AXIS Hurt By Financial Markets Volatility
Bermuda-headquartered AXIS Capital Holdings Limited this week reported net income available to common shareholders for the third quarter of 2011 of $212 million, or $1.66 per diluted common share, compared with $239 million, or $1.78 per diluted common share, for the third quarter of 2010.
For the nine months ended September 30, 2011, AXIS Capital reported a net loss to common shareholders of $71 million, or $0.58 per diluted common share, compared with net income available to common shareholders of $556 million, or $4.04 per diluted common share, for the corresponding period in 2010.
Operating income1 for the third quarter of 2011 was $95 million, or $0.74 per diluted common share, compared with $189 million, or $1.41 per diluted common share, for the third quarter of 2010. For the nine months ended September 30, 2011, AXIS Capital reported an operating loss of $221 million, or $1.82 per diluted common share, compared with operating income of $429 million, or $3.12 per diluted common share, for the first nine months of 2010.
Third Quarter Highlights
- Gross premiums written increased 11% to $835 million;
- Net premiums written increased 8% to $673 million;
- Net premiums earned increased 11% to $840 million;
- Combined ratio of 91.5%, compared to 85.6%;
- Major catastrophe-related losses in the quarter included:
- Estimated pre-tax net losses (net of reinstatement premiums) of $65 million related to Hurricane Irene, Tropical Storm Lee and Danish flooding; and
- A $26 million (net of reinstatement premiums) aggregate increase in our pre-tax net loss estimate for first half 2011 catastrophes, including the February New Zealand earthquake and June aftershock (“New Zealand II and III”, respectively) and the Japanese earthquake and tsunami.
- Net favorable prior year reserve development of $78 million, pre-tax, benefiting the combined ratio by 9.4 points, compared with $72 million in the prior year quarter, benefiting the combined ratio by 9.5 points;
- Net investment income of $49 million, a decrease of 56%;
- Shareholders’ equity of $5.4 billion; and
- Diluted book value per common share of $37.06, a modest increase from $36.78 at June 30, 2011 but down 6% from $39.37 at December 31, 2010.
Commenting on the third quarter 2011 financial results, John Charman, CEO and president of AXIS Capital, stated: “In the quarter, we achieved a modest increase in diluted book value per share and generated operating income of $95 million, driven by strong underwriting results producing a combined ratio of 91.5%. Our net written premiums increased by more than 8% in the quarter, as our underwriting units fought hard to find opportunities to grow profitably.
“Our results were, however, adversely impacted by a reduction in the valuation of our alternative investments due to the extreme volatility in the financial markets as well as continued pressure on new money yields.
“In the short-tail and specialty lines, we are seeing the market momentum moving away from price reductions toward gradual and deliberate price increases. As the market factors in investment yields, which are at all-time lows, we expect this positive momentum to accelerate as well as to spread more broadly into the professional and casualty lines.
“We have the capital and the embedded experience, as well as the organizational breadth and depth, to strongly and nimbly address opportunities that present themselves if market pricing meets or exceeds levels commensurate with our view of risk. Because conditions in the various business lines we write are mixed and are likely to evolve at various speeds, we expect to balance deployment of capital in underwriting opportunities with share repurchase through organic earnings.”
Segment Highlights
Insurance Segment
AXIS’ insurance segment reported gross premiums written in the quarter of $493 million, up 14% from the third quarter of 2010. For the nine months ended September 30, 2011, gross premiums written were $1.6 billion, up 13% from the prior period. These increases were largely driven by new business generated by our new accident & health unit, our geographic expansion (including our Australian and Canadian operations) and our new renewable energy initiative. Net premiums earned increased 16% and 20%, respectively, for the third quarter and year to date, due to the aforementioned increases in gross premiums written and changes in our ceded reinsurance purchasing effected in the second quarter of 2010.
