AXIS CAPITAL HOLDINGS LTD quarterly report, Q2 FY2018

AXIS Capital Holdings Limited — Q2 2018 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2018. AXIS provides specialty insurance and reinsurance through its Insurance and Reinsurance segments. Comparisons below are with the corresponding 2017 period unless noted. Dollar amounts are U.S. dollars.

Financial performance

Metric	Q2 2018	Six months 2018	Prior comparable period
Net premiums earned	$1.186 billion	$2.353 billion	$981 million; $1.920 billion
Net income	$104 million	$177 million	$96 million; $116 million
Net income available to common shareholders	$93 million; $1.11 diluted EPS	$155 million; $1.85 diluted EPS	$85 million; $1.01 EPS; $90 million; $1.05 EPS
Operating income, non-GAAP	$106 million; $1.27 per diluted share	$229 million; $2.73 per diluted share	$110 million; $1.31 per share; $161 million; $1.89 per share
Underwriting income and combined ratio	$116 million; 93.1%	$259 million; 92.0%	$57 million; 97.6%; $73 million; 99.8%
Net investment income / losses	$110 million / $(45) million	$211 million / $(60) million	$106 million / $(4) million; $205 million / $(29) million
Operating cash flow	Not separately reported here	$(42) million	$149 million provided

Q2 gross and net premiums written were $1.651 billion and $1.000 billion; first-half totals were $4.314 billion and $2.986 billion. First-half earned premiums rose 23% year over year.
Q2 net favorable prior-year reserve development was $60 million; first-half development was $114 million. Catastrophe and weather losses were $38 million in Q2 and $73 million in the first half, versus $50 million and $85 million a year earlier.
Q2 foreign-exchange gains were $44 million, compared with losses of $36 million in Q2 2017. First-half gains were $6 million versus losses of $58 million.

Financial position and liquidity

At June 30, total assets were $25.0 billion, total liabilities $19.8 billion, and shareholders’ equity $5.3 billion. Common shareholders’ equity was $4.5 billion.
Total cash and investments were approximately $15.2 billion, including $1.089 billion cash and cash equivalents and $437 million restricted cash. Fixed maturities, cash and short-term securities represented 88% of cash and investments and had an average AA- rating.
Debt was $1.377 billion; debt to total capital was 20.8%, versus 20.5% at year-end 2017. Debt plus preferred equity to total capital was 32.5%. The company said it intended to use part of the proceeds from its 4.0% senior notes to repay or redeem 2.65% notes due April 2019.
Gross loss reserves were $12.0 billion and reinsurance recoverables were $3.3 billion. Diluted book value per common share was $52.47, down from $60.45 at June 30, 2017. The quarterly common dividend declared was $0.39 per share.
First-half operating cash flow was negative $42 million, while cash, cash equivalents and restricted cash increased $163 million to $1.527 billion. Investing activities provided $314 million; financing used $98 million.

Material changes and unusual items

The October 2017 Novae acquisition materially expanded reported premium volumes and added purchase-accounting costs. Q2 and first-half results included amortization of acquired business value of $53 million and $111 million, respectively, and intangible amortization of $4 million and $7 million.
AXIS transferred $819 million of Syndicate 2007 reserves for 2015 and prior years to a reinsurer under a January 2018 reinsurance-to-close agreement; the consideration was paid in cash and securities. This reduced both reserves and investments/cash.
First-half reorganization expenses were $32 million, with $19 million in Q2. These relate to the transformation program. Management expects approximately $100 million of annual run-rate savings from 2020 and approximately $100 million of cumulative pre-tax charges by 2020; $48 million had been incurred since Q3 2017.
Net investment losses increased, including realized losses on sales of U.S. government and agency mortgage-backed securities and equity-security fair-value losses. Adoption of ASU 2016-01 moved equity-security fair-value changes into earnings; it also reclassified approximately $70 million of after-tax unrealized equity gains from accumulated other comprehensive income to retained earnings.
Unrealized losses on available-for-sale investments drove a $188 million first-half loss in other comprehensive income, and fixed-maturity net unrealized position shifted from $11 million gains at year-end to $173 million losses at June 30. Management stated it did not intend to sell securities in unrealized-loss positions and expected recovery toward amortized cost.

Outlook, commentary and risks

Management expects opportunities for further profitable growth in 2018, but gave no numerical earnings or premium-growth guidance. It expects net premiums written to grow less than gross premiums written as more risk is shared with strategic capital partners.
Management described pricing as generally improved since late 2017, particularly in catastrophe-exposed property, while emphasizing variable and competitive market conditions and a focus on adequately priced business. It cited Novae’s increased London-market scale and ongoing portfolio rebalancing toward less volatile lines.
In July 2018, after quarter-end, AXIS obtained $200 million of catastrophe protection for three years through Northshore Re II Limited. The filing says the transaction was not consolidated.
Key risks include catastrophe severity and reserve-estimate uncertainty, reinsurance recoverability, pricing and underwriting cycles, investment-market and foreign-exchange movements, and execution of Novae integration and the transformation program. Management cautioned that actual losses from 2017 hurricanes, Mexico earthquakes and California wildfires may differ materially from estimates.
There were no material changes to the risk factors in the 2017 Form 10-K and no material legal proceedings outside the ordinary course of business. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.

Investor verification priorities

Assess whether premium growth and improved combined ratios are sustainable apart from Novae-related additions, favorable prior-year reserve development and lower catastrophe losses.
Review reserve adequacy, catastrophe-loss estimates and the quality and collectability of the $3.3 billion reinsurance recoverable balance.
Reconcile weak first-half operating cash flow with the reported increase in cash balances and examine working-capital movements and the RITC settlement.
Track investment-market sensitivity, realized and unrealized losses, and liquidity or valuation risks in private funds and other less-liquid investments.
Verify progress toward the stated $100 million annual savings target, related restructuring charges, and the 2019 senior-note refinancing plan.