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AXS > SEC Filings for AXS > Form 10-Q on 26-Apr-2013All Recent SEC Filings

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Form 10-Q for AXIS CAPITAL HOLDINGS LTD


26-Apr-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS


The following is a discussion and analysis of our financial condition and results of operations. This should be read in conjunction with the consolidated financial statements and related notes included in Item 1 of this report and also our Management's Discussion and Analysis of Results of Operations and Financial Condition contained in our Annual Report on Form 10-K for the year ended December 31, 2012. Tabular dollars are in thousands, except per share amounts. Amounts in tables may not reconcile due to rounding differences.

Page

First Quarter 2013 Financial Highlights 35 Executive Summary 36 Underwriting Results - Group 39 Results by Segment: For the three months ended March 31, 2013 and 2012 45
i) Insurance Segment 45
ii) Reinsurance Segment 48 Other Expenses (Revenues), Net 50 Net Investment Income and Net Realized Investment Gains/Losses 51 Cash and Investments 54 Liquidity and Capital Resources 57 Critical Accounting Estimates 59 New Accounting Standards 59 Off-Balance Sheet and Special Purpose Entity Arrangements 59 Non-GAAP Financial Measures 60


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FIRST QUARTER 2013 FINANCIAL HIGHLIGHTS

First Quarter 2013 Consolidated Results of Operations

Net income available to common shareholders of $303 million, or $2.59 per share basic and $2.55 diluted

Operating income of $227 million, or $1.92 per diluted share(1)

Gross premiums written of $1.7 billion

Net premiums written of $1.6 billion

Net premiums earned of $874 million

Net favorable prior year reserve development of $54 million

Underwriting income of $171 million and combined ratio of 83.0%

Net investment income of $109 million

Net realized investment gains of $44 million

First Quarter 2013 Consolidated Financial Condition
Total cash and investments of $14.5 billion; fixed maturities, cash and short-term securities comprise 89% of total cash and investments and have an average credit rating of AA-

Total assets of $19.7 billion

Reserve for losses and loss expenses of $9.1 billion and reinsurance recoverable of $1.9 billion

Total debt of $995 million and a debt to total capital ratio of 14.5%

Repurchased 3.4 million common shares for total cost of $131 million; this included 3 million shares from Trident II, L.P. and affiliated entities, who disposed of their remaining interest in AXIS Capital during the quarter. At April 25, 2013, remaining authorization under the repurchase program approved by our Board of Directors was $634 million.

Common shareholders' equity of $5.4 billion; diluted book value per common share of $44.67

(1) Operating income is a non-GAAP financial measure as defined in SEC Regulation G. See 'Non-GAAP Financial Measures' for reconciliation to nearest GAAP financial measure (net income available to common shareholders).


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EXECUTIVE SUMMARY

Business Overview

We are a Bermuda-based global provider of specialty lines insurance and treaty reinsurance products with operations in Bermuda, the United States, Europe, Singapore, Canada, Australia and Latin America. Our underwriting operations are organized around our two global underwriting platforms, AXIS Insurance and AXIS Reinsurance.

Our mission is to provide our clients and distribution partners with a broad range of risk transfer products and services and meaningful capacity, backed by significant financial strength. We manage our portfolio holistically, aiming to construct the optimum consolidated portfolio of funded and unfunded risks, consistent with our risk appetite and development of our franchise. We nurture an ethical, entrepreneurial and disciplined culture that promotes outstanding client service, intelligent risk taking and the achievement of superior risk-adjusted returns for our shareholders. We believe that the achievement of our objectives will position us as a leading global, diversified specialty insurance and reinsurance company, as measured by quality, sustainability and profitability. Our execution on this strategy in the first three months of 2013 included:

expansion of our agriculture reinsurance business;

the continued expansion of our accident & health line, which launched in 2010 and is focused on specialty accident and health products; and

the focus on lines of business with attractive rates.

Results of Operations
                                                  Three months ended March 31,
                                                 2013       % Change      2012

  Underwriting income:
  Insurance                                   $  40,989       288%     $  10,562
  Reinsurance                                   129,810       149%        52,127
  Net investment income                         108,908       (6%)       116,023
  Net realized investment gains                  44,478       207%        14,491
  Other expenses, net                           (12,628 )    (78%)       (57,366 )
  Net income                                    311,557       129%       135,837
  Preferred share dividends                      (8,741 )     (5%)        (9,219 )
  Loss on repurchase of preferred shares              -      (100%)       (4,621 )
  Net income available to common shareholders $ 302,816       148%     $ 121,997

  Operating income                            $ 227,492       68%      $ 135,734

nm - not meaningful

Underwriting Results

We recognized total underwriting income of $171 million for the first quarter of 2013, compared to $63 million for the first quarter of 2012. Underwriting income improved in each of our segments, with the primary driver being the absence, to date, of natural catastrophe and significant weather events in 2013. A number of other factors also contributed, including growth in net premiums earned, a lower acquisition cost ratio and a $9 million increase in net favorable prior year reserve development. Partially offsetting this was an increase in general and administrative expenses, consistent with the continued expansion of our global underwriting platform over the past year.


