Business context and reporting period
AXIS Capital Holdings Limited is a Bermuda-based specialty insurer and treaty reinsurer operating through AXIS Insurance and AXIS Reinsurance. This summary covers the unaudited three months ended March 31, 2013, compared with the same period in 2012, unless otherwise noted. Amounts are U.S. dollars.
Financial results and condition
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Gross premiums written | $1,746 million | $1,525 million | +15% |
| Net premiums earned | $874 million | $846 million | +3% |
| Total revenues | $1,028 million | $978 million | +5% |
| Underwriting income | $171 million | $63 million | +172% |
| Combined ratio | 83.0% | 94.8% | Improved 11.8 points |
| Net income | $312 million | $136 million | +129% |
| Net income available to common shareholders | $303 million | $122 million | +148% |
| Diluted earnings per common share | $2.55 | $0.96 | — |
| Operating income, non-GAAP | $227 million | $136 million | +68% |
| Net investment income | $109 million | $116 million | −6% |
| Net realized investment gains | $44 million | $14 million | — |
Underwriting: Both segments improved. Insurance underwriting income was $41 million (up from $11 million); reinsurance underwriting income was $130 million (up from $52 million). The current-year loss ratio improved to 56.4% from 65.7%, primarily because there had been no natural catastrophe or significant weather events in 2013 through quarter-end. Favorable prior-year reserve development was $54 million, versus $45 million.
Cash flow and liquidity: Operating cash flow was $221 million, compared with $176 million. Investing activities used $9 million, versus $449 million; financing activities used $164 million, compared with $306 million provided in Q1 2012. Cash and cash equivalents were $800 million at March 31, excluding $57 million of restricted cash. Total investments were $13.7 billion; cash, short-term investments and fixed maturities represented most of the reported $14.5 billion in cash and investments.
Capital and debt: Total assets were $19.7 billion and shareholders’ equity was $5.9 billion. Senior notes were $995 million; the reported debt-to-total-capital ratio was 14.5%. The company had no borrowings or letters of credit outstanding under its new $250 million credit facility; $407 million of letters of credit were outstanding under its separate $750 million LOC facility. The company repurchased 3.4 million common shares for $131 million. Diluted book value per common share was $44.67.
Material changes versus the prior comparable period
- Underwriting income rose substantially, reflecting the absence of catastrophe losses to date, premium growth, a lower acquisition cost ratio, and higher favorable reserve development. General and administrative expenses increased to $141 million from $124 million, associated in part with expansion of the underwriting platform.
- Net investment income declined as fixed-income reinvestment yields fell; fixed-maturity income decreased 12%. Net realized gains increased, including gains on equity sales and investment derivatives.
- Foreign exchange moved from a $20 million loss in Q1 2012 to a $35 million gain in Q1 2013, mainly due to Sterling and euro movements affecting foreign-denominated insurance liabilities.
- Other comprehensive income shifted from a $150 million gain to a $53 million loss, largely reflecting unrealized investment valuation changes. Total return on average cash and investments was 0.7%, versus 2.1%.
- Premium growth was led by reinsurance, including agriculture, and by insurance accident and health. Net premiums written increased 15%.
Outlook, risks and unusual items
- Management expected pricing improvements in several lines to continue during 2013 and help offset persistently low interest rates. It anticipated further favorable accident-year underwriting impact as rate increases earned through, while noting competitive pressure could constrain results in some lines. No quantified earnings or premium guidance was provided.
- Management expected additional new agriculture reinsurance business in Q2 2013. The company was evaluating alternatives for its $750 million LOC facility ahead of its scheduled year-end 2013 expiration.
- Reserve estimates remain uncertain for catastrophe events from 2010–2012, including Storm Sandy, the Japanese earthquake and tsunami, New Zealand earthquakes and Thai floods. Q1 favorable prior-year development included $30 million of adverse development for 2010–2012 catastrophe and weather events, including a $28 million increase for the February Christchurch earthquake.
- Some hedge and credit fund investments have redemption restrictions. At quarter-end, $18 million was in funds not accepting redemption requests, and $78 million of related investment commitments remained unfunded. Management could not estimate when certain legacy liquidation or side-pocketed funds would distribute assets.
- Management stated operating cash flows and portfolio liquidity should meet foreseeable cash needs, while noting net paid losses could rise in the short term. The filing identifies catastrophe frequency and severity, reserve adequacy, reinsurance recoveries, market movements, competition, ratings and regulatory changes among material risks.
- The filing reported no material change in risk factors, no material proceedings outside ordinary business, no material change in market-risk disclosures, and no material changes in internal control over financial reporting. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the unusually low 83.0% combined ratio is sustainable, given the benefit from no Q1 catastrophe activity and $54 million of favorable prior-year reserve development.
- How estimates for significant catastrophe losses, especially the 2010–2012 events, develop as additional claims information emerges.
- Whether premium growth and pricing improvements translate into durable underwriting profitability, particularly in expanding agriculture, accident and health, and European motor business.
- The impact of low reinvestment yields and the increased allocation to alternative investments, including liquidity limits, valuation assumptions and Level 3 exposures.
- Renewal plans and available capacity for the LOC facility, along with ongoing compliance with credit-facility covenants.
- The financial and per-share effects of continued share repurchases and the remaining authorization, reported at approximately $634 million on April 25, 2013.