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February 8, 2012
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AXIS Capital Holdings Limited (AXS) reported fourth-quarter operating earnings of 53 cents per share, striding ahead of the Zacks Consensus Estimate by 5 cents. Results were way behind $1.37 earned in the prior-year period. Operating income was $67 million in the quarter, plummeting 63.2% from $182 million in fourth quarter 2010.
Higher premiums were more than offset by lower investment income and elevated expenses inducing lower earnings in the quarter. The company also suffered high catastrophe losses due to the Thai floods, which weighed on the results.
Including net realized investment losses of $3.6 million, or 3 cents per share and foreign exchange gains of $16.5 million, or 13 cents per share, the company reported a net income of $80.1 million, or 63 cents per share, compared with $264.3 million, or $1.99 per share, in the prior-year quarter.
The year-ago quarter included net realized investment gains of $77 million, or 58 cents per share and foreign exchange gain of $4.9 million, or 4 cents per share.
AXIS Capital incurred operating loss of $1.26 per share in full year 2011, narrower than the Zacks Consensus Estimate of a loss of $1.31. Results however compared unfavorably with operating income of $4.49 per share in 2010.
Including net realized investment gains of $110 million, or 93 cents per share, foreign exchange gains of $43.6 million, or 34 cents per share, and adjustment for anti-dilutive securities of 6 cents, the company reported a net income of $9.4 million, or 7 cents per share, in 2011 compared with $819.8 million, or $6.02 per share, in 2010.
Operational Performance
Gross premiums written in the quarter increased 5% year over year to $666.5 million. Full year gross premiums written improved 9.2% over 2010 to $4.1 billion.
Net premiums earned in the fourth quarter were $846.7 million, up 11.8% year over year while full year net premiums earned increased 12.5% year over year to $2.9 million.
Net investment income declined 5.5% year over year to $102 million, largely due to lower reinvestment yields on fixed maturities. Full year net investment income declined 11% over 2010 to $362.4 million largely due to lower returns from alternative investments and lower reinvestment yields on fixed maturities.
Total revenue grossed $945.7 million in the quarter, inching up 0.3% from the year-ago quarter. The top line modestly surpassed the Zacks Consensus Estimate of $943 million.
Full year total revenue grossed $3.8 billion, ahead of the Zacks Consensus Estimate of $3.67 billion and 7% higher than the year-ago revenue.
Total expenses in the quarter were $849 million, up 29% year over year, due largely to an increase in acquisition costs and higher net losses and loss expenses. Full year total expense climbed up 40.8% over 2010.
The combined ratio deteriorated to 100.5% in the quarter from 85.6% in the year-ago quarter. Full year combined ratio deteriorated to 112.3% from 88.7% in 2010.
Segment Update
Insurance Segment: Gross premiums written increased 5% year over year to $493 million in the quarter, driven by growth in newer geographies (including Canada and Australia) and business lines. Full year gross premiums written rose 11% over 2010.
Net premiums earned increased 13%. The increase stemmed from changes in ceded reinsurance purchasing and the increase in gross premiums written. Full year net premiums earned climbed 18% over 2010.
Third quarter underwriting income dropped 67.6% over the prior-year quarter to $22 million in the quarter under review. Full year underwriting income plummeted to $35 million from $210 million in 2010 due to huge natural catastrophe activity.
The combined ratio deteriorated to 94.1% from 79.5% in the year-ago quarter while full year combined ratio deteriorated to 97.7% from 82.8% in 2010.
Reinsurance Segment: Gross premiums written in the fourth quarter was $145 million, improving 5.1% from the year-ago period. Full year gross premiums written increased 8% on the back of strength at motor and trade credit and bond reinsurance lines.
Net premiums earned increased 11% in the quarter while full year net premiums earned increased 8% over 2010.
The segment incurred an underwriting loss of $7 million in the quarter, compared with an underwriting income of $65 million in the year-ago quarter. Full year loss came in at $362 million compared with income of $199 million in 2010.
The combined ratio deteriorated to 101.5% in the quarter from 84.9% in the year-ago quarter. Full year combined ratio was 119.2 %, up from 88.6% in 2010.
Financial Position
Cash and cash equivalents of AXIS Capital at the end of the quarter was up 3.6% to $1.08 billion from $1.05 billion at the end of 2010.
Total capitalization as of December 31, 2011, was $6.4 billion, including $1.0 billion of long-term debt and $0.5 billion of preferred equity.
Book value per share was $38.08 as of December 31, 2011, up 3% from $37.06 as of September 30, 2011.
Return on equity was 5.5% in the quarter compared with 13.9% in the year-ago quarter.
Net cash flows from operations were $199 million for the quarter and $1.2 billion for 2011.
Share Repurchase and Dividend
During the fourth quarter, AXIS Capital spent $50 million to buy back 1.6 million shares at an average price of $31.07 per share. On February 6, 2012, the company had approximately $544 million remaining under its authorization for common share repurchases through December 31, 2012.
The board declared a dividend of 24 cents in the quarter, a 4% year-over-year increase.
Peer Comparison
ACE Limited (ACE), which competes with AXIS Capital, reported a fourth-quarter 2011 operating income of $1.94 per share, which came in ahead of the Zacks Consensus Estimate by 13 cents. Earnings declined 5% from $2.05 per share earned in the year-ago quarter.
The quarter suffered huge catastrophe losses of $155 million, which jumped more than threefold. However, premiums increased on the back of acquisitions, global accident and health insurance business, and property and casualty business in Asia and Latin America. Net investment income also experienced an uptick.
Full year operating earrings came in at $6.97 per share, striding ahead of the Zacks Consensus Estimate of $6.83. Results compare unfavorably with $7.79 earned in 2010.
Our Take
We believe conservative underwriting practices, a solid capital position and positive ratings from ratings agencies as well as share buyback programs and dividend hikes position AXIS Capital for reasonable growth going forward. Also, the company’s substantial investment in the underwriting platform will help widen its scale of operations.
However, the company remains heavily exposed to losses resulting from natural disasters, man-made catastrophes and other catastrophic events.
The quantitative Zacks #5 Rank (short-term Strong Sell rating) for the company indicates downward pressure on the shares over the near term.
Read the full analyst report on "ACE"
Read the full analyst report on "AXS"
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