Ther insurance segment reported underwriting income of $41 million for the quarter, compared to $67 million for the third quarter of 2010. The current quarter’s underwriting result reflected a combined ratio of 89.4%, compared with 79.3% in the prior year quarter. The segment’s current accident year loss ratio increased from 55.8% in the third quarter of 2010 to 64.8% this quarter and includes $38 million in pre-tax net losses (net of reinstatements) related to Hurricane Irene and Tropical Storm Lee. Net favorable prior period reserve development was $33 million, or 8.8 points, this quarter compared with $28 million, or 8.7 points, in the third quarter of 2010. The increase in general and administrative expenses reflected the continued build-out of the segment’s global platform over the past year. For the nine months ended September 30, 2011, we recognized underwriting income of $13 million, compared with $142 million for the prior year; the difference was largely attributable to a higher level of natural catastrophe activity.
Reinsurance Segment
AXIS’ reinsurance segment reported gross premiums written in the quarter of $342 million, up 8% from the third quarter of 2010. Premium growth in the quarter primarily related to trade credit and bond reinsurance. For the nine months ended September 30, 2011, gross premiums written were $1.8 billion, up 8% from the comparable period in 2010, with the increase primarily driven by the motor and trade credit and bond reinsurance lines. Net premiums earned increased 7% for both the third quarter and year to date, consistent with the increases in gross premiums written.
Underwriting income for the reinsurance segment was $50 million for the quarter, compared to $60 million in the third quarter of 2010. The segment’s combined ratio increased from 86.3% in the third quarter of 2010 to 89.5% for the third quarter of 2011.
The segment’s third quarter 2011 and 2010 current accident year loss ratios 73.5% and 71.8%, respectively, were both impacted by catastrophe-related losses. Third quarter 2011 results included estimated pre-tax net losses (net of reinstatement premiums) of $27 million related to Hurricane Irene and Danish flooding. In addition, the segment’s estimated aggregate pre-tax net losses (net of reinstatement premiums) related to first half 2011 major named catastrophe events increased by $26 million; a $38 million increase in the combined estimates for New Zealand II and III was partially offset by a reduction of $12 million in the estimate for the Japanese earthquake and tsunami. Comparatively, third quarter 2010 results included $85 million related to New Zealand I. Additionally, the company recognized a higher level of attritional losses in the third quarter of 2011, primarily related to aggregate property reinsurance of regional insurance companies in the US and reflecting the frequency and severity of weather events in 2011.
Net favorable prior period reserve development was $46 million, or 9.7 points, this quarter compared with $44 million, or 10.0 points, in the third quarter of 2010.
For the nine months ended September 30, 2011, our reinsurance segment reported an underwriting loss of $355 million, compared with income of $134 million for the comparable period of 2010. The significant increase in the level of natural catastrophe activity during 2011 was the primary driver of this variance.
Investments
Net investment income for the third quarter was $49 million, a 51% decrease relative to the second quarter of this year and a 56% decrease relative to the third quarter of 2010. These decreases were primarily driven by reduced valuations from hedge funds and credit funds due to the current turmoil in the global financial markets. Net investment income from fixed maturities was $82 million this quarter, compared with $90 million in the prior year quarter. This decline was due to lower reinvestment yields, offset partially by a higher fixed maturity investment balance.
For the quarter, net realized investment gains were $58 million compared to $77 million in the prior year quarter.
Capitalization/Shareholders’ Equity
Total capitalization at September 30, 2011 was $6.4 billion, including $1.0 billion of long-term debt and $0.5 billion of preferred equity.
At September 30, 2011, diluted book value per common share on a treasury stock basis was $37.06, a modest increase from $36.78 at June 30, 2011 but a decline from $39.37 at December 31, 2010.
The company did not repurchase any common shares under its authorized repurchase plan during the quarter. At October 31, 2011, AXIS had approximately $593 million of remaining authorization for common share repurchases through December 31, 2012.
AXIS Capital is a Bermuda-based global provider of specialty lines insurance and treaty reinsurance with shareholders’ equity at September 30, 2011 of $5.4 billion and locations in Bermuda, the United States, Europe, Singapore, Canada and Australia.
Its operating subsidiaries have been assigned a rating of “A+” (“Strong”) by Standard & Poor’s and “A” (“Excellent”) by A.M. Best. AXIS Capital and AXIS Specialty Finance LLC have been assigned senior unsecured debt ratings of A- (stable) by Standard & Poor’s and Baa1 (stable) by Moody’s Investors Service.
