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AXS > SEC Filings for AXS > Form 10-Q on 31-Oct-2013All Recent SEC Filings

Show all filings for AXIS CAPITAL HOLDINGS LTD

Form 10-Q for AXIS CAPITAL HOLDINGS LTD


31-Oct-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

Third Quarter 2013 Financial Highlights 39 Executive Summary 40 Underwriting Results - Group 44 Results by Segment: For the three and nine months ended September 30, 51 2013 and 2012
i) Insurance Segment 51
ii) Reinsurance Segment 54 Other Expenses 56 Net Investment Income and Net Realized Investment Gains/Losses 57 Cash and Investments 60 Liquidity and Capital Resources 63 Critical Accounting Estimates 66 New Accounting Standards 66 Off-Balance Sheet and Special Purpose Entity Arrangements 66 Non-GAAP Financial Measures 67



THIRD QUARTER 2013 FINANCIAL HIGHLIGHTS

Third Quarter 2013 Consolidated Results of Operations

Net income available to common shareholders of $137 million, or $1.23 per share basic and $1.21 diluted

Operating income of $197 million, or $1.74 per diluted share(1)

Gross premiums written of $905 million

Net premiums written of $716 million

Net premiums earned of $945 million

Net favorable prior year reserve development of $80 million

Estimated natural catastrophe and weather-related pre-tax net losses (net of related reinstatement premiums) of $51 million; relating to worldwide weather-related loss events

Underwriting income of $153 million and combined ratio of 86.3%

Net investment income of $103 million

Net realized investment losses of $5 million

Third Quarter 2013 Consolidated Financial Condition
Total cash and investments of $14.8 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 $19.9 billion

Reserve for losses and loss expenses of $9.5 billion and reinsurance recoverable of $1.9 billion

Total debt of $996 million and a debt to total capital ratio of 14.7%

No share repurchases during the quarter. At October 30, 2013, remaining authorization under the repurchase program approved by our Board of Directors was $409 million

Common shareholders' equity of $5.2 billion and diluted book value per common share of $44.60

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


Table of Contents


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 Re.

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 nine months of 2013 included:

expansion of our agriculture reinsurance business;

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

the addition of a number of underwriting and support staff as we continue to build-out the Company's global platform, explore opportunities in new and existing lines of business and grow our business internationally;

announcement of the expansion of the Company's global underwriting platform, facilitated through the establishment of a new syndicate that we expect to start operations at Lloyd's from 2014 and provide us with access to Lloyd's worldwide licenses and an extensive distribution network. The new syndicate has been approved in principle by Lloyd's Franchise Board and will be managed by Asta Managing Agency Ltd. for the first three years under a turnkey arrangement;

entering into a reinsurance agreement to obtain catastrophe protection for our insurance and reinsurance segments through a catastrophe bond structure with Northshore Re Limited (refer 'Underwriting Results - Group' for more detail); and

the continued focus on lines of business with attractive rates.

In addition, we issued $225 million of 5.50% Series D preferred shares and used a portion of the net proceeds to redeem the $100 million of 7.25% Series A preferred shares outstanding. The execution of these transactions reduced the weighted average annual dividend rate on our preferred equity capital base by 57 basis points to 6.385%, with a minimal impact on our financial leverage.

During September 2013, A.M. Best upgraded the financial strength rating of each of our principal operating insurance and reinsurance subsidiaries to a financial strength rating of A+ (Stable) (refer 'Liquidity and Capital Resources - Financial Strength Ratings' for more detail).


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Results of Operations
                                       Three months ended September 30,           Nine months ended September 30,
                                        2013         % Change      2012            2013        % Change      2012

  Underwriting income:
  Insurance                        $    88,722         16%      $  76,391     $    74,226       (33%)     $ 111,509
  Reinsurance                           64,366        (18%)        78,608         259,584        15%        225,919
  Net investment income                103,429          -%        103,638         295,450         -%        294,110
  Net realized investment gains         (4,708 )        nm         50,803          56,004       (41%)        95,699
  (losses)
  Other expenses                      (101,174 )       31%        (77,292 )      (139,348 )     (18%)      (170,186 )
  Net income                           150,635        (35%)       232,148         545,916        (2%)       557,051
  Preferred share dividends            (13,514 )       55%         (8,741 )       (30,452 )       3%        (29,487 )
  Loss on repurchase of preferred            -          -%              -          (3,081 )     (78%)       (14,009 )
  shares
  Net income available to common   $   137,121        (39%)     $ 223,407     $   512,383         -%      $ 513,555
  shareholders

