AXIS Capital Holdings Limited — Q3 2018 Form 10-Q
Business context and period: AXIS is a global specialty insurer and reinsurer operating through Insurance and Reinsurance segments. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are with 2017. Results include Novae, acquired October 2, 2017, so year-over-year premium growth is substantially acquisition-related.
Financial performance and position
| Metric | Q3 2018 | Nine months 2018 | Comparable 2017 |
|---|---|---|---|
| Net premiums earned | $1,224 million | $3,577 million | $1,017 million; $2,937 million |
| Net income (loss) | $54 million | $231 million | $(457) million; $(342) million |
| Net income (loss) available to common shareholders | $43 million | $199 million | $(468) million; $(378) million |
| Diluted EPS | $0.52 | $2.37 | $(5.61); $(4.47) |
| Operating income, non-GAAP | $81 million | $310 million | $(446) million; $(284) million |
| Underwriting income (loss), non-GAAP | $59 million | $318 million | $(513) million; $(439) million |
| Combined ratio | 97.9% | 94.0% | 152.9%; 118.1% |
| Net investment income | $114 million | $325 million | $95 million; $300 million |
| Net investment gains (losses) | $(18) million | $(78) million | $15 million; $(15) million |
Gross premiums written were $1.424 billion in Q3 and $5.737 billion for nine months, up 20% and 29%, respectively. Net premiums written were $920 million and $3.906 billion, up 10% and 18%. Premium growth largely reflects Novae; excluding Novae, Insurance net premiums earned declined year over year in both periods.
Q3 catastrophe and weather losses were an estimated $92 million (7.5 points on the current-year loss ratio); nine-month losses were $162 million (4.5 points), versus $617 million and $702 million in the respective 2017 periods. Favorable prior-year reserve development was $46 million in Q3 and $160 million year to date. Segment Q3 underwriting results were a $12 million Insurance loss (102.2% combined ratio) and $71 million Reinsurance income (89.5% combined ratio).
Cash flow and liquidity: Nine-month operating cash flow was $131 million, versus $312 million in 2017; investing activities provided $409 million, versus $848 million; financing activities used $141 million, versus $787 million. Cash, cash equivalents and restricted cash totaled $1.752 billion at September 30. Total investments were $13.636 billion, making total cash and investments approximately $15.4 billion. Management said operating cash flows and the investment portfolio should cover expected outflows and contractual commitments for the foreseeable future.
Capital and balance sheet: Total assets were $24.843 billion and total shareholders’ equity $5.272 billion. Common equity was $4.497 billion; book value per diluted common share was $52.70, down from $55.33 at September 30, 2017. Loss reserves were $12.026 billion, with $3.439 billion of reinsurance recoverables on paid and unpaid losses. Debt was $1.378 billion; debt to total capital was 20.7%, and debt plus preferred equity to total capital was 32.4%. Fixed maturities, cash and short-term securities represented 89% of cash and investments and had an average credit rating of AA-.
Material changes and unusual items
- Results recovered sharply from 2017’s catastrophe-heavy loss periods. Underwriting profitability improved, driven by lower catastrophe losses, premium growth and lower current-year loss ratios excluding catastrophes; acquisition and integration effects also contributed.
- Novae-related amortization was $39 million in Q3 and $150 million year to date for value of business acquired, plus $2 million and $9 million of intangible amortization. Transaction and reorganization expenses were $16 million and $48 million, respectively.
- The company expects approximately $100 million in annual pre-tax run-rate cost savings from its transformation program beginning in 2020; $75 million of pre-tax reorganization charges had been incurred since Q3 2017.
- The Syndicate 2007 reinsurance-to-close transaction transferred $819 million of reserves and involved $819 million of consideration paid; $600 million was settled through a transfer of securities. The transaction reduced reported reserves and investments/cash.
- Fixed-maturity fair value fell to $11.768 billion from $12.622 billion at year-end 2017; net unrealized fixed-maturity losses were $174 million, versus $11 million of gains at year-end, primarily reflecting higher U.S. Treasury rates. Nine-month other comprehensive loss was $187 million.
- Adoption of accounting guidance moved equity-security fair-value changes into net income. This included $25 million of nine-month unrealized equity losses; the prior period was not restated.
Outlook, risks and contingencies
- Management expects opportunities for profitable specialty-line growth, but describes market conditions as competitive and mixed. It intends to prioritize adequately priced business and trade growth for profitability where appropriate; no specific earnings or premium guidance was provided.
- Management cited improved rates since late 2017, particularly in catastrophe-exposed property and U.S. excess casualty, while noting a well-capitalized reinsurance market and continued competition.
- In October 2018, Hurricane Michael made landfall. The company’s preliminary pre-tax net loss estimate was $100–$120 million, to be recognized in Q4; actual ultimate losses may differ materially.
- Loss reserves and catastrophe estimates remain judgmental and uncertain. The filing highlights potential variability for Hurricane Florence and prior events including Hurricanes Harvey, Irma and Maria, Mexico earthquakes, and California wildfires. Prior-year favorable development included strengthening of the U.S. excess casualty book.
- Other material risk themes include catastrophe frequency and severity, reserve adequacy, reinsurance recoverability, pricing cycles, investment-market movements, foreign exchange, and the ability to realize Novae integration and transformation benefits. Some private investment funds have limited liquidity; unfunded investment commitments are disclosed in the filing.
- The company reported no material legal proceedings outside the ordinary course and no material changes to its previously disclosed risk factors. Disclosure controls were assessed as effective; no material Q3 change in internal control was reported.
Investor verification checklist
- Confirm premium growth and underwriting performance excluding Novae, including the sustainability of the improved combined ratio.
- Track catastrophe reserve revisions, Hurricane Michael’s final insured loss impact, and the assumptions underlying prior-year favorable development.
- Assess progress toward the $100 million annual savings target, related costs, and Novae integration benefits.
- Review fixed-income unrealized losses, portfolio duration and credit quality, and liquidity of other investments and their unfunded commitments.
- Verify debt maturities and refinancing plans, including the intended repayment or redemption of the 2.65% Senior Notes due April 2019.