AXIS Capital Holdings Limited — 2011 Form 10-K
Business context and period. Bermuda-based global specialty insurer and reinsurer, operating through AXIS Insurance and AXIS Re. This is the annual report for the fiscal year ended December 31, 2011, with 2010 comparatives. Amounts below are U.S. dollars.
Key financial results and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Gross premiums written | $4.10 billion, up 9% | $3.75 billion |
| Net premiums earned | $3.31 billion, up 12% | $2.95 billion |
| Total revenues | $3.80 billion | $3.55 billion |
| Net income | $46 million | $857 million |
| Net income available to common shareholders | $9 million; $0.08 basic and $0.07 diluted EPS | $820 million; $6.74 basic and $6.02 diluted EPS |
| Underwriting result / combined ratio | $(327) million / 112.3% | $409 million / 88.7% |
| Net investment income / realized gains | $362 million / $121 million | $407 million / $195 million |
| Operating cash flow | $1.19 billion | $1.19 billion |
| Assets / shareholders’ equity | $17.81 billion / $5.44 billion | $16.45 billion / $5.62 billion |
| Debt / debt to total capital | $995 million / 15.4% | $994 million / 15.0% |
| Cash and investments | $13.55 billion | $12.57 billion |
- Net premiums written were $3.42 billion. Loss and loss expense reserves totaled $8.43 billion; reinsurance recoverables were $1.77 billion.
- Net favorable prior-year reserve development was $257 million, down from $313 million in 2010.
- Common shareholders’ equity was $4.94 billion; diluted book value per common share was $38.08, down from $39.37.
- Common dividends declared were $0.93 per share. The company repurchased 1.6 million shares under its plan for approximately $50 million of market purchases; $544 million of authorization remained at year-end.
Material changes versus 2010
- Catastrophe losses drove a sharp deterioration in underwriting: the combined ratio rose 23.6 points to 112.3%, and underwriting moved from income to loss. The reinsurance segment recorded a $362 million underwriting loss; insurance underwriting income fell to $35 million.
- Management cited $931 million of estimated pre-tax net catastrophe losses, net of reinstatement premiums, for 2011 events. Major losses included the Christchurch earthquakes and aftershock, the Japanese earthquake and tsunami, Australian weather events, U.S. storms, Thai flooding, Hurricane Irene and other events. Estimates for some events remained uncertain.
- Premium growth was broad-based: insurance gross premiums written increased 11%, led by accident and health and geographic expansion; reinsurance gross premiums written increased 8%, led by motor and credit and bond business.
- Net investment income declined 11%, reflecting lower reinvestment yields and weaker hedge- and credit-fund returns. Net realized investment gains were also lower than in 2010.
- Net income available to common shareholders fell from $820 million to $9 million. Net income included investment gains and foreign-exchange gains, while the company’s non-GAAP operating loss was $154 million, or $1.26 per diluted share.
Liquidity, capital and outlook
- Operating cash flow was $1.19 billion; investing cash outflow was $833 million and financing cash outflow was $302 million. Cash and cash equivalents at year-end were $1.08 billion, including restricted cash.
- Management stated that $9.1 billion, or 67% of cash and investments, was in investment-grade, short- or intermediate-maturity holdings expected to be available within one to three business days under normal conditions. Restricted investments totaled $2.65 billion.
- Fixed maturities had an average AA- rating and approximately 2.8-year duration. The portfolio was exposed to market movements; the filing estimates a $510 million pre-tax fair-value decline under a specified combined 100-basis-point interest-rate increase and credit-spread widening scenario.
- Available LOC and revolving credit-facility capacity was approximately $853 million at year-end; there were no borrowings or letters of credit outstanding under the revolving facility. The company reported compliance with facility covenants.
- Management viewed the industry as being in the early stages of a pricing-cycle change and expected pricing adequacy to improve over the next few years, while emphasizing that market conditions were mixed and underwriting would remain selective. Low interest rates were expected to continue pressuring investment returns. The stated long-term ROACE target is 15% over the underwriting cycle.
Risks, contingencies and unusual items
- Key exposures include catastrophe frequency and severity, reserve-estimation uncertainty, long-tail claims, reinsurance counterparty collectability, investment and credit-market volatility, foreign exchange, and underwriting-cycle competition. Broker concentration is notable: three brokers generated 63% of 2011 gross premiums written.
- The company highlighted uncertainty around the ultimate losses from the New Zealand events, Japanese earthquake and tsunami, and Thai floods. Its reserves are management estimates and could develop adversely; favorable prior-year development contributed $257 million to 2011 underwriting results.
- European sovereign-debt concerns prompted sales of U.K. and European bank holdings in 2011. The company reported $975 million of fixed-maturity eurozone exposure at year-end, largely in Germany and France; it subsequently sold remaining French, Spanish and Belgian sovereign holdings in January 2012.
- Regulatory changes include Bermuda group-supervision requirements effective January 2012 and anticipated Solvency II implementation. Dividend capacity at subsidiaries is subject to regulatory and capital constraints.
- A class-action insurance brokerage case was agreed in principle to settle for an immaterial amount; preliminary court approval had been obtained, with a final settlement order still awaited. The filing says routine legal proceedings are not expected to have a material effect.
- Deloitte issued an unqualified opinion on the financial statements and internal controls. The filing reports no material off-balance-sheet arrangements.
Most important facts for investors to verify
- How 2011 catastrophe loss estimates develop as claims adjustment progresses, particularly for New Zealand, Japan and Thailand, and whether reinsurance recoveries are collected as expected.
- Whether underwriting profitability and combined ratios recover after the 2011 catastrophe-driven deterioration, and whether premium growth reflects adequate pricing and terms.
- Reserve adequacy, including assumptions and adverse-development potential in professional, liability and motor lines; favorable prior-year reserve releases should not be assumed to recur.
- Investment portfolio sensitivity to low yields, credit spreads, equity markets and eurozone exposures, including liquidity and valuation assumptions for alternative investments.
- Capital and holding-company liquidity after dividends and repurchases, including the availability of subsidiary distributions and compliance with regulatory and credit-facility requirements.
- Progress on the announced industry pricing improvement and implementation of Bermuda and European regulatory requirements.