AXIS Capital Holdings Limited — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. AXIS Capital is a global specialty insurance and reinsurance underwriter, operating through AXIS Insurance and AXIS Re. Amounts below are in U.S. dollars; financial statement figures are unaudited.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net premiums earned | $1.266B | $1.277B | $2.496B | $2.535B |
| Total revenues | $1.384B | $1.198B | $2.728B | $2.460B |
| Net income | $150.7M | $34.8M | $330.8M | $184.0M |
| Net income available to common shareholders | $143.1M | $27.2M | $315.6M | $168.9M |
| Diluted EPS | $1.67 | $0.32 | $3.68 | $1.97 |
| Operating income, non-GAAP | $191.2M | $149.0M | $391.2M | $328.8M |
| Net investment income | $136.8M | $92.2M | $270.6M | $183.6M |
| Net investment gains (losses) | $(24.4)M | $(173.3)M | $(44.6)M | $(267.8)M |
Q2 underwriting income was $148.5M and the combined ratio was 91.5%, improved from 93.4%. For the first half, underwriting income was $287.9M and the combined ratio was 91.2%, compared with 92.4%. Lower catastrophe losses and higher investment income supported results; investment gains and foreign exchange remained volatile. Q2 foreign exchange losses were $30.1M, versus gains of $57.0M a year earlier.
Operating cash flow for the first six months was $601.1M, up from $513.8M. Ending cash, cash equivalents and restricted cash totaled $1.518B. Total cash and investments were $16.2B. Total assets were $29.3B and shareholders’ equity was $5.021B. Debt was $1.313B; debt to total capital was 20.7%, down from 22.0% at year-end 2022. Common shareholders’ equity was $4.471B and book value per diluted common share was $50.98.
Loss reserves were $15.419B, with $6.438B of reinsurance recoverables on paid and unpaid losses. Fixed maturities had $708M of net unrealized losses, reduced from $850M at December 31, 2022. Management reported an average AA- rating for fixed maturities, short-term investments and cash equivalents.
Material changes versus the prior comparable period
- Q2 gross premiums written increased 8% to $2.284B and net premiums written rose 10% to $1.446B. Insurance-segment gross premiums written grew 15%, while reinsurance declined 7%.
- For the first half, gross and net premiums written each declined 2%. Reinsurance gross premiums written fell 20%, reflecting the continued exit from catastrophe and property reinsurance lines, while insurance gross premiums written grew 11%.
- Net investment income increased 48% in Q2 and 47% for the first half, primarily from higher fixed-maturity yields. Net investment losses narrowed substantially from 2022, when realized losses and equity-market declines were larger.
- First-half catastrophe and weather-related losses, net of reinstatement premiums, were $70M, compared with $127M in 2022. Q2 catastrophe and weather-related losses were $32M pretax, net of reinsurance.
- First-half net favorable prior-year reserve development was $10.4M. Favorable development in some lines was partly offset by adverse development in reinsurance liability and motor, including strengthening for higher expected loss trends due to inflation.
Outlook, commentary and risks
Management expects rate improvement to continue across most markets through 2023, with attractive pricing and opportunities for targeted profitable growth, particularly in specialty and excess-and-surplus insurance and non-proportional reinsurance. The company says it will maintain disciplined underwriting and operate within risk and volatility limits. The filing gives no numerical earnings or revenue guidance.
- Management reports that the company has exited catastrophe and property reinsurance lines, continuing a strategy to reduce exposure to volatile catastrophe risk.
- Net reserves for the Russia-Ukraine war were estimated at $47M pretax. Management highlights substantial estimation uncertainty and says actual losses may differ materially; it reported no direct Russia or Ukraine investment exposure.
- Two collateral-dependent commercial mortgage loans with estimated loan-to-value ratios above 100% resulted in a $4M expected-credit-loss allowance. The broader commercial mortgage portfolio’s weighted-average debt-service coverage ratio was 2.0x and loan-to-value ratio 66%.
- Other investments include funds valued using NAVs generally reported on a one-quarter lag. Unfunded investment commitments totaled approximately $510M across multi-strategy, direct lending, private equity and real estate funds.
- Management reviewed banking-sector exposures and stated potential exposures were within risk appetite. It continues monitoring banking and commercial real estate conditions, inflation, catastrophe activity, foreign exchange and credit risks.
- The $150M secured letter-of-credit facility expired in March 2023; management determined the remaining $500M facility was sufficient. FHLB borrowings were $86M, secured by investments with a fair value of $95M.
The company reported no material legal proceedings outside the ordinary course, no material changes to its previously disclosed risk factors, and effective disclosure controls at June 30, 2023. Management expects operating cash flows and its investment portfolio to cover cash outflows and contractual commitments for the foreseeable future.
Most important facts for investors to verify
- Whether underwriting profitability and combined ratios remain strong as reinsurance premiums contract following the catastrophe and property-line exits.
- How liability and motor reserve strengthening, inflation trends and catastrophe estimates develop in subsequent quarters.
- Whether higher investment income persists, and the effects of realized investment losses, interest rates and foreign exchange on earnings and book value.
- The liquidity and valuation risks in NAV-based and other less-liquid investments, including the timing of unfunded capital commitments.
- Whether management’s pricing outlook and disciplined-growth strategy translate into profitable growth without increasing volatility or reserve risk.