AXIS Capital Holdings Limited — Q3 2015 Form 10-Q
Business context and reporting period. Bermuda-based specialty insurer and treaty reinsurer, operating through AXIS Insurance and AXIS Re. This unaudited filing covers the quarter and nine months ended September 30, 2015, compared with the same 2014 periods; balance-sheet comparisons are with December 31, 2014. Amounts below are U.S. dollars.
Key financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Total revenue | $1.176 billion | $1.118 billion | $3.160 billion | $3.310 billion |
| Net premiums earned | $919 million | $966 million | $2.765 billion | $2.912 billion |
| Net income attributable to AXIS Capital | $258 million | $289 million | $497 million | $637 million |
| Net income available to common shareholders | $248 million | $279 million | $467 million | $607 million |
| Diluted earnings per common share | $2.50 | $2.68 | $4.65 | $5.68 |
| Net investment income | $46 million | $67 million | $226 million | $264 million |
| Net realized investment gains (losses) | $(70) million | $77 million | $(124) million | $121 million |
| Underwriting income | $56 million | $113 million | $214 million | $349 million |
| Combined ratio | 96.6% | 92.2% | 95.7% | 91.6% |
| Operating income, non-GAAP | $51 million | $133 million | $281 million | $443 million |
Q3 reported revenue included a $280 million PartnerRe termination fee; PartnerRe also reimbursed $35 million of merger expenses. Operating income excludes the fee, realized investment gains or losses, foreign-exchange gains or losses, and reorganization expenses. Q3 operating income was $0.51 per diluted share.
- Underwriting: Gross premiums written rose 4% in Q3 to $937 million, but fell 4% for the nine-month period to $3.804 billion. Net premiums earned declined 5% in both comparative periods. Q3 catastrophe and weather-related losses were estimated at $43 million, including $30 million related to the Tianjin port explosion. Favorable prior-year reserve development was $45 million in Q3 and $166 million year to date.
- Profit drivers: Underwriting income and earnings declined year over year, reflecting lower earned premiums, higher catastrophe losses and a reduced contribution from favorable prior-year reserve development. The group combined ratio worsened 4.4 percentage points in Q3 and 4.1 points year to date. Q3 current-accident-year loss ratio excluding catastrophe and weather losses improved modestly, according to management.
- Investments and margins: Lower hedge-fund performance contributed to the decline in net investment income; other investments recorded a $27 million loss in Q3. Realized investment losses reflected foreign-currency losses and $32 million of Q3 other-than-temporary impairment charges. Nine-month impairment charges were $63 million, versus $12 million in 2014. Nine-month pre-tax total return on average cash and investments was 0.3%, versus 1.9%.
- Cash flow: Operating activities provided $703 million for the first nine months, compared with $736 million in 2014. Investing activities used $170 million and financing activities used $449 million. Cash and cash equivalents were $992 million at September 30, up from $922 million at year-end; the filing’s $14.9 billion total cash-and-investments figure includes restricted cash.
Financial position and material changes
- Total assets were $20.6 billion and total liabilities $14.7 billion. Shareholders’ equity was $5.83 billion, compared with $5.88 billion at year-end; diluted book value per common share was $53.68.
- Loss and loss-expense reserves were $9.70 billion, with $2.04 billion of reinsurance recoverables on paid and unpaid losses. Unearned premiums were $3.11 billion.
- Senior notes were $992 million; debt to total capital was 14.5%. The $500 million secured letter-of-credit facility was reduced from $750 million; $345 million of letters of credit were outstanding. Management said operating cash flows and investment-portfolio liquidity should cover foreseeable cash needs and contractual commitments.
- Following PartnerRe’s termination of the proposed amalgamation on August 3, AXIS received $315 million in total and reinstated its share repurchase program. It paid $300 million under an accelerated share repurchase agreement, initially acquiring about 4.15 million shares; final share delivery remained subject to settlement. The reported remaining repurchase authorization was approximately $444 million at October 29.
- AXIS completed its acquisition of Ternian Insurance Group on April 1 and recognized $13 million of intangible assets. In September it decided to wind down Australian retail insurance operations, impairing approximately $13 million of related intangibles.
- AXIS early adopted a revised consolidation standard and stopped consolidating Ventures Re effective January 1, 2015. The adoption had no cumulative-retained-earnings impact; year-over-year comparisons may be affected by the change in consolidation.
Outlook, risks and contingencies
- Management described insurance markets as highly competitive, with price reductions across most lines, particularly property and some specialty lines, and expected near-term pricing pressure to continue. Reinsurance pricing and terms remained pressured by excess capacity and buyer consolidation, although management said erosion appeared to be stabilizing in some areas.
- Management said it would emphasize attractive risk-adjusted returns, expand selectively in areas such as agriculture and weather, and continue rebalancing toward less-volatile business. The filing provides no numerical earnings or premium guidance.
- Loss reserves remain estimates subject to uncertainty, especially for complex events including Storm Sandy, the Japan earthquake and tsunami, New Zealand earthquakes and the Tianjin explosion. Actual losses may differ materially from current estimates. Prior-year reserve releases supported results, while adverse development included Australian professional lines, liability claims and a specific credit and political risk claim.
- Investment risks include market movements, widening credit spreads, foreign-exchange fluctuations, hedge-fund performance and less-observable valuations. Approximately $742 million of assets measured at fair value were Level 3; direct lending, some hedge-fund and CLO investments have limited liquidity. Unfunded commitments included $234 million for direct lending funds and additional commitments to real estate, multi-strategy and other funds.
- At September 30, net foreign-currency exposure was $279 million net long; a hypothetical 10% currency movement was estimated to affect equity by $28 million pre-tax. Routine legal proceedings arise in the ordinary course; the company reported no material proceedings outside that course and no material change in previously reported risk factors.
Important facts for investors to verify
- How sustainable underwriting results are without favorable reserve development, and how reserve estimates develop for catastrophe events and adverse lines.
- The recurring earnings picture excluding the PartnerRe fee, investment losses, foreign-exchange gains and reorganization charges; compare GAAP net income with the company’s non-GAAP operating income.
- Whether competitive pricing, ceded reinsurance costs and lower earned premiums continue to pressure underwriting margins, especially in reinsurance.
- Performance, valuation assumptions and liquidity terms for hedge funds, CLO equities, direct lending funds and other Level 3 investments, including unfunded commitments.
- Final settlement of the accelerated share repurchase, ongoing buybacks and dividends, and the effect of the Ventures Re deconsolidation on comparability.