AXIS Capital Holdings Limited — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Unaudited interim results; amounts below are in U.S. dollars, generally millions except per-share data.
Business context
AXIS is a Bermuda-based specialty insurer and treaty reinsurer operating through AXIS Insurance and AXIS Re. The filing reports results under those two segments.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $1,118 | $1,045 | $3,310 | $3,118 |
| Net premiums earned | $966 | $945 | $2,912 | $2,765 |
| Net income attributable to AXIS | $289 | $151 | $637 | $546 |
| Net income available to common shareholders | $279 | $137 | $607 | $512 |
| Diluted earnings per common share | $2.68 | $1.21 | $5.68 | $4.41 |
| Operating income, non-GAAP | $133 | $197 | $443 | $474 |
| Underwriting income | $113 | $153 | $349 | $334 |
| Combined ratio | 92.2% | 86.3% | 91.6% | 90.5% |
| Net investment income | $67 | $103 | $264 | $295 |
| Net realized investment gains (losses) | $77 | $(5) | $121 | $56 |
Q3 common-shareholder earnings benefited from $72 million of foreign-exchange gains and $77 million of realized investment gains, while operating income—which excludes realized investment gains and foreign-exchange effects—fell 32%. For the nine months, operating income declined 7% despite higher reported net income.
Quarterly underwriting income fell 26% year over year. Insurance underwriting income decreased to $16 million from $89 million, while reinsurance underwriting income rose to $98 million from $64 million. The group’s Q3 loss ratio was 57.1%; acquisition and general and administrative expense ratios were 19.2% and 15.9%, respectively. Favorable prior-year reserve development was $65 million in Q3 and $193 million year to date.
Operating cash flow was $736 million for the first nine months, versus $889 million a year earlier. Investing activities used $281 million and financing activities used $74 million. Cash and cash equivalents were $1.290 billion at quarter-end; including restricted cash, cash and cash equivalents were about $1.408 billion.
Financial position, capital and liquidity
- Total assets were $20.965 billion and total shareholders’ equity was $5.880 billion at September 30, 2014.
- Total investments were $14.135 billion; fixed maturities were $12.445 billion. Management reported total cash and investments of $15.5 billion, with fixed maturities, cash and short-term securities representing 90% and averaging an AA- credit rating.
- Loss and loss expense reserves were $9.752 billion; reinsurance recoverables on paid and unpaid losses were $1.948 billion.
- Senior notes totaled $1.490 billion. Debt to total capital was 20.4%, up from 14.6% at year-end 2013. There was no debt outstanding under the $250 million credit facility; letters of credit under the separate LOC facility totaled $429 million.
- Operating cash flows and investment-portfolio liquidity were expected by management to cover required outflows and contractual commitments for the foreseeable future. No material off-balance-sheet arrangements were reported.
Changes versus comparable periods
- Q3 net income available to common shareholders more than doubled, but the increase reflected substantial foreign-exchange and realized investment gains; operating income and underwriting income declined.
- Net investment income decreased 36% in Q3, mainly because other investments, particularly hedge funds, produced a loss rather than the prior-year income. Nine-month net investment income declined 11%.
- Q3 combined ratio deteriorated 5.9 percentage points. Management cited higher agriculture reserves, increased property mid-size and attritional losses, and business mix; lower catastrophe losses partly offset those pressures.
- Nine-month underwriting income increased 4%, principally on stronger reinsurance results and lower catastrophe losses, partly offset by weaker insurance underwriting and higher acquisition costs.
- Net unrealized investment losses reduced other comprehensive income by $250 million in Q3; nine-month other comprehensive loss was $95 million. Common shareholders’ equity was broadly unchanged from year-end, while common shares outstanding fell from 109.5 million to 100.8 million, primarily reflecting repurchases.
- Cash flow from operations was lower year over year. The company issued $500 million of new senior notes in March and repurchased $469 million of common shares during the nine months.
Outlook, risks and unusual items
- No numerical earnings or underwriting guidance was provided. Management described insurance pricing as slowing or leveling off, with pressure in some lines; it saw comparatively better U.S. opportunities, especially casualty. Reinsurance pricing and terms remained under pressure from excess capacity, alternative capital and consolidation of buyers.
- Management identified agriculture reinsurance as a source of increased current-year loss reserves after a significant decline in agricultural commodity prices. Q3 estimated catastrophe and weather-related net losses were $22 million, primarily from North American weather events; the nine-month amount was $72 million.
- Reserve estimates remain subject to uncertainty, particularly for complex catastrophe events including Storm Sandy, the 2011 Japan earthquake and tsunami, and the 2010–2011 New Zealand earthquakes. Favorable prior-year development was substantial and depends on loss emergence and actuarial estimates; the filing also reports adverse development on certain insurance liability claims.
- The $500 million of new notes—2.65% due 2019 and 5.15% due 2045—was intended to fund repayment of $500 million of 5.75% notes due December 1, 2014. The filing states this repayment was expected, not that it had already occurred.
- Investment risks include market and interest-rate movements, credit spreads, foreign exchange and less-liquid investments. Other investments included $585 million classified as Level 3; $71 million of hedge fund holdings remained within lockup periods. Unrealized loss positions and Level 3 valuations rely in part on management estimates.
- Routine legal proceedings arise in the ordinary course; the company reported no material legal proceedings outside that course and no material changes to previously disclosed risk factors. Disclosure controls were considered effective, with no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether repayment of the $500 million notes due December 2014 was completed, and the resulting debt, interest expense and leverage.
- How agriculture loss reserves develop as commodity prices and cedant information change, and whether favorable prior-year reserve releases continue to be supported by experience.
- Whether the Q3 earnings contribution from foreign-exchange and realized investment gains is repeatable; also monitor hedge fund performance and investment-related OCI volatility.
- Whether insurance and reinsurance pricing, business mix, acquisition costs and attritional losses support underwriting profitability amid the competitive market described by management.
- Liquidity and valuation exposure in restricted or Level 3 investments, catastrophe reserves and reinsurance recoverables, alongside continued share repurchases and dividend payments.