AXIS Capital Holdings Limited — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited results compared with Q1 2013. Balance-sheet comparisons are to December 31, 2013. AXIS is a Bermuda-based specialty insurer and treaty reinsurer operating through AXIS Insurance and AXIS Re.
Financial performance
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net premiums earned | $945.9 million | $874.0 million | +8% |
| Total revenue | $1,042.4 million | $1,028.0 million | +1% |
| Net income | $148.5 million | $311.6 million | -52% |
| Net income available to common shareholders | $137.2 million | $302.8 million | -55% |
| Diluted EPS | $1.24 | $2.55 | Lower |
| Operating income (non-GAAP) | $137.1 million | $227.5 million | -40% |
| Net investment income | $82.7 million | $108.9 million | -24% |
| Net realized investment gains | $10.6 million | $44.5 million | -76% |
| Underwriting income | $108.8 million | $170.8 million | -36% |
| Combined ratio | 91.9% | 83.0% | +8.9 points |
Revenue growth reflected higher earned premiums, partly offset by reduced investment income and realized gains. Earnings also faced a year-over-year swing from $34.9 million of foreign-exchange gains in Q1 2013 to $4.2 million of losses in Q1 2014. Q1 2014 included $43.5 million of favorable prior-year reserve development, compared with $54.5 million a year earlier; management reported no significant catastrophe or weather-related losses during the quarter.
Underwriting and material changes
- Gross premiums written rose 4% to $1.82 billion and net premiums written rose 6% to $1.66 billion. Earned premiums increased in both segments.
- Insurance underwriting income fell 59% to $16.8 million; its combined ratio worsened to 96.3% from 89.9%. Management cited higher property mid-size and attritional losses, increased professional-line loss activity, and business-mix effects.
- Reinsurance underwriting income fell 29% to $92.0 million; its combined ratio rose to 82.1% from 72.5%. Contributing factors included a higher current-year loss ratio, higher acquisition costs, and less favorable prior-year development.
- The group current accident-year loss ratio increased to 62.1% from 56.4%; the acquisition-cost ratio rose to 18.2% from 16.6%. Favorable reserve development reduced the reported loss ratio by 4.6 points.
- Net investment income declined mainly because hedge-fund income was lower than in the strong equity-market quarter of 2013. Realized investment gains also decreased, including lower gains on fixed-maturity sales and losses on investment derivatives.
Cash flow, financial position, and capital
- Operating cash flow was $151.3 million, versus $220.6 million in Q1 2013. Investing activities used $163.8 million; financing activities provided $294.5 million. Cash and cash equivalents ended the quarter at $1.21 billion; including restricted cash, cash was approximately $1.29 billion.
- Total investments were $14.11 billion; cash and investments together were approximately $15.4 billion. Fixed maturities, cash, and short-term investments represented 89% of cash and investments, with an average credit rating of AA-.
- Total assets were $21.00 billion, total liabilities $15.12 billion, and shareholders’ equity $5.88 billion. Loss reserves were $9.67 billion, with $1.91 billion of reinsurance recoverables on paid and unpaid losses.
- Senior notes were $1.49 billion, up from $996 million at year-end. Debt to total capital increased to 20.4% from 14.6%. The company issued $250 million of 2.65% notes due 2019 and $250 million of 5.15% notes due 2045; proceeds were expected to fund repayment of $500 million of 5.75% notes maturing December 1, 2014. No borrowing was outstanding under its $250 million credit facility.
- AXIS repurchased 4.0 million common shares for $178.7 million and declared a $0.27 per-share dividend, up from $0.25. Diluted book value per common share was $47.13.
Outlook, risks, and unusual items
Management described increasing competition amid abundant industry and alternative capital, with reinsurance-market pressure expected to continue for the rest of 2014. It cited comparatively better conditions in U.S. markets and said it would prioritize business with acceptable profitability. No numerical earnings or premium guidance was provided. Management expected operating cash flows and investment-portfolio liquidity to meet cash outflows and contractual commitments for the foreseeable future.
- Reserve estimates remain judgmental and could change materially, particularly for complex catastrophe events including Storm Sandy and the 2010–2011 New Zealand and 2011 Japan earthquakes. The filing reports favorable prior-year development, but cautions that past reserve trends may not recur.
- Investment risks include market movements and less-liquid alternative investments. At quarter-end, $100 million of hedge-fund holdings remained within lockups and $12 million was invested in funds not accepting redemptions; some commitments and investments have multiyear terms.
- Total net foreign-currency exposure was $715.7 million net long. A hypothetical 10% currency move was estimated to affect equity by $71.6 million before tax.
- The $500 million note issuance and planned repayment of the maturing 5.75% notes are important financing items. The filing states the company was in compliance with debt and credit-facility covenants.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. The filing disclosed no material legal proceedings outside ordinary-course insurance and reinsurance matters and no material changes to previously reported risk factors.
Investor verification priorities
- Check the drivers and sustainability of the deterioration in current-year loss ratios and combined ratios, especially insurance property and professional lines.
- Assess reserve adequacy and the assumptions behind favorable prior-year reserve development, including catastrophe-event estimates.
- Verify the timing and use of note proceeds to repay the $500 million notes due in December 2014, and monitor debt and capital ratios after repayment.
- Review the quality, liquidity, valuation assumptions, and commitments associated with hedge funds, direct lending funds, CLO investments, and Level 3 assets.
- Distinguish recurring underwriting and investment performance from prior-year foreign-exchange gains, realized gains, and other non-GAAP operating measures.