AXIS Capital Holdings Limited — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Comparisons are with Q1 2014 unless otherwise noted. Amounts are U.S. dollars.
Business context
AXIS is a Bermuda-based specialty insurer and treaty reinsurer, operating through AXIS Insurance and AXIS Re. Its strategy included shifting toward less-volatile lines, expanding reinsurance protection and third-party capital, and growing accident and health and weather-risk offerings.
Financial results and condition
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Gross premiums written | $1.679 billion | Down 8% |
| Net premiums earned | $906 million | $946 million; down 4% |
| Total revenue | $963 million | $1.042 billion |
| Underwriting income | $96 million | $109 million; down 12% |
| Combined ratio | 94.3% | 91.9%; worsened 2.4 percentage points |
| Net income attributable to AXIS | $166 million | $147 million |
| Net income available to common shareholders | $156 million; diluted EPS $1.54 | $137 million; diluted EPS $1.24 |
| Operating income, non-GAAP | $136 million; diluted operating EPS $1.35 | $137 million; diluted operating EPS $1.24 |
| Net investment income | $92 million | $83 million |
| Net realized investment losses | $43 million | Versus $11 million gains |
| Operating cash flow | $(28) million | $151 million provided |
Net income benefited from $63 million of foreign-exchange gains, compared with $4 million of FX losses a year earlier. Higher realized investment losses partly offset improved investment income. Basic and diluted EPS also benefited from lower weighted-average shares outstanding.
Insurance segment underwriting income was $10 million, with a 97.9% combined ratio; reinsurance underwriting income was $86 million, with an 82.8% combined ratio. Favorable prior-year reserve development was $50 million, versus $43 million in Q1 2014. Current-quarter catastrophe and weather losses were $8 million.
At March 31, total assets were $20.5 billion and shareholders’ equity was $6.0 billion. Cash and investments totaled approximately $14.9 billion; cash and cash equivalents were $997 million, including $273 million restricted. Loss reserves were $9.4 billion, with $1.9 billion of reinsurance recoverables. Senior notes were $991 million; debt-to-total-capital was 14.2%. Management said operating cash flows and portfolio liquidity should cover foreseeable obligations. The fixed-income portfolio had an average AA- rating and 3.0-year duration.
Material changes and management commentary
- Gross premiums written fell primarily in reinsurance, reflecting prior-year multi-year treaties, currency effects and competitive conditions. On a constant-currency basis, total gross premiums written declined 4%. Reinsurance premiums earned fell 8%; insurance premiums earned were broadly flat.
- The combined ratio rose as the current accident-year loss ratio, acquisition-cost ratio and expense ratio increased. Management cited business mix, mid-size insurance losses, reinsurance acquisition costs, lower earned premiums and higher expenses.
- Investment income increased mainly because hedge funds benefited from global market volatility. Realized losses included foreign-currency-related security losses and $18 million of other-than-temporary impairment charges, mainly on downgraded high-yield corporate debt and foreign-currency securities.
- Management described insurance pricing as leveling off, with declines in some property and specialty lines. Reinsurance remained highly competitive, with excess capacity pressuring pricing and terms. Management identified selected opportunities for profitable growth, including U.S. casualty and certain professional, property and marine lines.
- AXIS and PartnerRe had agreed to a proposed merger of equals, then expected to close in the second half of 2015 subject to shareholder and regulatory approvals and other conditions. The agreement included a $55 million no-approval fee and, in specified circumstances, a termination fee initially reported as $280 million after amendment, plus capped expense reimbursement. A PartnerRe third-party proposal was announced after quarter-end; PartnerRe later said discussions had ended. The agreement was subsequently amended to permit a PartnerRe special dividend of $11.50 per share.
- AXIS completed its acquisition of Ternian Insurance Group on April 1, 2015, recognizing $13 million of intangible assets. The company incurred $7 million of merger-related expenses during the quarter and suspended open-market share repurchases pending the merger.
Risks, contingencies and unusual items
- Loss-reserve estimates remain judgmental, particularly for complex catastrophe events including Storm Sandy, the Japanese earthquake and tsunami, and New Zealand earthquakes; actual losses may differ materially. Favorable prior-year development supported reported underwriting results.
- Investment risks include currency and credit movements, OTTI, and valuation uncertainty in less-liquid or Level 3 holdings. Hedge-fund lockups, direct-lending funds and CLO investments constrain liquidity; certain investment commitments are long term.
- Foreign-currency exposure was net long $340 million at quarter-end; a hypothetical 10% currency move was estimated to affect equity by $34 million before tax.
- Outstanding commitments included $72 million of reinsurance premiums and a $50 million commercial mortgage loan purchase commitment. Direct-lending and other fund commitments are also disclosed in the filing.
- The secured letter-of-credit facility limit was reduced from $750 million to $500 million; $354 million was outstanding at March 31. The filing reported no material legal proceedings outside ordinary business and no material change to previously disclosed risk factors.
Most important facts for investors to verify
- Whether the PartnerRe amalgamation obtained required approvals and closed, and the final transaction economics, fees and dividend terms.
- Whether AXIS’s favorable reserve development persists and whether catastrophe and long-tail loss estimates require material revisions.
- Whether premium trends, competitive pricing and the worsening combined ratio affect underwriting profitability in subsequent quarters.
- Whether hedge-fund returns and other investment income remain sustainable, and whether foreign-exchange and credit losses or illiquid investment valuations change materially.
- Whether operating cash generation recovers from the quarter’s cash use and whether liquidity remains adequate after commitments and transaction-related outlays.