AXIS Capital Holdings Limited (NYSE:AXS) Q4 2022 Earnings Call Transcript

AXIS Capital Holdings Limited (NYSE:AXS) Q4 2022 Earnings Call Transcript January 26, 2023

Operator: Hello and welcome to the Fourth Quarter 2022 AXIS Capital Earnings Call. All participants will be in listen only-mode. Please note today’s event is being recorded. And now I would like to turn the conference over to Miranda Hunter, Head of Investor Relations. Ms. Hunter, please go ahead.

Miranda Hunter: Thank you, operator. Good morning, ladies and gentlemen. I’m happy to welcome you to our conference call to discuss the financial results for AXIS Capital for the fourth quarter and year ended December 31, 2022. Our earnings press release and the financial supplement were issued last night after market closed. If you would like copies, please visit the Investor Information section of our website at axiscapital.com. We have set aside an hour for today’s call, which is available as an audio webcast on our website. With me today are Albert Benchimol our President and CEO; Pete Vogt, our CFO; and Vince Tizzio, CEO, Specialty Insurance and Reinsurance and our future group CEO. Before I turn the call over to Albert, I will remind everyone that the statements made during the call including the question-and-answer section which are not historical facts may be forward-looking statements.

Forward-looking statements including but not limited to our comments on January renewals involve risks, uncertainties and assumptions. Actual events or results may differ materially from those projected in our forward-looking statements, due to a variety of factors including the risk factors set forth in our company’s most recent report on Form 10-K and our other reports the company filed with the SEC. This includes the additional risks identified in the cautionary note regarding forward-looking statements in our earnings press release issued last night. We undertake no obligation to publicly update or revise any forward-looking statements. In addition to this presentation may include non-GAAP financial measures. Reconciliations are included in our earnings press release and our financial supplement.

And with that I’ll turn the call over to Albert.

Albert Benchimol: Thank you, Miranda and welcome to your first AXIS conference call and good morning everyone and thank you for joining us. As we commented in our press release, this was a strong quarter to cap a milestone year for AXIS. Over the past few years during these investor calls, we’ve shared our journey with you as we work diligently and steadfastly to reposition AXIS to be a leading specialty underwriter and create a stronger more resilient book of business, while placing the company on a pathway to generating lasting profitable growth. To accomplish this, we’ve significantly transformed our business. We drove consistent growth in attractive specialty markets, reduced our exposure to catastrophes and created a faster, more integrated and more efficient operating model.

We’re a very different company today than we were a few years ago, a focused specialty underwriter delivering steadily improving results. To be clear, we’re not declaring victory and we’re committed to continue increasing our growth, our profitability and our efficiency. But we are progressing into 2023 with accelerating momentum underpinned by years of improved underlying performance, strong positions in our chosen markets and rising demand for specialty coverages. We’re confident that we’ll not only continue to build on this progress but we’re well on our way to taking the business to even higher levels. Let’s get to the results. So notwithstanding another year, where the industry was challenged by catastrophes, financial and social inflation and Russia’s invasion of Ukraine, excluding the impact of mix we’ve improved in our key performance metrics.

During the year, we generated record premium production, reduced our expense ratio, grew our underwriting income by 35% and improved our overall combined ratio by 1.7 points to 95.8%. Our specialty insurance business continued to produce excellent results for the quarter and for the year. For the year, we grew our specialty insurance gross written premiums by 15%, net earned premiums by 18% and underwriting income by 46%, and produced an all-in combined ratio of 89.6%, improving both our loss and expense ratios. For AXIS Re, notwithstanding the finalization of our exit from property and property catastrophe markets mid-year as we focus the business on specialty reinsurance, our market presence remains strong and relevant as indicated by recent renewal activity.

I’m pleased to report that we performed very well the 1/1 renewals. We maintained our disciplined underwriting approach and standards, exited non-target business, all the while remaining close to our customers and brokers. In the end, we successfully balanced substantially all the non-property-related renewals that met our thresholds. We estimated losing less than $10 million of desired renewals due to our exits from property and property cat reinsurance where our shares were reduced. In the end of our of our addressable non-property-related renewals, we estimate a 90% retention ratio, 12.5% rate increases and 7% new business with more than half of the new business coming from targeted credit and surety, cyber and A&H lines. So overall, we achieved mid single-digit growth ex-FX on the renewed part of the portfolio.

