AXIS Capital Holdings Limited — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. AXIS is a Bermuda-based global specialty insurer and reinsurer operating through Insurance and Reinsurance segments. Figures below are in U.S. dollars; “$m” means millions.
Financial performance
| Metric | 2012 | 2011 | Change / context |
|---|---|---|---|
| Gross premiums written | $4,140m | $4,096m | Up 1%; Insurance grew 9%, Reinsurance declined 7%. |
| Net premiums earned | $3,415m | $3,315m | Up 3%. |
| Net income available to common shareholders | $495m | $9m | Basic EPS $4.05; diluted EPS $4.00, versus $0.08 and $0.07. |
| Operating income (non-GAAP) | $422m | $(154)m | Diluted operating EPS $3.41 versus $(1.26). |
| Underwriting income | $263m | $(327)m | Combined ratio 96.2% versus 112.3%; below 100% indicates underwriting profit. |
| Net investment income / realized gains | $381m / $127m | $362m / $121m | Investment income up 5%; fixed-income yield declined to 2.7% from 3.2%. |
| Operating cash flow | $1,121m | $1,190m | Down about 6%; cash and cash equivalents fell to $851m from $1,083m. |
| Total assets / shareholders’ equity | $18,852m / $5,780m | $17,806m / $5,444m | Common equity was $5,277m; diluted book value per common share rose to $42.97 from $38.08. |
| Debt / capital | $995m / $6,775m | $995m / $6,439m | Debt-to-total-capital ratio 14.7%, down from 15.4%. |
Material changes and notable items
- Underwriting results improved by about $590m, primarily as catastrophe losses were lower than in 2011. The company reported $331m of net losses for Storm Sandy and $105m for other notable 2012 catastrophe and weather events; 2011 catastrophe and weather losses were reported at $931m.
- Favorable prior-year reserve development was $245m, compared with $257m in 2011. Gross loss reserves increased to $9,059m; reinsurance recoverable on unpaid and paid losses was $1,864m.
- Insurance premiums written rose, led by professional lines, liability and accident and health. Reinsurance premiums fell as AXIS repositioned catastrophe exposure and reduced selected property and European credit/bond writings.
- Net income included $127m of realized investment gains. The year also included $14m loss on preferred-share repurchases and $34m of senior-leadership transition costs, including separation payments and accelerated or incremental share-based compensation.
- Quarterly results were uneven: fourth-quarter underwriting loss was $74m and net loss available to common shareholders was $19m, following profitable first three quarters.
Liquidity, capital and outlook
- Total cash and investments were about $14.4bn. Management estimated approximately $13.4bn could be available within one to three business days under normal conditions; $2.9bn of investments were restricted. Operating cash flow was $1.1bn.
- Committed facilities included a $750m letter-of-credit facility and a $500m revolving credit facility. At year-end, $423m of letters of credit was outstanding under the former and none under the latter; stated remaining capacity was $827m. The company reported covenant compliance.
- Management expected gross premiums written to increase in both segments in 2013. It cited favorable pricing momentum in primary insurance and generally acceptable reinsurance profitability, with pressure in some lines from new capacity and firmer pricing in loss-affected property treaties and selected other lines.
- Management’s long-term ROACE target is 15% over a full underwriting cycle; 2012 ROACE was 9.7% and operating ROACE was 8.2% (non-GAAP).
Risks, contingencies and governance
- Key exposures include severe natural or man-made catastrophes, reserve-estimation uncertainty, pricing and underwriting-cycle changes, investment-market and low-interest-rate risk, foreign exchange, and reinsurer or broker counterparty risk. Three brokers accounted for 61% of 2012 gross premiums written.
- AXIS cautioned that estimates for Sandy and prior catastrophe events may change as claims develop. Long-tail liability and professional-lines reserves rely in part on industry benchmarks; reserve sensitivities are not presented as a best- or worst-case range.
- Other concerns include regulatory and solvency changes, potential rating downgrades, restricted subsidiary distributions, and the availability and cost of reinsurance and collateral facilities. The European Solvency II framework was still pending implementation details.
- A broker-related antitrust/RICO class action was settled for an immaterial amount; the court entered a final settlement order in March 2012, closing the matter. The filing reports no other material proceedings outside the ordinary course.
- The auditor issued an unqualified opinion on the financial statements and internal controls. Management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Most important facts for investors to verify
- Whether catastrophe-loss estimates—especially Sandy—and the $9.1bn gross reserve remain adequate as claims mature.
- How much of 2012 earnings improvement reflects lower catastrophe losses and favorable reserve development, versus sustainable underwriting performance.
- Whether the 2013 premium-growth outlook is achieved without weakening pricing, terms or risk selection.
- Investment portfolio sensitivity to interest rates, credit spreads and equity declines; reported stress tests estimate a $569m pretax fixed-maturity fair-value decline under specified rate and spread shocks.
- Liquidity and holding-company access to subsidiary distributions, including restricted assets, facility renewals and regulatory capital requirements.
- Effects of broker concentration, reinsurer collectability, and leadership-transition costs on future business and expenses.