted share |
| Net investment income | $111 million | $105 million; +6% |
| Net realized investment gains | $30 million | $16 million |
| Net cash from operating activities | $278 million | $335 million |
| Cash and cash equivalents at quarter-end | $963 million | $930 million at Dec. 31, 2010 |
| Combined ratio | 161.3% | 98.3% |
| Net favorable prior-year reserve development | $50 million | $81 million |
Underwriting and material changes
- Underwriting loss was $461 million versus $28 million of underwriting income in Q1 2010. The group loss ratio rose to 129.4% from 67.3%; catastrophe claims drove the deterioration.
- Management estimated Q1 net catastrophe losses, net of reinstatement premiums, of $287 million for the Japanese earthquake, $203 million for the Christchurch earthquake, and $87 million for Australian events. Estimates remain uncertain, particularly for Japan, and may change as claims information develops.
- Reinsurance reported a $413 million underwriting loss and a 189.7% combined ratio, compared with a $5 million loss and 101.1% ratio a year earlier. Insurance reported a $48 million underwriting loss and a 114.9% combined ratio, versus $33 million of income and 87.2%.
- Premium growth reflected Global Accident & Health expansion in Insurance and motor reinsurance growth. Net premiums written rose faster than gross premiums written partly because ceded premium ratios fell after reinsurance program changes in 2010.
- Net favorable prior-year reserve development was lower than in 2010. Current-year catastrophe losses more than offset that favorable development.
Financial position, liquidity and capital
- Total assets were $17.674 billion, up from $16.446 billion at year-end 2010. Loss reserves were $8.014 billion, up from $7.032 billion; reinsurance recoverables on paid and unpaid losses were $1.689 billion.
- Total investments were $11.915 billion. Management reported total cash and investments of approximately $13.0 billion; fixed maturities, cash and short-term securities represented 92% of that total and had an average credit rating of AA.
- Shareholders’ equity was $5.190 billion, down from $5.625 billion. Common equity was $4.690 billion. Diluted book value per common share was $35.69; management said it was up 3% from a year earlier.
- Senior notes were $994 million. Debt to total capital was 16.1%, versus 15.0% at year-end; debt plus preferred equity to total capital was 24.2%, versus 22.6%.
- Management described liquidity as strong: 69%, or $9.0 billion, of the cash and investment portfolio (excluding restricted investments) was in investment-grade, intermediate-maturity fixed income holdings and cash expected to be available within one to three business days. It expected operating cash flows to cover outflows and commitments for the foreseeable future.
Outlook, risks and unusual items
- No quantitative earnings or premium guidance was provided. Management expected catastrophe activity, low industry profitability, low investment yields and new catastrophe models to support improved insurance and reinsurance pricing. It reported rate increases in catastrophe-affected regions and that property catastrophe rate declines had generally halted.
- Key exposures include catastrophe-loss estimate uncertainty, claims exceeding reserves, failure of loss-limitation methods, reinsurance-counterparty and cedant risks, pricing and competitive conditions, investment-market movements, foreign exchange, ratings changes, and regulatory or accounting changes. Management cautioned actual catastrophe losses could differ materially from current estimates.
- Fixed-maturity pre-tax yield declined to 3.4% from 3.8%, reflecting lower reinvestment yields. Other-investment income increased, principally from CLO equity valuations and distributions; these investments and hedge/credit funds carry valuation and liquidity risks. Hedge fund redemptions may be restricted, though no gates were imposed during the quarter.
- After quarter-end, founding shareholders exercised 18.1 million warrants on a cashless basis, resulting in 11.9 million shares issued. The company paid $93 million of deferred dividends to participating warrant holders; this amount was included in March 31 other liabilities. About 1.7 million warrants remained outstanding at April 28.
- The company reached an agreement in principle to settle a broker-related class action for an immaterial amount; settlement remained subject to a definitive agreement and court approval. It also had a $39 million outstanding reinsurance-purchase commitment.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, and no material changes to the risk factors in its 2010 Form 10-K.
Important facts for investors to verify
- How actual claims and industry loss estimates for Japan, Christchurch and the Australian events compare with the company’s initial estimates, and how much reinsurance is ultimately recoverable.
- Whether pricing improvements materialize at renewals and offset catastrophe losses, softer rates and investment-yield pressure.
- Loss-reserve development, especially the sustainability of favorable prior-year releases and developments in longer-tail lines.
- Liquidity and capital effects as catastrophe claims are paid, including the impact of the post-quarter warrant exercise and $93 million deferred-dividend payment.
- Valuation, redemption terms and performance of Level 3 investments, CLO equity positions and other less-liquid funds.
- Final terms and court approval of the proposed legal settlement.