Business context and reporting period
AXIS Capital Holdings Limited is a Bermuda-based specialty insurer and treaty reinsurer, reporting through AXIS Insurance and AXIS Re. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods unless stated otherwise. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net premiums earned | $945.9 million | $850.6 million | $1,819.9 million | $1,697.0 million |
| Total revenues | $1,045.7 million | $955.8 million | $2,073.7 million | $1,933.3 million |
| Net income | $83.7 million | $189.1 million | $395.3 million | $324.9 million |
| Net income available to common shareholders | $72.4 million | $168.2 million | $375.3 million | $290.2 million |
| Diluted earnings per common share | $0.62 | $1.35 | $3.19 | $2.31 |
| Net investment income | $83.1 million | $74.4 million | $192.0 million | $190.5 million |
| Net realized investment gains | $16.2 million | $30.4 million | $60.7 million | $44.9 million |
| Operating income, non-GAAP | $50.0 million | $112.8 million | $277.5 million | $248.6 million |
| Combined ratio | 101.7% | 92.3% | 92.7% | 93.6% |
Q2 underwriting income was $9.9 million, versus $119.7 million a year earlier. The 101.7% combined ratio indicates an underwriting loss before investment income and other items. Six-month underwriting income was $180.7 million, broadly level with $182.4 million in 2012. Q2 gross and net premiums written rose 20% and 24%, respectively; six-month growth was 17% and 18%.
Operating cash flow was $456.9 million for the first half, compared with $463.6 million in 2012. Cash and cash equivalents were $1.011 billion at June 30; total cash and investments were reported as $14.4 billion. Total assets were $19.85 billion, total liabilities $14.28 billion, and shareholders’ equity $5.56 billion. Loss and loss expense reserves were $9.34 billion, with $1.98 billion of reinsurance recoverables on paid and unpaid losses.
Senior notes totaled $995.5 million; the debt-to-total-capital ratio was 15.2%, versus 14.7% at year-end 2012. The company had no borrowings under its $250 million credit facility and reported compliance with its covenants. Its separate $750 million letter-of-credit facility had $466 million outstanding. Common equity was $4.93 billion, and diluted book value per common share was $42.67.
Material changes versus the prior comparable period
- Q2 common-shareholder income fell 57%, and diluted EPS declined from $1.35 to $0.62, primarily as catastrophe and weather losses rose and favorable prior-year reserve development decreased. Q2 catastrophe and weather losses were estimated at $140 million net of reinstatement premiums, versus $55 million for the comparable 2012 period.
- Q2 combined ratio deteriorated 9.4 percentage points to 101.7%. Insurance posted an underwriting loss of $55.5 million and a 113.2% combined ratio; reinsurance earned $65.4 million with an 87.5% ratio. For the first half, reinsurance underwriting income increased to $195.2 million, while insurance recorded a $14.5 million underwriting loss.
- Favorable prior-year reserve development was $42.1 million in Q2 and $96.6 million for the first half, down from $74.6 million and $119.8 million, respectively. First-half development included $38 million from liability reinsurance, primarily older accident years.
- Investment income was nearly unchanged year to date. Higher hedge-fund income was offset by lower fixed-maturity income amid low interest rates. Fixed-maturity fair value declined $283 million from December 31, 2012, as sovereign yields rose and credit spreads widened; this contributed to a $319.3 million after-tax first-half loss in investment-related OCI and a $285.4 million Q2 comprehensive loss.
- Common shares repurchased totaled 8.5 million for $359 million in the first half. The company issued $225 million of 5.50% Series D preferred shares and redeemed $100 million of 7.25% Series A preferred shares, reducing the weighted-average preferred dividend rate by 57 basis points.
Outlook, commentary, risks and unusual items
Management said pricing generally continued to improve, but at a slower pace and with meaningful differences by geography and business class. U.S. catastrophe reinsurance pricing was under pressure as additional capital entered the market. The company planned to pursue selective, diversified growth, particularly in accident and health and agriculture reinsurance. No quantified earnings or premium guidance was provided.
Management said operating cash flows and the investment portfolio were expected to cover cash outflows and contractual commitments for the foreseeable future, while cautioning that net paid losses could rise in the near term. Loss estimates for events including Storm Sandy, the Japanese earthquake and tsunami, New Zealand earthquakes, and Canadian, European and Argentinian floods remain uncertain; actual losses may differ materially from current estimates. Other key exposures include reserve adequacy, catastrophe frequency and severity, reinsurance recoverability, investment-market movements, foreign exchange, and the liquidity and valuation of less-liquid investments. Hedge-fund holdings included $95 million subject to lockups and $14 million in funds not accepting redemptions; direct-lending commitments included $106 million unfunded.
Unusual or judgment-sensitive items include the large Q2 catastrophe losses, favorable reserve development, unrealized investment losses recorded largely in OCI, and $6.0 million of first-half OTTI charges. The filing reported no material change in previously disclosed risk factors, no material legal proceedings outside the ordinary course, and no off-balance-sheet arrangements as defined by Regulation S-K.
Important facts for investors to verify
- Whether catastrophe claims, particularly the 2013 weather events and previously reported major events, develop materially beyond management’s estimates.
- How much future earnings depend on favorable prior-year reserve releases and whether recent accident-year loss performance supports current reserves.
- Whether premium growth in accident and health and agriculture reinsurance can be sustained profitably, given the Q2 underwriting result and market pricing trends.
- The sensitivity of investment values, book value, and capital ratios to further yield-curve or credit-spread changes, and the liquidity and valuation assumptions for hedge funds and CLO investments.
- Progress renewing or replacing the letter-of-credit facility scheduled to expire December 31, 2013, and the impact of ongoing share repurchases and capital actions on equity and leverage.