AXIS CAPITAL HOLDINGS LIMITED The following is a discussion and analysis of our results of operations for the
three and nine months ended
Page
Third Quarter 2020 Financial Highlights 47
Overview 48
Consolidated Results of Operations 51
Results by Segment:
i) Insurance Segment 53
ii) Reinsurance Segment 59
Net Investment Income and Net Investment Gains (Losses) 65 Other Expenses (Revenues), Net
67
Financial Measures 69
Non-GAAP Financial Measures Reconciliation 71
Cash and Investments 74
Liquidity and Capital Resources 77
Critical Accounting Estimates 80
Recent Accounting Pronouncements 80
Off-Balance Sheet and Special Purpose Entity Arrangements 80
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THIRD QUARTER 2020 FINANCIAL HIGHLIGHTS
Third Quarter 2020 Consolidated Results of Operations
•Net loss attributable to common shareholders of$73 million , or$(0.87) per common share and diluted common share •Operating loss(1) of$65 million , or$(0.77) per diluted common share(1) •Gross premiums written of$1.3 billion •Net premiums written of$0.8 billion •Net premiums earned of$1.1 billion •Estimated pre-tax catastrophe and weather-related losses, net of reinsurance and reinstatement premiums, of$240 million (insurance:$132 million and reinsurance:$108 million ), or 22.2 points on the current accident year loss ratio, primarily attributable to Hurricanes Laura and Sally, the Midwest derecho, wildfires across theWest Coast ofthe United States , theBeirut port explosion and other weather-related events. •Underwriting loss(2) of$135 million and combined ratio of 114.5% •Net investment income of$102 million •Net investment gains of$56 million •Foreign exchange losses of$61 million Third Quarter 2020 Consolidated Financial Condition •Total cash and investments of$15.6 billion ; fixed maturities, cash and short-term securities comprise 91% of total cash and investments and have an average credit rating of AA- •Total assets of$26.5 billion •Reserve for losses and loss expenses of$13.7 billion and reinsurance recoverable on unpaid and paid losses and loss expenses of$4.7 billion •Total debt of$1.3 billion and debt to total capital ratio(3) of 19.9% •Common shareholders' equity of$4.7 billion ; book value per diluted common share of$54.75 (1)Operating income (loss) and operating income (loss) per diluted common share are non-GAAP financial measures as defined in Item 10(e) of SEC Regulation S-K. The reconciliations to the most comparable GAAP financial measures, net income (loss) available (attributable) to common shareholders and earnings (loss) per diluted common share, respectively, and a discussion of the rationale for the presentation of these items are provided in 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Financial Measures Reconciliation'. (2)Consolidated underwriting income (loss) is a non-GAAP financial measure as defined in Item 10(e) of SEC Regulation S-K. The reconciliation to net income (loss), the most comparable GAAP financial measure, is presented in 'Management's Discussion and Analysis of Financial Condition and Results of Operations - Consolidated Results of Operations'. (3)The debt to total capital ratio is calculated by dividing debt by total capital. Total capital represents the sum of total shareholders' equity and debt. 47
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Table of Contents OVERVIEW
•implementing a global response strategy to help manage and mitigate the impact of COVID-19, spanning underwriting, capital management, investments, operations and employee welfare;
•increasing our relevance in a select number of attractive specialty lines insurance and treaty reinsurance markets, and continuing the implementation of a more focused distribution strategy;
•continuing to grow a leadership position in the areas of our business with
strong potential for profitable growth including
•continuing to re-balance our portfolio towards less volatile lines of business that carry attractive rates;
•continuing to improve in the effectiveness and efficiency of our operating platforms and processes;
•investing in data and technology capabilities, and tools to empower our underwriters and enhance the service that we provide to our customers;
•broadening risk-funding sources and the development of vehicles that utilize third-party capital; and
•growing our corporate citizenship program to give back to our communities and help contribute to a more sustainable future.
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Outlook
We are committed to leadership in specialty insurance and global reinsurance, where we have depth of talent and expertise. We believe we are well-positioned to succeed in the rapidly evolving marketplace. Through our hybrid strategy, we have developed substantial platforms, providing us with both balance and diversification, enabling us to take advantage of positive opportunities in either market to generate the most attractive risk-return portfolio for our shareholders. We believe our market positioning, underwriting expertise, best-in-class claims management capabilities, and strong relationships with our distributors and clients will provide opportunities for increased profitability, with differences among our lines driven by our tactical response to market conditions.