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The improvement in our insurance segment's first quarter underwriting income was largely driven by the absence of natural catastrophe and significant weather activity. Growth in net premiums earned and a reduction in the segment's acquisition cost ratio, driven by business mix changes, also contributed. Partially offsetting these favorable variances were a $9 million reduction in net favorable prior year reserve development and an increase in general and administrative expenses.

The absence of natural catastrophe and significant weather activity was also the most significant driver of improvement in our reinsurance segment's underwriting income. An $18 million increase in net favorable prior year reserve development and a reduction in the segment's acquisition cost ratio, driven by accruals for loss-sensitive features in underlying reinsurance contracts, also contributed.

Net Investment Income

The $7 million decrease in first quarter net investment income was largely attributable to a $10 million reduction in income from our fixed maturity portfolio, driven by lower reinvestment yields but partially offset by higher investment balances. Our alternative investment portfolio ("other investments") made significant contributions in both periods, generating $43 million and $40 million of income in the first quarters of 2013 and 2012, respectively.

Net Realized Investment Gains

During each quarter, we realized investment-related gains on sales [related to minor fixed income reallocations]. In addition, during the first quarter of 2013, we realized gains on the sale of equities, with proceeds used to fund additions to our other investments. Other-than-temporary impairment ("OTTI") charges were $3 million lower in the first quarter of 2013.

Other (Expenses) Revenues, Net

Depreciation in the Sterling and euro against the U.S. dollar drove foreign exchange gains of $35 million in the first quarter of 2013, related to the remeasurement of our foreign-denominated net insurance-related liabilities. During the first quarter of 2012, appreciation of those currencies drove the recognition of $20 million of foreign exchange losses. Excluding these foreign exchange-related amounts, other expenses increased by $11 million, with the primary driver being an increase in income tax expense associated with the improvement in underwriting income described above.

Loss on Repurchase of Preferred Shares

The loss on repurchase of preferred shares recognized in the first quarter of 2012 resulted from certain preferred equity transactions and related to the recognition of issue costs as an expense upon redemption. As these issue costs were recognized in shareholders' equity in the period of issuance, there was no impact on book value. Refer to Item 1, Note 9 to the Consolidated Financial Statements for further details.

Outlook

Pricing has improved consistently over the last one to two years in a number of our business lines, particularly in insurance lines, with variances present by geography, product and layer. Improvement in the insurance marketplace, particularly in the U.S., is also benefiting reinsurance lines. Broadly, global reinsurance market conditions remain stable.

We expect a continuation of this improvement in 2013 to compensate for the persistency of a low interest rate environment, especially in mid and longer-tail lines. For property and casualty business that has experienced rate increases for more than one year, rate increases have begun to positively impact our accident year underwriting results. For lines of business, such as professional lines and marine, which began to see rate increases during 2012, we expect a favorable impact on our accident year underwriting results to be recognized as we progress through the year. For other lines of business that have shown acceptable levels of profitability in recent years, we expect to maintain acceptable levels of profitability although competitive pressures could result in some pressure on accident year underwriting results. In addition to opportunities which we are constantly evaluating for growth throughout our product lines, we expect to recognize additional new business from our new agriculture reinsurance initiative during the second quarter.


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Financial Measures
We believe the following financial indicators are important in evaluating our
performance and measuring the overall growth in value generated for our common
shareholders:
                                               Three months ended and at March 31,
                                                   2013                    2012

  ROACE (annualized)(1)                                22.7 %                    9.7 %
  Operating ROACE (annualized)(2)                      17.1 %                   10.8 %
  DBV per common share(3)                  $          44.67         $          39.53
  Cash dividends declared per common share $           0.25         $           0.24
  Value creation(4)                        $           1.95         $           1.69

(1) Return on average common equity ("ROACE") is calculated by dividing annualized net income available to common shareholders for the period by the average shareholders' equity determined by using the common shareholders' equity balances at the beginning and end of the period.

(2) Operating ROACE is calculated by dividing annualized operating income for the period by the average common shareholders' equity determined by using the common shareholders' equity balances at the beginning and end of the period. Annualized operating ROACE is a non-GAAP financial measure as defined in SEC Regulation G. See 'Non-GAAP Financial Measures' for reconciliation to the nearest GAAP financial measure (ROACE).

(3) Diluted book value ("DBV") represents total common shareholders' equity divided by the number of common shares and diluted common share equivalents outstanding, determined using the treasury stock method. Cash settled awards are excluded from the denominator.

(4) Value creation represents the change in diluted book value per common share and dividends declared during the period.

