AXIS Capital Lags Expectations - Analyst Blog

AXIS Capital Holdings Ltd. (AXS) reported operating income of $1.33 per share, lagging the Zacks Consensus Estimate of $1.80. However, results compare favorably with operating income of $1.22 in the prior-year period. Operating income was $180.1 million in the quarter compared with $182.6 million in second-quarter 2009.

Including net realized investment gains of $24.7 million or 18 cents per share, the company reported net income of $204.9 million or $1.51, compared with $159.2 million or $1.06 in the prior year quarter. The year-ago quarter includes net realized investment losses of $23.5 million or 16 cents per share.

Net premiums earned were $735.0 million up 4% from $706.8 million in the prior year quarter. Net investment income declined 26% year-over-year to $82.6 million largely due to lower reinvestment yields as well as unfavorable foreign exchange translations.

Total revenues increased 7.9% year-over-year to $842.4 million in the quarter. Total reported revenues were slightly below the Zacks consensus estimate of $845 million.

Total expenses in the quarter were $622.1 million, up 3.6% year over year.

Combined ratio deteriorated by 580 basis points to 86.2% in the quarter.

Segment Update

Insurance Segment: Gross premium written increased 16% year over year to $613 million driven by strong property and marine lines of business.

Net premiums written increased 49% year-over-year to $466.9 million in the quarter due to impact of the changes in certain of ceded reinsurance programs.

Combined Ratio decreased by 360 basis points year-over-year to 86.2% in the quarter. Net favorable prior year reserve development of $79 million benefited the combined ratio.

Reinsurance Segment: Gross premiums written were $327 million, down 16% year-over-year largely due to shifting renewal dates on certain treaties in property and motor lines.

Net premiums written decreased 17% year-over-year to $322.1 million in the quarter.

Combined Ratio increased by 12.3% year-over-year to 81.8% in the quarter.

Financial Position

Cash and cash equivalents balance of AXIS Capital at the end of the quarter improved 38.6% to $1.2 billion from $0.9 billion at the end of second-quarter 2009.

Book value per share was $41.54 at Jun 30, 2010, up 9.8% from $37.84 at Dec 31, 2009.

Return on equity was 14.6% in the quarter compared with 17.4% in the prior year quarter.

Share Repurchase and Dividend

AXIS Capital spent $121 million to buy back 4 million common shares at an average price of $30.59. The company also spent $10 million to buy back 0.3 million common shares at an average price of $29.56 in July 2010.

As of Jul 30, 2010, AXIS Capital had $123 million of authorization remaining for common share repurchases through December 2011. The board of directors of AXIS Capital authorized a cash dividend of 21 cents per share. The dividend represents an increase of 5% from 20 cents authorized in the prior year quarter.

We believe conservative underwriting practices, solid capital position, and positive ratings from ratings agencies as well as share buyback program and dividend hike strongly position AXIS Capital, going forward.

However, the low investment yield environment as well as a challenging property and casualty market keeps us on the sidelines. We maintain our long-term Neutral recommendation on AXIS Capital. The Zacks #4 Rank (Sell) rating for the company indicates downward directional pressure on the shares over the near term.
 
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