AXIS Capital Holdings Limited (AXS) reported second-quarter operating earnings of 65 cents per share, comfortably exceeding the Zacks Consensus Estimate of 52 cents. Results, however, compared unfavorably with $1.13 earned in the prior-year period. Operating income was $83.1 million in the quarter, plummeting 46% from $152.8 million in second quarter 2010.
Higher premiums coupled with higher investment income were more than offset by elevated expenses inducing lower earnings in the quarter. The company also suffered due to catastrophe losses, which totaled $101 million, net of reinstatement premiums.
Including net realized investment gains of $36.6 million or 28 cents per share and foreign exchange losses of $18.6 million or 14 cents per share, the company reported a net income of $101.1 million or 79 cents per share compared with $204.8 million or $1.51 per share in the prior-year quarter. The year-ago quarter included net realized investment gains of $24.7 million or 18 cents per share and foreign exchange losses of $27.4 million or 20 cents per share.
Operational Performance
Gross premiums written in the quarter increased 11% year over year to $1.05 billion on the back of benefits from new accident and health initiative, performance strength of the renewable energy insurance team in London and P&C operations in Canada and Australia.
Net premiums earned were $840 million, up 14% from $735 million in the prior-year quarter.
Net investment income increased 21% year over year to $100 million, largely due to higher returns from alternative investments.
Total revenue increased 16% year over year to gross $977.6 million in the quarter. The improvement was largely due to higher premiums earned as well as higher net investment income.
Total expenses in the quarter were $864.9 million, surging 39% from $622 million in the year ago quarter, due largely to a whopping increase in net losses and loss expenses and acquisition costs.
The combined ratio deteriorated to 98.9% in the quarter from 86.2% in the year ago quarter. Excluding the catastrophe events, combined ratio deteriorated to 84.0% from 82.7% in the year ago quarter.
Segment Update
Insurance Segment: Gross premiums written increased 11% year over year to $682 million, driven by new business generated by new accident & health unit, geographic expansion and new renewable energy initiative.
Net premiums earned increased 19%. The increase stemmed from changes in ceded reinsurance purchasing and the increase in gross premiums written.
Second quarter underwriting income dipped 52% over prior year quarter to $20 million, in the quarter under review. Combined ratio deteriorated to 94.2% from 86.2% in the year ago quarter.
Reinsurance Segment: Gross premiums written in the first quarter was $364 million, improving 11% from the year-ago period driven by strength at motor, trade credit and bond and liability reinsurance lines.
Net premiums earned increased 11% in the quarter.
Underwriting income in the quarter was $9 million, substantially lower than $79 million in the year-ago period. Combined ratio deteriorated to 98.2% in the quarter from 81.8% in the year-ago quarter.
Financial Position
Cash and cash equivalents of AXIS Capital at the end of the quarter declined 6.3% to $871.1 million from $929.5 billion at the end of 2010.
Total capitalization as of June 30, 2011, was $6.3 billion, including $1.0 billion of long-term debt and $0.5 billion of preferred equity.
Book value per share was $36.78 as of June 30, 2011, inched up 0.6% from $36.57 as of June 30, 2010.
Return on equity was 7.0% in the quarter compared with 12.4% in the year ago quarter.
Share Repurchase and Dividend
AXIS Capital had not bought back any shares during the quarter. On August 2, 2011, the company had approximately $593 million remaining under its authorization for common share repurchases through December 31, 2012.
The board declared a dividend of 23 cents in the quarter, a 9.5% year-over-year increase.
Peer Comparison
ACE Limited (ACE), which competes with AXIS Capital, reported second-quarter operating income of $2.01 per share, ahead of the Zacks Consensus Estimate by 33 cents. Better-than-expected results stemmed from higher premiums and investment income.
Our Take
We believe conservative underwriting practices, solid capital position and positive ratings from ratings agencies as well as share buyback programs and dividend hikes strongly position AXIS Capital 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.
We maintain our “Neutral” recommendation on AXIS Capital. The quantitative Zacks #4 Rank (short-term Sell rating) for the company indicates downward pressure on the shares over the near term.
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