  Operating income                 $   196,677         (2%)     $ 200,640     $   474,215         6%      $ 449,207

nm - not meaningful

Underwriting Results

Total underwriting income for the three months ended September 30, 2013 was $153 million, and was comparable to $155 million for the three months ended September 30, 2012. A $19 million increase in pre-tax natural catastrophe and weather-related losses (net of related reinstatement premiums) was offset by a $20 million increase in net favorable prior year reserve development.

The insurance segment incurred an insignificant amount of natural catastrophe and weather-related losses during the three months ended September 30, 2013 with $5m incurred during the the three months ended September 30, 2012. The insurance segment also reported a $2m increase in favorable prior year reserve development.

The reinsurance segment incurred $51 million (net of reinstatement premiums) of natural catastrophe and weather-related losses during the three months ended September 30, 2013 compared to $27 million (net of reinstatement premiums) incurred during the three months ended September 30, 2012. The decrease in the reinsurance underwriting result was partially offset by an increase in favorable prior year reserve development of $17 million.

Total underwriting income was $334 million for the nine months ended September 30, 2013 and was broadly comparable to $337 million for the nine months ended September 30, 2012. The pre-tax natural catastrophe and weather-related net losses (net of related reinstatement premiums) increased by $71 million, while favorable prior year development decreased by $4 million during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. These decreases were almost fully offset by the increase in the amount of net premium earned and decreases in the acquisition ratio.

The decrease in our insurance segment's underwriting result for the nine months ended September 30, 2013 was primarily driven by a $39 million increase in natural catastrophe and weather-related losses (net of reinstatement premiums) and a $36 million reduction in net favorable prior year reserve development. These factors were partially offset by the increase in net premiums earned, and reductions in the current year accident loss ratio (after adjusting for the natural catastrophe and weather-related events) and acquisition cost ratios.

Underwriting income for our reinsurance segment increased by $34 million for the nine months ended September 30, 2013, compared to nine months ended September 30, 2012 and included a $32 million increase in net favorable prior year reserve development. The reinsurance segment also benefited from an increase in net earned premiums and a reduction in the acquisition cost ratio, which more than offset a $32 million increase in natural catastrophe and weather-related losses.


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Net Investment Income

Net investment income was $103 million for the three months ended September 30, 2013 and was comparable to $104 million for the three months ended September 30, 2012. While net investment income of $295 million for the nine months ended September 30, 2013 was comparable to $294 million for the nine months ended September 30,2012, there were underlying variances by asset class. An increased allocation to hedge funds drove a $15 million increase in income from other investments. Offsetting this increase was a $10 million reduction in income from our fixed maturity portfolio, driven by the prevailing low interest rate environment but partially offset by higher investment balances.

Net Realized Investment Gains (Losses)

During each period presented, we realized investment related gains on sales related to minor fixed maturity reallocations. In addition, during the nine months ended September 30, 2013, we realized gains on the sale of equities, with proceeds used to fund additions to our other investments. Net losses from the change in fair value of our investment derivatives during the three months ended September 30, 2013 were higher than in the three months ended September 30, 2012 due to $5 million in net losses relating to interest rate swaps which were introduced during the current quarter to hedge some of the interest rate risk of our fixed maturity portfolio.

Other Expenses

Each period presented was impacted by foreign exchange losses resulting from the re-measurement of our foreign denominated net insurance related liabilities; excluding these foreign exchange related amounts, other expenses decreased by $9 million and $34 million for the three and nine months ended September 30, 2013 respectively. Performance related compensation costs were the primary driver of the variance for the three months ended September 30, 2013. Separation payments and accelerated and incremental share-based compensation expenses totaling $34 million were recognized in corporate expenses during the second quarter of 2012, in conjunction with our senior leadership transition, and were the primary driver of the variance for the nine months ended September 30, 2013.