We’re encouraged these statistics indicate that our decision to exit the reinsurance property and casualty markets did not materially impact our ability to access and retain the business that we wanted. Our performance during the 1/1 renewal speaks to the value that AXIS Re brings to the market through the knowledge and expertise of our underwriters and the deep relationships that we share with our customers and brokers. We operate in a competitive environment for sure and the year is only beginning. But I believe that our performance in recent renewals demonstrates that we have a strong focused reinsurance business within a broad specialty underwriting company. Importantly, we are in the markets where we want to be and where we have strong positioning that allows us to take advantage of what we expect will be continued favorable conditions for the foreseeable future buoyed by rising demand for specialty coverage.

We’ve achieved our plan of rebalancing our business in 2022. On a pro forma basis specialty insurance made up 71% of our gross written premium and we should report in excess of 75% this year. Moreover, we’re taking concerted actions to sustain our growth and build upon our momentum, while delivering increased value to our customers. This includes the launch of our dedicated wholesale division with expanded products and resources, investments in production in product innovation and digital capabilities, expansion into lower middle markets and efforts to further leverage our global platform to benefit our strategic partners. And we’ve made this progress, while cultivating a strong team and a purpose-driven culture that’s earned AXIS recognition as the best place to work.

We’re confident that the best days are ahead for AXIS and we look to the future with excitement. On a personal note, it’s been a real privilege to lead AXIS during this time of transformation. As we announced last month after 11 years as President and CEO of AXIS, I’ll transition my responsibilities to Vince Tizzio on May four at our Annual General Meeting. In Vince, we have a fantastic leader who I’m confident has the vision, industry knowledge, grit and tenacity to lead AXIS to even greater levels of success. I’m incredibly excited for the future of this company and I’m confident that with Vince at the wheel, AXIS will be in very capable hands. On that note, I’m sure you’re eager to hear from both Pete and Vince. And so given the CEO transition we’ve adjusted our typical call format.

I’ll now pass the floor to Pete who will share our financial summary. Vince will then deliver commentary on the markets. I’ll come back with some closing comments and then we’ll have our Q&A. But I want to close by saying that for AXIS, I firmly believe that our moment has arrived. And with that I’ll pass the floor to Pete. Pete?

Pete Vogt: Thank you, Albert and good morning, everyone. This was an excellent quarter for AXIS. During the quarter, we generated net income available to common shareholders of $41 million and an annualized ROE of 4.2%. Operating income was $167 million with an annualized operating ROE of 16.9%. Diluted book value per share increased $3.45 or almost 8% to $46.95 at year end. This was principally driven by net unrealized gains reported in other comprehensive income and net income generated. This was partially offset by common share dividends declared. As noted in our press release, adjusted for net unrealized losses on available-for-sale fixed maturities, the book value per diluted common share would be $55.49. The company produced consolidated current accident year combined ratio ex-cat and weather of 90% an increase of 0.5 point over the prior year quarter and a consolidated current accident year loss ratio ex-cat and weather of 55.5% an increase of 1.2 points.

Both of these metrics were impacted by mix of business. This quarter’s pre-tax cat and weather-related losses net of reinsurance and reinstatement premiums were $64 million or 4.7 points. This compares to $54 million or 4.3 points in 2021. Out of the $64 million of cat losses $32 million or 2.4 points was due to weather primarily attributable to Winter Storm Elliot. Additionally, we had $23 million attributable to the COVID-19 pandemic. These losses were attributable to a handful of A&H contract A&H catastrophe XOL contracts, in Japan. We have no exposure to other countries in that region. We also had $9 million of losses due to the Russia-Ukraine war. These losses were in the insurance segment, with approximately two-third associated with political risk and one-third associated with marine war.

Net favorable prior year development was $8 million. This was equally split between the segments. As announced in December, we were pleased to complete loss portfolio transfer reinsurance agreements with RiverStone International for reserves in our professional lines and liability lines in the insurance portfolio. These reserves relate to businesses, that we had generally exited years ago. We acquired the protection at a cost substantially in line with our carried reserves. The net financial impact of the transaction in the quarter was a cost of $11 million, including adverse prior year reserve development of $5 million and acquisition costs of $6 million. We have included an exhibit at the back of our investor financial supplement, which illustrates the income statement financial components of the transaction.