Return on Equity
The improvement in operating ROACE was primarily attributable to the aforementioned increase in underwriting income. ROACE is also impacted by net realized investment gains, foreign exchange losses (gains) and the loss on repurchase of preferred shares. In the aggregate, these amounts contributed favorably to our first quarter 2013 results and adversely to our first quarter 2012 results, with the previously described variance in foreign exchange losses
(gains) being the primary driver of the difference. As a result, ROACE exceeded operating ROACE in the first quarter of 2013, while trailing it in the comparative quarter.
Diluted Book Value per Common Share
Our DBV per common share increased 13% from that of a year ago, primarily reflective of the generation of $676 million in net income available to common shareholders over the past 12 months. An overall improvement in valuations for our available-for-sale securities and the execution of common share repurchases at a discount to book value over the past year also contributed. Value creation
Taken together, we believe that growth in diluted book value per common share and common share dividends declared represent the total value created for our common shareholders. Growth in diluted book value was 4% in each of the first quarters of 2013 and 2012; dividends declared provided additional value for our shareholders.


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UNDERWRITING RESULTS - GROUP
--------------------------------------------------------------------------------

The following table provides our group underwriting results for the periods
indicated. Underwriting income is a pre-tax measure of underwriting
profitability that takes into account net premiums earned and other insurance
related income as revenues and net losses and loss expenses, acquisition costs
and underwriting-related general and administrative costs as expenses.
                                                                Three months ended March 31,
                                                              2013        % Change       2012

  Revenues:
  Gross premiums written                                  $ 1,746,483       15%      $ 1,525,168
  Net premiums written                                      1,570,440       15%        1,367,186
  Net premiums earned                                         874,039        3%          846,362
  Other insurance related income                                  595                        631

  Expenses:
  Current year net losses and loss expenses                  (492,913 )                 (555,922 )
  Prior year reserve development                               54,499                     45,232
  Acquisition costs                                          (145,491 )                 (168,397 )
  Underwriting-related general and administrative
  expenses(1)                                                (119,930 )                 (105,217 )

  Underwriting income(2)                                  $   170,799       172%     $    62,689

General and administrative expenses(1) $ 141,475 $ 123,652 Income before income taxes(2) $ 321,688 $ 138,685

(1) Underwriting-related general and administrative expenses is a non-GAAP measure as defined in SEC Regulation G. Our total general and administrative expenses also included corporate expenses of $21,545 and $18,435, respectively, for the three months ended March 31, 2013 and 2012; refer to 'Other Expenses (Revenues), Net' for additional information related to these corporate expenses. Also, refer to 'Non-GAAP Financial Measures' for further information.

(2) Group (or consolidated) underwriting income is a non-GAAP financial measure as defined in SEC Regulation G. Refer to Item 1, Note 2 to the Consolidated Financial Statements for a reconciliation of consolidated underwriting income to the nearest GAAP financial measure (income before income taxes) for the periods indicated above. Also, refer to 'Non-GAAP Financial Measures' for additional information related to the presentation of consolidated underwriting income.


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UNDERWRITING REVENUES

Premiums Written:

Gross and net premiums written, by segment, were as follows:
                       Gross Premiums Written
                    Three months ended March 31,
                  2013         Change        2012

  Insurance   $   596,715       14%      $   524,678
  Reinsurance   1,149,768       15%        1,000,490
  Total       $ 1,746,483       15%      $ 1,525,168

  % ceded
  Insurance            27 %   (1) pts             28 %
  Reinsurance           1 %    0 pts               1 %
  Total                10 %    0 pts              10 %

Net Premiums Written Three months ended March 31,

                  2013        % Change       2012

  Insurance   $   432,681       14%      $   378,614
  Reinsurance   1,137,759       15%          988,572
  Total       $ 1,570,440       15%      $ 1,367,186

Gross premiums written for the first quarter increased by $221 million, with growth emanating from both our reinsurance and insurance segments.

Our reinsurance segment recognized a $149 million increase, driven by targeted expansion of our agriculture business, which contributed $73 million of the total. The majority of the remaining growth emanated from Europe, where we increased our participation in the U.K. motor market (primarily on a quota share basis) and expanded our catastrophe portfolio; foreign exchange rate movements also contributed significantly to an increase in motor gross premiums written. In the U.S., a number of cedants restructured programs and increased retentions; this, as well as changes in renewal timing, drove a reduction in first quarter professional lines gross premiums written. However, we did recognize an increase in property business, driven by select new business opportunities in the U.S.

In our insurance segment, our accident & health line was the primary driver of the increase, contributing $29 million, or 41%, of the overall growth. Our property, professional lines and liability lines of business also contributed. Rate increases, new business opportunities and, to a lesser extent, renewal timing drove the increase for property. Continued expansion in Europe, Canada and Australia drove the growth in professional lines. Liability growth was driven by select new business opportunities and, to a lesser extent, rate increases in the U.S. wholesale excess casualty market.


