AXIS Capital Beats Estimate - Analyst Blog

AXIS Capital Holdings Limited (AXS) reported third-quarter operating income of $1.22 per share, beating the Zacks Consensus Estimate of $1.16 by 6 cents. Results also compared favorably with an operating income of $1.00 per share in the prior-year period. Operating income was $163.5 million in the quarter compared with $151.6 million in the year ago quarter.

Including net realized investment gains of $75.3 million or 56 cents per share, the company reported net income of $238.8 million or $1.78 per share compared with $96 million or 70 cents in the prior-year quarter. The year-ago quarter included net realized investment losses of $247.5 million or $1.63 per share.

Net premiums earned were $758.9 million, up 7.5% from $706.0 million in the prior-year quarter. Net investment income declined 17.1% year over year to $111.8 million, largely due to lower reinvestment yields as well as lower returns from alternative investments.

Total revenue more than doubled, grossing $948.1 million in the quarter. Total reported revenue beat the Zacks Consensus target of $862 million.

Total expenses in the quarter were $690.1 million, up 29.9% year over year. The combined ratio deteriorated 1,240 basis points to 85.6% in the quarter.

Segment Update

Insurance Segment: Gross premiums written increased 5% year over year to $433.6 million, driven by strong credit and political risk lines of business.

Net premiums written increased 29% year over year to $309.3 million in the quarter due to the impact of changes in certain ceded reinsurance programs. The combined ratio deteriorated 880 basis points year over year to 79.3% in the quarter. Net favorable prior-year reserve development was $28 million in the quarter.

Reinsurance Segment: Gross premiums written were $317 million, down 12% year over year, largely due to lower liability reinsurance premiums as well as professional lines reinsurance premiums.

Net premiums written decreased 11% year over year to $317 million in the quarter. The combined ratio deteriorated 1,550 basis points year over year to 86.3% in the quarter.

Financial Position

Cash and cash equivalents of AXIS Capital at the end of the quarter improved 34% to $1.1 billion from $0.9 billion at the end of third-quarter 2009.

Total capitalization as of September 30, 2010, was $6.8 billion, including $1.0 billion of long-term debt and $0.5 billion of preferred equity. Book value per share was $44.59 as of September 30, 2010, up 7% from $41.54 as of June 30, 2010.

Return on equity was 12.6% in the quarter compared with 13.0% in the prior-year quarter.

Share Repurchase and Dividend

AXIS Capital spent $13 million to buy back 0.4 million common shares at an average price of $29.65. In September, the company's board of directors authorized a new $750 million common share repurchase program. As of October 29, 2010, AXIS Capital had $870 million of authorization remaining for common share repurchases through December 2012.

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, a solid capital position, and positive stances from rating agencies as well as share buyback programs and dividend hikes strongly position AXIS Capital, going forward.

However, the low investment yield environment as well as a challenging property and casualty market keep us on the sidelines. We maintain our “Neutral” recommendation on AXIS Capital. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.