As noted in the press release issued by RiverStone, on December 15, the transaction covers net reserves for losses and loss expenses of approximately $400 million and provides ground-up cover to a policy limit of $605 million. The consolidated acquisition cost ratio was 20.6% in the quarter, an increase of 0.2 points over the prior year and this was driven by an increase in the reinsurance segment, largely offset by a decrease in the insurance segment. The consolidated G&A expense ratio was 13.9%, a decrease of 0.9 point over the prior year quarter. This was largely attributable to good expense control and net earned premium growth. We continue to focus on our expense controls. This can be seen as our quarterly G&A expense growth rate was only 20% of our net premiums earned growth rate.

The normalized G&A expense ratio in the quarter was 11.9%. This was two points lower than the current quarter G&A expense ratio, largely due to corporate expenses of $15 million attributable to our CEO transition and performance-related compensation costs. Reorganization expenses of $9 million were mainly related to the exit from catastrophe and property reinsurance lines of business. Reorganization expenses are excluded from operating income. And lastly, on a consolidated basis, fee income from strategic capital partners was $12 million in the quarter compared to $27 million in the prior year. Before I discuss the segments, I’d like to bring to your attention some updates that we made to our lines of business for disclosure purposes. You will see on Page 8 of the financial supplement in the insurance segment, we have made the following updates.

Cyber is now a separate line of business. It was previously reported within professional lines. Property and terrorism lines of business have been combined. The new line of business will be referred to as property, as our terrorism business mainly covers physical damage and business interruption following an act of terrorism. And lastly, we combined Marine and Aviation into a single line of business. In addition, also on Page 8 within the reinsurance segment, the catastrophe property and engineering lines of business are now identified as runoff lines. This update will apply to all our public company disclosures. Prior year amounts have been reclassified in the business descriptions in our financial supplement also reflect these updates. Now, let’s move on to our discussion on the segments.

I’ll start in insurance. Once again, insurance had a strong quarter, with good performance across a number of metrics. Gross premiums written increased by 12% to $1.5 billion, making it our highest production quarter ever. The increase primarily related to new business and favorable rate changes in property and liability lines as well as new business in marine and aviation lines and accident and health lines. The current accident year loss ratio ex-cat and weather decreased by 1.5 points principally due to improved loss experience in property, marine and aviation and cyber lines. On a run rate basis, it’s better to look at the full year loss ratio. The acquisition cost ratio decreased by 0.3 point in the fourth quarter. Excluding the loss portfolio transfer, the acquisition cost ratio would have been 17.9%, a decrease of one point from last year.

The decrease is primarily related to a decrease in profit commission costs. The underwriting-related G&A expense ratio decreased by three points in the fourth quarter, mainly driven by an increase in net premiums earned and a decrease in performance-related compensation costs and personnel costs. Now let’s move on to the reinsurance segment. I’ll remind everyone that the fourth quarter is the smallest quarter for gross premiums written for reinsurance, representing just over 10% of the segment’s annual gross premiums. Reinsurance segment’s gross premiums written increased by $40 million or 16%, compared to the prior year quarter. The increase was primarily attributable to increased line sizes and new business in credit and surety, as well as favorable premium adjustments, notably in motor and professional lines.

These increases were partially offset by a decrease in catastrophe lines attributable to the exit from this line of business, as well as a decrease in liability lines, due to timing differences. The current accident year loss ratio ex-cat and weather, increased by over six points, principally due to changes in mix of business associated with the exit from catastrophe and property lines of business. Additionally, we reviewed our loss cost trend assumptions and given the current inflationary environment, we increased the year-to-date loss ratios in our motor liability and professional lines of business, and this impacted the quarter by over one point. For a better view on the ongoing run rate of our reinsurance business, I would look at the full year loss ratio for the business, ex-property and cat, which is 67.3%, essentially flat from 2021.

