AXIS Capital Holdings Limited (AXS) reported third-quarter operating earnings of 74 cents per share, lagging the Zacks Consensus Estimate by 2 cents. Results also compared unfavorably with $1.41 earned in the prior-year period. Operating income was $95 million in the quarter, plummeting 49.7% from $189 million in third 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 catastrophe losses, which totaled $91 million, net of reinstatement premiums.
Including net realized investment gains of $56.6 million or 44 cents per share and foreign exchange gains of $60.7 million or 48 cents per share, the company reported a net income of $212.1 million or $1.66 per share compared with $238.8 million or $1.78 per share in the prior-year quarter.
The year-ago quarter included net realized investment gains of $75.3 million or 56 cents per share and foreign exchange losses of $25.5 million or 19 cents per share.
Operational Performance
Gross premiums written in the quarter increased 11% year over year to $835 million.
Net premiums earned were $840 million, up 11% from $759 million in the prior-year quarter.
Net investment income dipped 56% year over year to $49 million, largely due to reduced valuations from hedge funds and credit funds.
Total revenue grossed $948.1 million in the quarter, almost in line with the year ago quarter. Top line however surpassed the Zacks Consensus Estimate of $930 million.
Total expenses in the quarter were $723.1 million, increasing 4.8% from $690.1 million in the year ago quarter, due largely to an increase in acquisition costs and general and administrative expenses.
The combined ratio deteriorated to 91.5% in the quarter from 85.6% in the year ago quarter.
Segment Update
Insurance Segment: Gross premiums written increased 14% year over year to $493 million, driven by new business generated by new accident & health unit, geographic expansion and new renewable energy initiative.
Net premiums earned increased 16%. The increase stemmed from changes in ceded reinsurance purchasing and the increase in gross premiums written.
Third quarter underwriting income dipped 39% over prior year quarter to $41 million, in the quarter under review. Combined ratio deteriorated to 89.4% from 79.3% in the year ago quarter.
Reinsurance Segment: Gross premiums written in the third quarter was $342 million, improving 8% from the year-ago period driven by strength at trade credit and bond reinsurance lines.
Net premiums earned increased 7% in the quarter.
Underwriting income in the quarter was $50 million, down 16.7% from $60 million in the year-ago period. Combined ratio deteriorated to 89.5% in the quarter from 86.3% in the year-ago quarter.
Financial Position
Cash and cash equivalents of AXIS Capital at the end of the quarter was up 0.6% to $935.2 million from $929.5 billion at the end of 2010.
Total capitalization as of September 30, 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 $37.06 as of September 30, 2011, inched up 0.8% from $36.78 as of June 30, 2011.
Return on equity was 7.8% in the quarter compared with 14.6% in the year ago quarter.
Share Repurchase and Dividend
AXIS Capital had not bought back any shares during the quarter. On October 31, 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 a third-quarter 2011 operating income of $2.22 per share, which came in ahead of the Zacks Consensus Estimate by a substantial 43 cents. Earnings improved 10% from $2.01 per share earned in the year-ago quarter.
Better-than-expected results stemmed from higher premiums and investment income. The quarter experienced solid current accident year underwriting results benefiting from both underwriting discipline and risk management. Acquisitions also contributed to the results.
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 #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.
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