Preferred Share Dividends and Loss on Repurchase of Preferred Shares

The increase in preferred share dividends for the three and nine months ended September 30, 2013 was driven by the increase in preferred equity capital at September 30, 2013 compared to September 30, 2012 following the preferred equity transactions executed in the first half of 2013. During the first half of 2013 we issued $225 million of 5.50% Series D preferred shares. The increase in preferred share dividends for the three and nine months ended September 30, 2013 includes the accrual of the dividends relating to the new Series D issue which are payable in the fourth quarter, and is partially offset by the reduction in the weighted average annual dividend rate on our preferred equity capital base described above (refer 'Business Overview'). The Series D preferred share proceeds were partially used to redeem the $100 million of 7.25% Series A preferred shares outstanding. The redemption of the Series A preferred shares resulted in a recognition of a loss on repurchase of preferred shares, reflecting initial issue costs of $3 million, for the nine months ended September 30, 2013. As these issue costs were recognized in shareholders' equity in the period of issuance, the loss on repurchase of preferred shares did not impact book value.

During the nine months ended September 30, 2012, in conjunction with the issuance of our 6.875% Series C preferred shares in the first quarter of 2012, we redeemed $150 million of our 7.25% Series A preferred shares and repurchased $247 million of our 7.50% Series B preferred shares via tender offer. The Series B tender offer closed in the second quarter of 2012, resulting in the recognition of a $9 million loss. Of this amount, $7 million related to the premium paid to repurchase the shares in advance of the first eligible redemption date. The remaining $2 million loss recognized in the second quarter, as well as a $5 million first quarter 2012 loss associated with the Series A redemption, related to the recognition of the proportionate share of issue costs as an expense; as these issue costs were recognized in shareholders' equity in the period of issuance, these amounts did not impact book value.

Outlook

The overall insurance markets continue to improve on average, but with increasing variation by accounts, lines of business and geographies. In insurance, average price increases have slowed compared to the increases observed during the previous quarters with the U.S. market continuing to see the strongest improvements. In reinsurance, the market is generally stable, with the exception of the U.S. catastrophe market where an unprecedented influx of capacity had a significant downward impact on premium rates. Despite the pressures on rates across reinsurance lines, profitability generally remains adequate, and where necessary, underlying insurance market rate improvements are accruing to the benefit of the reinsurers.


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We continue to grow our business in the areas that we consider most attractive and continue to pursue diversified growth in select specialty areas across both segments, most notably with our accident and health line and our agriculture reinsurance initiative.

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       Nine months ended and at
                                                           September 30,                   September 30,
                                                       2013             2012           2013             2012

  ROACE (annualized)(1)                                 10.9 %            16.9 %        13.1 %            13.3 %
  Operating ROACE (annualized)(2)                       15.6 %            15.2 %        12.1 %            11.6 %
  DBV per common share(3)                          $   44.60         $   43.57     $   44.60         $   43.57
  Cash dividends declared per common share         $    0.25         $    0.24     $    0.75         $    0.72
  Value creation(4)                                $    2.18         $    3.26     $    2.38         $    6.21

(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. Refer '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
ROACE is impacted by net realized investment gains (losses), foreign exchange losses and losses on repurchase of preferred shares. In the three months ended September 30, 2013, net realized gains were significantly lower and foreign exchange losses significantly higher compared to the three months ended September 30, 2012 resulting in a reduction in the ROACE. The comparable variances for those two balances were less pronounced in the nine month period ended September 30, 2013.
Diluted Book Value per Common Share
Our DBV per common share increased 2% from that of a year ago, primarily reflective of the generation of $494 million in net income available to common shareholders over the past twelve months which was partially offset by the reduction in the unrealized gains on investments included in accumulated other comprehensive income due to the rise in sovereign yield curves during the first half of 2013. 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. During the three months ended September 30, 2013, the total value created consisted primarily of our diluted net income per share of $1.21, unrealized gains on investments included in other comprehensive income and dividends declared. During the nine months ended September 30, 2013, our diluted net income per share of $4.41 in addition to dividends declared, more than offset the impact of the upward shift in sovereign yield curves.