Rates, terms and conditions across virtually all insurance lines continued to see accelerating improvement. While the insurance market remains competitive with capacity and capital willing to support business with a broad range of return hurdles in certain pockets, there has been more consistent signs of firming. We expect many specialty segments will experience further pricing improvements as carriers assess pricing, portfolio construction and account preferences through the course of the year. In this competitive market environment, we are focusing on lines of business and market segments that are adequately priced, and we are trading off growth for profitability in other areas.
The reinsurance market is also experiencing acceleration in rates, and improved terms and conditions, as well as restructuring of treaties and demand for more reinsurance. This is being driven by meaningful adjustments to both supply and demand given the significant losses in recent years and mounting pressure in the industry with uncertainty of future loss costs, record low interest rates, and pressure on reserves in long-tail lines. We believe this will contribute to a healthier, more profitable market that still requires strong underwriting discipline and portfolio management. During the last few years, we have repositioned our portfolio while emphasizing strong underwriting and, at the same time, have achieved increased relevance with our clients in the markets where we choose to compete. The external environment is dynamic with reinsurance markets improving quickly, and conditions now expected to be favorable in several areas. These conditions allow for profitable growth in some areas and continued discipline in others. Overall, we believe our business is well-positioned for the current market environment.
We are encouraged by the pricing improvements that we are seeing across both the insurance and reinsurance segments and - at the same time - maintain a disciplined approach to our underwriting. While there is positive rate momentum across most lines and markets, not all lines are at adequate levels and, in multiple cases, more rate is needed to deliver adequate returns, particularly given recent high loss experience in the market, COVID-19, and lower interest rates. Where prices appropriately reflect these trends to deliver adequate profitability we will look to grow within our risk and volatility guidelines. With the most balanced book in the history of our company, we believe AXIS is well positioned to drive profitable growth within the current market environment.
Recent Developments Related to COVID-19
On
COVID-19, and its related impacts, are an emerging and evolving risk to which we are exposed from an underwriting, investments, capital and liquidity, operations and employee welfare perspective. We have implemented a global response strategy to help manage and mitigate these risks.
Our team continues to track the situation closely, including stress and scenario testing on existing underwriting and investment exposures, taking into consideration among other assumptions, the possible severity and duration of the outbreak.
Reserving
At
The estimate of net reserves for losses and loss expenses related to the COVID-19 pandemic is subject to significant uncertainty. This uncertainty is driven by the inherent difficulty in making assumptions around the impact of the COVID-19 pandemic due to the lack of comparable events, the ongoing nature of the event, and its far-reaching impacts to world-wide economies and the health of the global population.
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The estimate does not include an explicit estimate of potential losses arising from the indirect impacts of COVID-19 which would primarily impact third party coverages such as professional lines, liability and credit lines. We expect that it may take several quarters, or potentially several years, for the full impact of COVID-19 and its economic repercussions on these lines of business to fully emerge.
While we believe the overall estimate of net reserves for losses and loss
expenses is adequate for losses and loss adjustment expenses that have been
incurred at
Actual losses for this event may ultimately differ materially from current estimates.
Underwriting
As our industry and society continues to navigate the challenges brought on by
COVID-19, we are closely monitoring cash receipts from our customers and
reinsurers, giving due consideration to related directives issued by certain
government agencies. At
Our underwriters are reassessing risk appetite in light of the COVID-19 pandemic, in particular as it relates to exposure to communicable diseases, viruses, pathogens and other similar risks. We are taking appropriate steps to mitigate exposure to these types of risks, including increasing pricing and adding policy terms and conditions, including exclusions. During the remainder of 2020, premium volume may be adversely impacted due to the disruption to both society and the insurance and reinsurance marketplace on a global scale. Adjustments to premiums in subsequent periods could be material.
Capital and Liquidity
Following two debt issuances in 2019 that raised
We have a prudently constructed fixed maturity portfolio of
In the first quarter, we reduced our 2020 expense budget by approximately
We expect cash flows generated from operations, combined with liquidity provided by our investment portfolio, will be sufficient to cover cash outflows and other contractual commitments that become due within one year after the date that the financial statements are issued. We review each claim on an individual basis and where our policies provide coverage, we make payments to help our insureds overcome financial setbacks.
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