Zacks_Analysts' Blog : Neutral on AXIS Capital - Analyst Blog

New business opportunities across several of AXIS Capital Holdings Ltd.‘s (AXS) lines of business and geography have helped the company to achieve growth in premium writings. Also, the company continues to remain strongly capitalized and focused on boosting shareholders value, through share buybacks and dividend hikes.

However, substantial exposure to losses resulting from natural disasters, man-made catastrophes and other catastrophic events and a slow top-line growth dwarfed some of the positives. We thus retain our Neutral rating on the company.

New business from the accident and health unit (attributable to continued investments made over the past several quarters), geographic expansion in Canada and Australia and strong performances from the renewable energy insurance team have helped the company to deliver 11% higher gross insurance premium while new business from motor reinsurance line aided the company to post an 11% increase in gross reinsurance premium in the second quarter.

AXIS Capital, in 2010, bought back 21.8 million shares of common stock for $699 million. As of June 30, the company is left with an authorization of $593 million. Also, the board approved a 9.5% increase in its quarterly dividend. The company’s total capitalization as of June 30 was $6.3 billion, including $1 billion of long-term debt and $500 million of preferred equity. Its financial flexibility remains very strong, with a debt to total capital ratio of 15.7%.

The company suffered huge catastrophe losses in the second quarter. The company suffered pre-tax net losses (net of reinstatement premiums) of $75 million owing to severe U.S. weather events in April and May and loss of $31 million  due to the aftershocks in New Zealand in the second quarter. The combined ratio deteriorated substantially to 98.9% from 86.2% in the year-ago quarter. The company noted that it has suffered catastrophe losses of $706 million till in the first half, almost 1% of the total industry loss.

Although the reinsurance market remains disciplined and prices are gaining momentum, the insurance market remains competitive. Additionally, the stressed economic condition is restricting significant top-line growth.

In the second quarter, though AXIS Capital comfortably surpassed the Zacks Consensus Estimate, results lagged the year-ago earnings as higher premiums, coupled with higher investment income, were more than offset by elevated expenses. The company also suffered hugely due to catastrophe losses.

The Zacks Consensus Estimate for third-quarter 2011 is 79 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, loss of 59 cents and earnings of $4.01 per share.

The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

Headquartered in Pembroke, Bermuda, AXIS Capital is a global provider of specialty lines of insurance and treaty reinsurance. It competes with ACE Limited (ACE).