The acquisition cost ratio increased by 1.2 points, primarily related to changes in business mix, driven by our exit from catastrophe and property lines of business and adjustments attributable to loss-sensitive features, driven by improved loss performance, mainly in the credit surety business. This was partially offset by the impact of retrocessional contracts. The underwriting-related G&A expense ratio increased by one point, mainly driven by a decrease in fees related to arrangements with strategic capital partners. This was partially offset by a decrease in personnel costs, related to our exit from catastrophe and property lines of business. Net investment income was $147 million, compared to net investment income of $128 million for the fourth quarter of 2021.

In the quarter, investment income from fixed maturities was $105 million, up over 57% from $67 million in the fourth quarter last year, as the yield on the portfolio has increased 160 basis points from 1.9% to 3.5% over the last 12 months. At year-end, as I just noted, the fixed income portfolio had a book yield of 3.5%, at a duration of three years. Our market yield was 5.6%, 210 basis points above the book yield. I would note that since year-end, rates have declined a bit and our market yield is now at 5.25%. Given the duration of our portfolio and the current market yields, we would expect net investment income from fixed maturities to be at least $150 million greater in 2023, than we reported in 2022. Overall, the continued improvement in most operating metrics and positive momentum in our core underwriting book, this was a strong quarter for AXIS.

That summarizes our fourth quarter results. And with that, I’ll turn the call over to Vince for market commentary.

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Vince Tizzio: Thank you, Pete, and thank you, Albert for your earlier comments and kind words. In just a few short months, I will succeed Albert as our company President and CEO. I’m honored to do so and count it a privilege to advance our company strategy, along with our colleagues and build upon further our stakeholders’ trust. I’d like to provide a general view of the market, an overview of our rate performance across our businesses and share our outlook. Let’s just jump in. Within our insurance segment, conditions remain largely favorable, across most of our measures of production, new business writings. And in most classes, we continue to see rates generally in line or ahead of loss cost trends. As evidenced in our financial results, our distribution partners importantly continue to seek the value of our underwriting specialists, our broad product set and our little platform.

Let me provide more color on our insurance market. During the quarter there were a number of factors at play with different business lines performing at different points in the underwriting cycle. As an example, we saw firming conditions in many lines such as property, liability, credit and political risk all of which achieved rate increases in the fourth quarter that were higher than their annual averages. Further, as Albert has commented in the past quarters we continue to see deceleration and in some instances flat to negative rate change in the public D&O and financial institution markets. As a final example, in cyber we’re seeing a moderation in rate achievement, though pricing increases still remain at double-digits. I’ll speak more to this last point in a bit.

Overall, conditions are favorable as market dislocations continue to drive more risks into the specialty channel. For AXIS, we’re continuing to pursue a highly targeted and disciplined underwriting strategy across every line we write, across all channels of our distribution. We remain focused on driving ambitious profitable growth in attractive markets as we continue to provide outstanding service to our broker partners. Let’s get into the numbers in more detail. Within our insurance book the average rate increases was nearly 6% for the quarter and close to 9% for the year, marking 21 straight quarters of positive rate change and bringing the cumulative rate change for our insurance book to almost 60% since the beginning of 2018. By region, international produced rate increases of 8% for the quarter and nearly 10% for the year.

In North America, rate increases were 4% for the quarter and nearly 8% for the year. Looking at rate by underwriting division AXIS wholesale which is a key area of investment for AXIS generated increases of more than 8% in the quarter and 7% in the yea, these results were fueled by a resurgence of pricing across property and select casualty lines. Property rates were up more than 10% in the quarter and are over 8% for the year. We anticipate this momentum to continue as the market reacts favorably. Casualty lines are averaging an increase of more than 7%, with primary casualty strongest at 11% for the quarter and more than 9% for the year. Excess Casualty is up over 4% for both the quarter and year. I noted earlier that in cyber, we saw a deceleration in rate momentum but continued to experience firm market conditions with an average rate increase of nearly 22%.

This is compared to an average year-to-date increase of almost 50%. I will add that within AXIS we have benefited from compounded rate increase of almost 140% over these past three years. Within professional lines we saw a decrease of 2% in the fourth quarter. As Albert has remarked in prior calls, public D&O is seeing the most challenging conditions with rates down more than 22% year-to-date. This is driven by a number of factors including the reduction of IPO and de-SPAC business, while traditional business is exhibiting more modest reductions. Given the changing factors we are writing much less public D&O business than we did this time last year, while closely adhering to our risk selection and pricing adequacy standards. Importantly, our London-based professional lines unit which does not write U.S. public D&O is both growing and achieving average rate increases.

