AXIS Capital Holdings Limited — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; balance-sheet comparisons are against December 31, 2019. Amounts below are in U.S. dollars.
Business context
AXIS is a global specialty insurance and treaty reinsurance group, reporting Insurance and Reinsurance segments. Results reflect the COVID-19 pandemic, catastrophe losses, investment-market conditions and continued portfolio repositioning.
Financial performance and condition
| Metric | Q3 2020 | First nine months 2020 |
|---|---|---|
| Net premiums earned | $1.091 billion, down 6% year over year | $3.284 billion, down 4% |
| Net income (loss) | $(65) million | $(123) million |
| Net income (loss) attributable to common shareholders | $(73) million; $(0.87) per diluted share | $(146) million; $(1.73) per diluted share |
| Operating income (loss), non-GAAP | $(65) million; $(0.77) per diluted share | $(158) million; $(1.88) per diluted share |
| Underwriting result and combined ratio | $(135) million; 114.5% | $(245) million; 109.6% |
| Net investment income / gains | $102 million / $56 million | $240 million / $46 million |
| Operating cash flow | Not separately reported for the quarter | $349 million, versus $242 million in 2019 |
Q3 catastrophe and weather-related losses were estimated at $240 million net of reinsurance and reinstatement premiums, or 22.2 points on the combined ratio. Nine-month catastrophe and weather losses were $576 million, versus $206 million in 2019. The nine-month loss ratio was 75.0%, up from 64.1%; the combined ratio rose from 100.9% to 109.6%.
At September 30, total assets were $26.5 billion, total shareholders’ equity $5.3 billion, and common shareholders’ equity $4.7 billion. Cash and investments totaled $15.6 billion, including $1.0 billion of unrestricted cash and cash equivalents; fixed maturities, cash and short-term securities represented 91% of cash and investments and had an average credit rating of AA-. Debt was $1.3 billion, and debt-to-total-capital was 19.9%, down from 24.6% at year-end 2019. Net cash, cash equivalents and restricted cash were $1.441 billion.
Material changes versus comparable periods
- Q3 shifted from common-shareholder income of $28 million in 2019 to a loss of $73 million in 2020; nine-month results shifted from income of $292 million to a loss of $146 million.
- Insurance gross premiums written increased 5% in Q3 and 7% year to date, while Reinsurance gross premiums written fell 23% and 12%, respectively, reflecting portfolio actions, non-renewals and timing differences.
- Investment income declined 12% in Q3 and 33% year to date, primarily as fixed-maturity yields fell. Q3 investment gains increased to $56 million from $15 million.
- Foreign exchange was a significant Q3 headwind: a $61 million loss compared with a $60 million gain in Q3 2019.
- In June, the company repaid $500 million of 5.875% senior notes at maturity. It also redeemed $225 million of Series D preferred shares in January. No long-term debt was due to mature before the end of 2027.
- Net unrealized gains on available-for-sale investments increased shareholders’ equity; nine-month other comprehensive income was $178 million.
Outlook, commentary and risks
Management reported improving rates, terms and conditions across many insurance and reinsurance markets, but said pricing was not adequate in every line. Its stated approach is to pursue growth where expected returns justify risk and remain disciplined elsewhere; no quantified earnings or premium guidance was provided. Management expects operating cash flows and investment-portfolio liquidity to cover cash outflows and contractual commitments due within one year after issuance of the statements.
The company’s September 30 estimate for first-party COVID-19 losses remained $235 million, included in reported catastrophe losses. It excludes an explicit estimate for potential indirect impacts, including professional, liability and credit exposures; management said those losses could emerge over several quarters or years. COVID-19 estimates remain highly uncertain and could change materially. Other major catastrophe exposures include Hurricanes Laura and Sally, the Midwest derecho, West Coast wildfires and the Beirut port explosion.
Other risks include adverse reserve development, reinsurance collection or availability, investment and foreign-exchange volatility, lower interest rates, economic stress affecting premiums and counterparties, and changes in legal or regulatory interpretations of coverage. Management reported no material legal proceedings outside the ordinary course and no off-balance-sheet arrangements. A.M. Best downgraded its rating to A with a stable outlook; S&P changed its outlook to negative, and Moody’s rating and outlook were unchanged.
Important facts for investors to verify
- Whether COVID-19 claims, including indirect and business-interruption exposures, exceed current reserves and how coverage disputes affect ultimate losses.
- Catastrophe-loss development and reserve adequacy, particularly in professional and liability lines; nine-month favorable prior-year development was only $9 million.
- Reinsurance recoverables, counterparty collectability and the availability and cost of reinsurance protection.
- Investment returns, credit quality and liquidity, including the valuation and redemption constraints of private funds and other less-liquid investments.
- Rating-agency actions, capital adequacy and the effects of continued underwriting losses and dividends on common equity.