AXIS Capital Holdings Limited — Q3 2012 Form 10-Q
Business context and period. Bermuda-based specialty insurer and treaty reinsurer, with Insurance and Reinsurance reporting segments. This unaudited filing covers the three and nine months ended September 30, 2012; comparisons are with the same 2011 periods unless noted. Dollar amounts below are rounded to millions.
Financial results
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net premiums earned | $862m | $840m | $2,559m | $2,468m |
| Total revenues | $1,018m | $948m | $2,951m | $2,855m |
| Net income (loss) | $232m | $221m | $557m | $(43)m |
| Net income (loss) available to common shareholders | $223m | $212m | $514m | $(71)m |
| Diluted EPS | $1.82 | $1.66 | $4.11 | $(0.58) |
| Underwriting income (loss) | $155m | $90m | $337m | $(342)m |
| Combined ratio | 85.3% | 91.5% | 90.8% | 116.3% |
| Net investment income | $104m | $49m | $294m | $260m |
| Net realized investment gains | $51m | $58m | $96m | $125m |
Q3 operating income, a non-GAAP measure, was $201m, or $1.63 per diluted share, versus $95m and $0.74 a year earlier. Q3 common-share dividend declared was $0.24; the nine-month total was $0.72.
Balance sheet, cash flow and capital
- At September 30, total assets were $18.9bn, total liabilities $13.0bn and shareholders’ equity $5.9bn. Cash and cash equivalents were $800m, restricted cash $70m, and investments $13.4bn.
- Loss and loss expense reserves were $8.75bn; reinsurance recoverables were $1.79bn. Senior notes were $995m. Debt-to-total-capital was 14.5%, down from 15.4% at year-end 2011.
- For the first nine months, operating cash flow was $888m, investing cash outflow $628m and financing cash outflow $445m; cash and cash equivalents fell $182m to $800m.
- Management reported $14.2bn in total cash and investments and described liquidity as sufficient for foreseeable obligations. It stated that $9.0bn, or 63%, of the portfolio was in investment-grade, short-term and intermediate fixed-income holdings with proceeds normally available within one to three business days. Fixed maturities had an average AA- credit rating and 2.7-year duration.
Material changes and management commentary
- The substantial nine-month earnings and underwriting improvement chiefly reflected far lower catastrophe losses than in 2011. AXIS recorded $133m of catastrophe-related net losses in the first nine months of 2012, compared with $792m in the comparable 2011 period. 2011 included major Japan and New Zealand earthquakes, U.S. storms, Australian weather events and other catastrophes.
- Q3 catastrophe items included $40m of pretax net losses from U.S. crop drought and $20m from Hurricane Isaac, partly offset by a $27m reduction in estimates for first- and second-quarter 2012 U.S. weather losses. The company reported no material aggregate change in its estimates for 2010–2011 catastrophe events during the first nine months of 2012.
- Favorable prior-year reserve development was $60m in Q3 and $180m year to date, primarily from short-tail business and better-than-expected loss emergence. Management cautioned that complex catastrophe claims, particularly Japan, New Zealand and Thailand, make reserve estimates uncertain and actual losses could differ materially.
- Insurance gross premiums written grew 7% in Q3 and 8% year to date, while Reinsurance gross premiums written declined 7% and 9%, respectively. Reinsurance reductions reflected catastrophe portfolio repositioning, client purchasing and European trade-credit exposure management. Accident & health, professional lines and liability supported Insurance growth.
- Investment income benefited from stronger hedge-fund and other-investment returns: other investments generated $34m in Q3 versus a $30m loss a year earlier. Fixed-maturity income declined as reinvestment yields fell; the fixed-income portfolio’s pretax yield was 2.5% in Q3 versus 3.1% in Q3 2011. The investment portfolio’s unrealized appreciation also increased equity.
- AXIS issued $400m of 6.875% Series C preferred shares and redeemed or repurchased most of its higher-rate Series A and B preferred shares, reducing the weighted average preferred dividend rate by 42 basis points. It repurchased 9.4m common shares for $317m in the first nine months; $236m remained authorized at October 31.
- Management said primary insurance pricing was improving, particularly in the U.S., with improvement across many Insurance lines and geographies expected to continue. Reinsurance conditions were mixed: gradual strengthening in some proportional treaties and generally stable excess-of-loss pricing. The filing gives no specific earnings or revenue guidance.
Risks, contingencies and unusual items
- Hurricane Sandy: The October 2012 storm affected the Eastern United States. AXIS expected losses but said available information was insufficient to estimate aggregate net exposure.
- Reserve and catastrophe risk: Claims may exceed estimates; catastrophe frequency and severity, modeling limitations, cedant risk assessment and reinsurance recoverability could materially affect results.
- Investment and liquidity risk: Results are exposed to interest rates, credit spreads, equity prices and foreign exchange. Some hedge and credit fund holdings have redemption restrictions; $33m of fund investments were not accepting redemptions, and timing of distributions for some legacy holdings could not be estimated.
- Other items: The company recorded $34m of senior-leadership-transition costs in the first half, including $20m accelerated and incremental share-based compensation and $14m separation payments. The 2011 insurance brokerage antitrust matter was settled for an immaterial amount and closed in March 2012. No material changes to previously disclosed risk factors or market-risk disclosures were reported; management concluded disclosure controls were effective.
Important facts for investors to verify
- Track Sandy losses as estimates emerge, and assess subsequent revisions to catastrophe loss reserves, especially for 2010–2011 events.
- Evaluate how much earnings depend on favorable prior-year reserve releases and comparatively low catastrophe losses.
- Monitor premium and pricing trends by segment, including Insurance growth and Reinsurance portfolio reductions.
- Assess durability and liquidity of alternative-investment returns, Level 3 valuations and restricted fund holdings; distinguish these from recurring fixed-income income.
- Review capital deployment, including common-share repurchases, preferred-share costs and the remaining repurchase authorization.