To give a complete picture on the rate front, during the quarter, 88% of our insurance portfolio renewed flat to up. And for that — for the year-end that figure was 91%. Overall, new business pricing metrics have been at least as strong if not better than renewal pricing. In summary, we are well positioned to capitalize on favorable conditions across our key insurance markets including, a resurgence of rate in certain lines as mentioned. We have deep relationships with our customers, our distribution partners, a strong product set to service all of our channels of distribution, and we look forward to the continuance of these results. Let’s turn to reinsurance. Within reinsurance given the shifts in our property catastrophe market this quarter was marked by significant disruption.

As Peter noted the — for AXIS the fourth quarter only represents approximately 10% of our reinsurance portfolio. Nevertheless, pricing in our reinsurance business approximated 11% within the quarter. We’re observing a market reflecting strong steering in the form of pricing, terms and conditions and yes capacity deployment as evidenced by the 1/1 renewal cycle that went down to the very end. I’ll concentrate my comments on the 1/1 renewals where for us 45% of our business renewed at that point. Albert spoke earlier about our performance during the 1/1 renewals. I’ll spend some time now talking about what we saw on the rate front. Across our reinsurance book, pricing was up more than 12% with most lines of business seeing positive rate momentum.

By way of line motor performed the strongest with a 24% increase; marine was up 17% and we produced double-digit increases in A&H at 13%, liability at 11%. Professional lines was up 8% and credit and surety were flat. To the credit of our underwriting team, we approached the 1/1 renewal season with a focused and disciplined underwriting strategy grounded in our commitment to our chosen markets and with a clear and responsive communication stance with our trading partners. Stepping back and looking at our business in total, we continue to be encouraged by the favorable rate environment we see across the vast majority of lines that we write and we anticipate that these conditions will last throughout 2023. We are committed to answering the call from our customers for specialty products, services and capabilities.

With that, I’ll turn it back over to Albert.

Albert Benchimol: Thank you Vince and Pete. So there you have it. As we look at the year ahead, our specialty insurance business continues to fire on all cylinders and we’re investing to create new avenues of revenue growth within our key markets. The reinsurance market is firming up and we’re active and engaged participants in our chosen specialty lines. And across both businesses, we’re generally seeing favorable market conditions that should sustain throughout the year. So why don’t we open up our Q&A session. Operator?

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Q&A Session

Operator: Yes. Thank you. At this time, we will begin the question-and-answer session. And this morning’s first question comes from Brian Meredith with UBS.

Brian Meredith: Yeah. Thanks. First, Albert just all the best in your retirement and the next stage of your, I guess, your career here. First question for you is just maybe digging a little bit on this LPT cover that you bought. A little more understanding as to why you bought it. Obviously, there’s a cost to it not only the costs you booked in the quarter, but just the lack of investment income you’re going to have on the cash and invested assets that you transfer over to NSTAR . So maybe a little bit more behind why you thought this was necessary?

Albert Benchimol: Thank you, Brian, and thank you for your comment. So Pete is going to get into the details. But bottom line, we felt that this was opportunistically a very good move for us. First of all from a capital efficiency perspective. It’s ROE accretive, because of the fact that we’re releasing capital, which is helpful. But more importantly we — these are lines of business that have given us some issues in the past. We think they’re highly exposed to inflation. And so we felt that given the terms that we had that this was an attractive transaction for us. But Pete do you want to expand on that?

Pete Vogt: Yeah. I guess, what I would expand on is just overall Brian I think it really reduces our reserve risk going forward. This is really centered in the insurance pro lines and liability from 2019 accident year and prior to that. It includes a number of product lines that we’ve exited and it’s just good to get that uncertainty off of our balance sheet. And we did it with a good trading partner at what we think was a good price point, so. And as Albert noted it is accretive to the ROE and it does help free up some capital. So all-in-all, I think these are opportunistic and we just felt that this was a good opportunity to actually move some of those reserves off.