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Net Premiums Earned:

Net premiums earned by segment were as follows:
                    Three months ended March 31,
                 2013                  2012                %
                                                         Change

  Insurance   $  401,880     46 %   $ 390,254     46 %     3%
  Reinsurance    472,159     54 %     456,108     54 %     4%
  Total       $  874,039    100 %   $ 846,362    100 %     3%

Changes in net premiums earned reflect period to period changes in net premiums written and business mix, together with normal variability in premium earning patterns.

Growth in net premiums earned for our insurance segment was primarily driven by recent growth in gross premiums written in our accident & health line. The expansion of our agriculture business in 2013 was the primary driver of the increase for our reinsurance segment.

UNDERWRITING EXPENSES

The following table provides a breakdown of our combined ratio:
                                                 Three months ended March 31,
                                                 2013        % Point       2012
                                                              Change

  Current accident year loss ratio              56.4 %         (9.3 )     65.7 %
  Prior year reserve development                (6.2 %)        (0.8 )     (5.4 %)
  Acquisition cost ratio                        16.6 %         (3.3 )     19.9 %
  General and administrative expense ratio(1)   16.2 %          1.6       14.6 %
  Combined ratio                                83.0 %        (11.8 )     94.8 %

(1) The general and administrative expense ratio includes corporate expenses not allocated to underwriting segments of 2.5% and 2.2%, respectively, for the three months ended March 31, 2013 and 2012. These costs are further discussed in the 'Other Expenses (Revenues), Net' section.

Current Accident Year Loss Ratio

The reduction in the current accident year loss ratio primarily reflected the absence, to date, of natural catastrophe and significant weather events in 2013.

Prior Year Reserve Development

Our favorable prior year reserve development was the net result of several
underlying reserve developments on prior accident years, identified during our
quarterly reserve review process. The following table provides a breakdown of
prior year reserve development by segment:
                    Three months ended March 31,
                          2013                  2012

  Insurance   $         5,598                 $ 14,897
  Reinsurance          48,901                   30,335
  Total       $        54,499                 $ 45,232


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Overview

The majority of the net favorable prior year reserve development in each period related to short-tail lines of business. Professional lines reinsurance business also contributed meaningfully in both periods, with liability reinsurance business contributed significantly in the first quarter of 2013.

The underlying exposures in the property, marine and aviation reserving classes within our insurance segment and the property reserving class within our reinsurance segment largely relate to short-tail business. Development from these classes contributed $30 million and $19 million of the total net favorable prior year reserve development in the first quarter of 2013 and 2012, respectively.

Our professional lines reinsurance business contributed further net favorable prior year reserve development of $8 million and $19 million in the first quarter of 2013 and 2012, respectively. This prior year reserve development was driven by increased weight being given to experience based actuarial methods in selecting our ultimate loss estimates for accident years 2009 and prior. As our loss experience has generally been better than expected, this resulted in the recognition of favorable development. Given the significance of the global financial crisis, we expect that loss development patterns for the 2007 through 2009 accident years may ultimately differ from other years; as a result, we are exercising a greater degree of caution in recognizing potential favorable loss emergence for those years.

In the first quarter of 2013, we began to give weight to actuarial methods that reflect our actual experience for liability reinsurance business, as we believe that our older accident years are now at a stage of expected development where such methods will produce meaningful actuarial indications. As a result, we recognized $16 million of net favorable prior year reserve development, primarily emanating from the 2004 through 2007 accident years.

We caution that conditions and trends that impacted the development of our liabilities in the past may not necessarily occur in the future. Estimates for Natural Catastrophe and Significant Weather Events The frequency and severity of natural catastrophe and significant weather activity in the 2010 through 2012 calendar years was high and our March 31, 2013 net reserve for losses and loss expenses continues to include estimated amounts for numerous events that occurred during this period. We caution that the magnitude and/or complexity of losses arising from certain of these events, in particular Storm Sandy, the Japanese earthquake and tsunami, the three New Zealand earthquakes and the Thai floods, inherently increases the level of uncertainty and, therefore, the level of management judgment involved in arriving at our estimated net reserves for losses and loss expenses. As a result, our actual losses for these events may ultimately differ materially from our current estimates.
Our estimated net losses for such catastrophe events are derived from ground-up assessments of our in-force contracts and treaties providing coverage in the affected regions. These assessments take into account the latest information available from clients, brokers and loss adjusters. In addition, we consider industry insured loss estimates, market share analyses and catastrophe modeling analyses, when appropriate. Our estimates remain subject to change, as additional loss data becomes available.
The $54 million of net favorable prior year development recognized during the first quarter of 2013 includes an aggregate $30 million of adverse development . . .

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