Table of Contents


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 September 30,           Nine months ended September 30,
                                        2013         % Change      2012           2013        % Change       2012

  Revenues:
  Gross premiums written           $   904,797          7%      $ 847,686     $ 3,871,085       14%      $ 3,387,229
  Net premiums written                 716,389         10%        650,599       3,280,236       16%        2,819,360
  Net premiums earned                  945,242         10%        862,447       2,765,154        8%        2,559,414
  Other insurance related income           725                        953           1,756                      1,884

  Expenses:
  Current year net losses and loss    (581,557 )                 (503,083 )    (1,759,483 )               (1,601,255 )
  expenses
  Prior year reserve development        80,035                     60,431         176,648                    180,274
  Acquisition costs                   (173,682 )                 (158,796 )      (488,892 )                 (483,589 )
  Underwriting-related general and
  administrative
  expenses(1)                         (117,675 )                 (106,953 )      (361,373 )                 (319,300 )

  Underwriting income(2)           $   153,088         (1%)     $ 154,999     $   333,810       (1%)     $   337,428




  General and administrative       $   140,699                  $ 134,611     $   431,207                $   419,595
  expenses(1)
  Income before income taxes(2)    $   156,665                  $ 242,297     $   557,416                $   572,365

(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 $23,024 and $27,658 for the three months ended September 30, 2013 and 2012, respectively and $69,834 and $100,295 for the nine months ended September 30, 2013 and 2012, respectively; refer to 'Other Expenses' 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. Refer to 'Non-GAAP Financial Measures' for additional information related to the presentation of consolidated underwriting income.


Table of Contents

UNDERWRITING REVENUES

Premiums Written:

Gross and net premiums written, by segment, were as follows:
                                        Gross Premiums Written
                Three months ended September 30,       Nine months ended September 30,
                 2013         Change        2012        2013        Change       2012

  Insurance    $574,778         9%        $529,678   $1,952,548      13%      $1,729,365
  Reinsurance  330,019          4%        318,008     1,918,537      16%      1,657,864
  Total        $904,797         7%        $847,686   $3,871,085      14%      $3,387,229

  % ceded
  Insurance      32%         (5) pts        37%          29%       (3) pts       32%
  Reinsurance     2%          2 pts          -%          1%           -           1%
  Total          21%         (2) pts        23%          15%       (2) pts       17%

                                         Net Premiums Written
                Three months ended September 30,       Nine months ended September 30,
                 2013        % Change       2012        2013       % Change      2012

  Insurance    $393,627        18%        $332,591   $1,385,892      18%      $1,176,443
  Reinsurance  322,762          1%        318,008     1,894,344      15%      1,642,917
  Total        $716,389        10%        $650,599   $3,280,236      16%      $2,819,360

Gross premiums written for the three months ended September 30, 2013 increased by $57 million, and were driven by growth in our insurance segment with a smaller contribution from the reinsurance segment.

The increase in our insurance segment was driven by continued growth in liability business and was attributable to select new business opportunities and, to a lesser extent, rate increases in the U.S. wholesale excess casualty market. Professional lines showed an increase driven by new business, as we continue to expand our operations globally.

The increase in our reinsurance segment was driven by our professional lines with new business being the primary driver. The remainder of the variance was largely attributable to continued increases in the agriculture line (reflecting our agricultural initiative during the year) which was partially offset by reductions in the property line due to a reduction in reinstatement premiums received and the motor line due to premium adjustments.

For the nine months ended September 30, 2013, consolidated gross premiums written increased by $484 million; $261 million was attributable to our reinsurance segment, with the remaining $223 million generated by our insurance segment. Our agriculture reinsurance initiative and our accident and health line in the insurance segment contributed $128 million and $89 million of these amounts, respectively.

Outside of the agriculture initiative our reinsurance segment also reported growth in our property line of business primarily due to new business and the expansion of worldwide client relationships, increases in our catastrophe line of business due to the expansion of our European portfolio and growth in our . . .

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