Brian Meredith: Makes sense. Thanks. And then the second question just curious what is your ceded reinsurance program going to look like in 2023? And how could that affect, call it I know you had a pretty decent acquisition cost in your insurance business in the quarter. Could we see higher acquisition cost ratio there on some of your quota shares? How is it going to affect your appetite for property business going forward? Just maybe a little color on what you’re expecting that to look like?

Albert Benchimol: Yeah. I appreciate that. So the first thing I would say is that most of our large programs do not renew at 1/1. So as you may be familiar, our property program renews in May and then we’ll have a professional and casualty programs in the middle of the year. But we certainly renewed a lot of our specialty programs. We renewed our cyber program, so we can give you some insights on that. By and large, we came in with the capacity that we wanted. We came in by and large within the pricing that we expected and that we budgeted for. The one area where we gave up a little bit was on the cyber program. We gave up a point of ceding commission, but that’s frankly because we wanted to achieve a 60% quota share and we felt that that was the right thing to do.

But by and large, I would say that we did not get any surprises. We’ve got an incredible team on our ceded side. They stay in touch with our reinsurers all year long. And so we had a pretty good idea of where the capacity was what the pricing would be, and so we’re very satisfied that we got the reinsurance program that we needed in place. I think going forward, everything that I hear is that obviously, we’ll pay market conditions, but we think that we ought to be among the better treated cedents given the history of profitability of our relationships on the reinsurance side. But we’ll do those as we get into May and June and we’ll tell you about it when we do that. But that’s already been incorporated in our modeling. It’s been incorporated in our pricing and we feel very good about where we are.

Pete, anything you want to add to that?

Pete Vogt: I would just reiterate that last point Brian is one we’ve already reflected anticipated increased costs or lower ceding commissions in the pricing that we’re actually out in the market with on the insurance side. So our guys are on the front foot there.

Brian Meredith: Great. Thank you.

Operator: Thank you. And the next question comes from Yaron Kinar with Jefferies.

Yaron Kinar: Good morning, everybody. And I’ll jump in on the congratulations and best of luck to Albert on retirement. Hopefully, you get to enjoy watching the weather as a spectator. I guess my first question goes to the catastrophe losses. Have you run an exercise to try and determine what the natural weather catastrophe losses would have been for AXIS had you not exited the property and property cat reinsurance book?

Pete Vogt: Hey, Yaron, this is Pete. We haven’t gone back and said gee what would the net cat losses have been if we had not actually exited the program. I guess what I can tell you is, what I did look at, because I could definitely see, it was an interest in the market out there. But if we look at our actual cat loss ratio in the fourth quarter this time, it was materially below our average cat loss ratio in the fourth quarter whether you look over a five year horizon or a 10-year horizon. And that is adjusting that cat loss ratio to take out the impact of COVID in 2020 which we did put some up in the fourth quarter of 2020. But I mean if I look at an all-in group number, we were down more than 50% from where we had been historically.

And I think that’s probably the best metric to look at rather than trying to redo the book. I would just say on a true numbers basis, when you go and look at our fourth quarter’s average the last five years 2017 to 2021 or the last 10 2012 to 2021. And our loss ratio was down 9 points and 6.6 points on a cat basis. And I think that’s sort of a testament to where we’re going with our view on natural cash going forward.

Albert Benchimol: So Pete, correct me if I’m wrong, but I think if I — if we just take a look at nat cat to loan in this quarter it’s like around 2-point something nat cat loss ratio?

Pete Vogt: Yeah.

Albert Benchimol: So I think that gives you a sense of our exposure to nat cats compared to where we would have been in the past.

Yaron Kinar: Okay. Thank you. And then Pete, I think you mentioned that you took — you raised the loss picks made some inflation adjustments, I guess in the reinsurance portfolio. Were there any adverse prior year development associated with that?

Pete Vogt : Yes, Yaron. Right now, obviously, we don’t have the Q out, so you can’t see it. But when we file the K, you’ll see all the details by line of business what the PYD was in the quarter. So I won’t get into specifics here. But we really feel good about the view, we’ve got for inflation, as I mentioned in reinsurance, we moved the quarter up by about 1.25 points. And I do think that you’ll see some adjustments when the K comes out, as well as the global loss triangles, which we will also get out in the first half of this year.

Yaron Kinar : Okay. Maybe if I can sneak one last one in. Can you maybe talk about the source of the COVID-related losses in the quarter?