AXIS Capital Holdings Limited — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; balance-sheet comparisons are to December 31, 2015. Interim financial statements are unaudited. Amounts are in U.S. dollars.
Business context and results
AXIS is a Bermuda-based specialty insurance and treaty reinsurance group, operating through AXIS Insurance and AXIS Re. Management reported growth in selected specialty lines and continued use of reinsurance and third-party capital to manage portfolio risk.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Gross premiums written | $960m | $937m | $4,240m | $3,804m |
| Net premiums earned | $934m | $919m | $2,784m | $2,765m |
| Net income | $187m | $258m | $364m | $497m |
| Net income available to common shareholders | $177m | $248m | $335m | $467m |
| Diluted EPS | $1.96 | $2.50 | $3.61 | $4.65 |
| Underwriting income | $104m | $56m | $213m | $214m |
| Combined ratio | 92.6% | 96.6% | 95.7% | 95.7% |
| Net investment income | $117m | $46m | $258m | $226m |
| Net realized investment gains (losses) | $5m | ($70m) | ($40m) | ($124m) |
Financial position, cash flow and capital
- At September 30, total assets were $21.2bn, total liabilities $15.2bn, and shareholders’ equity $6.0bn. Total investments were $13.5bn; cash and cash equivalents were $848m, plus $229m restricted cash.
- Gross loss reserves were $9.9bn, with $2.3bn of reinsurance recoverables on paid and unpaid losses. Senior notes were $993m; debt-to-total-capital was 14.1%, down from 14.5% at year-end 2015.
- For the first nine months, operating cash flow was $265m, versus $703m in 2015. Investing activities provided $117m, compared with $170m used in 2015; financing activities used $523m, versus $449m. Cash and cash equivalents declined $140m to $848m.
- Management reported total cash and investments of $14.6bn and an average AA- credit rating for fixed maturities, cash and short-term securities. Common shareholders’ equity was $5.4bn and diluted book value per common share was $59.77.
- AXIS repurchased 8.5m common shares for approximately $449m during the first nine months and declared $1.05 per common share in dividends. Remaining board-authorized repurchase capacity was $375m as of October 27, 2016.
Material changes versus comparable periods
- Q3 common net income fell 29%; nine-month common net income fell 28%. The comparison is affected by the 2015 PartnerRe termination fee of $280m and $46m of reorganization expenses. Q3 2015 also included reimbursement of merger-related expenses. 2016 operating income, a non-GAAP measure, was $161m for Q3 and $309m year to date, versus $51m and $281m in 2015.
- Q3 underwriting income rose to $104m, principally reflecting more favorable prior-year reserve development, lower catastrophe losses and lower underwriting expenses. Nine-month underwriting income was essentially flat.
- Net favorable prior-year reserve development was $76m in Q3 and $224m year to date, compared with $45m and $166m in 2015. Current-year catastrophe and weather-related losses, net of reinstatement premiums, were $22m in Q3 and $145m year to date, versus $43m and $90m.
- Q3 net investment income benefited from a $38m gain on other investments, compared with a $27m loss in Q3 2015. Year-to-date net realized investment losses narrowed to $40m from $124m.
- Gross premiums written increased 11% year to date. Net premiums written increased 7% year to date, but declined 12% in Q3, partly reflecting the new Harrington Re retrocessional cover. The cover increased ceded premiums, particularly in reinsurance.
- AXIS invested $104m for an 18% interest in Harrington Re’s parent, jointly sponsored with Blackstone. Harrington-related underwriting and investment fees are to be shared equally under the arrangement.
Outlook, commentary and risks
- Management expected gross premiums written to increase in 2016, with the increase substantially offset by greater cessions to reinsurers and third-party capital partners. No specific earnings or EPS guidance was provided.
- Management described competitive insurance and reinsurance markets, excess capacity and price reductions across most lines, particularly catastrophe-exposed property and some global specialty business. It planned to prioritize adequately priced opportunities, diversification and less-volatile accounts.
- Key uncertainties include catastrophe severity, claims exceeding reserves, changes in coverage interpretation, reinsurance recoverability, market and investment volatility, foreign exchange movements, competition, and regulatory or political developments. Management cautioned that reserve estimates for complex catastrophe events may change materially.
- As a subsequent event, AXIS estimated an after-tax net loss of $45m–$60m from Hurricane Matthew in October 2016. The preliminary estimate may differ materially from ultimate losses.
- Other noted exposures include illiquid or long-term fund commitments, including $189m of unfunded direct-lending commitments and $40m remaining on a private-equity commitment. Management stated that cash flows and investment liquidity were expected to cover foreseeable required outflows and commitments.
Most important facts for investors to verify
- Whether favorable reserve development of $224m year to date is sustainable, and how catastrophe and long-tail reserves develop.
- The eventual Hurricane Matthew loss relative to the preliminary $45m–$60m after-tax estimate.
- Whether premium growth, increased ceded risk and the Harrington Re arrangement deliver the expected risk-adjusted returns and fee income.
- The drivers and durability of investment income, including valuation assumptions for less-liquid and Level 3 investments.
- Cash-flow conversion, share repurchases and dividends relative to operating cash generation and capital needs.