Risk-Reward Balances AXIS Capital

We continue to retain our Neutral rating on AXIS Capital Holdings Ltd. (AXS - Analyst Report) given the substantial exposure to catastrophe losses and low interest rate environment weighing on net investment income.

The company suffered huge catastrophe losses in the third quarter. The company suffered pre-tax net losses (net of reinstatement premiums) of $91 million largely due to Hurricane Irene, Tropical Storm Lee and Danish flooding. Underwriting income also dropped 29% year over year in the quarter. The combined ratio deteriorated substantially to 91.5% from 85.6% in the year-ago quarter.

Low interest rate environment continues to weigh on net investment income and the third quarter was no exception. A reduction in the valuation of alternatives portfolio stemming from volatile financial markets coupled with low interest rates reduced net investment income by 55.8%. The lower net investment income was also a primary reason of lower operating earnings in the third quarter.

Counting on the positives, new business opportunities across several of AXIS Capital’s lines of business and geography have helped the company to achieve growth in premium writings.

New business from accident and health unit, geographic expansion in Canada and Australia and strong performances from renewable energy insurance team have helped the company to deliver 11% higher gross insurance premium while better performance at trade credit and bond reinsurance lines as well as an increase in Latin American surety business enabled the company to post an 8% increase in gross reinsurance premium in the third quarter.

AXIS Capital continues to boost shareholder value, through share buybacks and dividend hikes. Recently in December, with an intention to return more value to its shareholders, the board of directors authorized a 4% hike in its quarterly dividend.

Though the company did not buy back any shares during the third quarter, it has $593 million left in its authorization. With a strong capital position and liquidity we expect the company to enhance shareholders value going forward.

The company also scores strongly with rating agencies. On the back of solid operating performance, superior risk based capitalization, effective risk management and strong management team, A.M. Best reiterated the financial strength rating (FSR) of A (Excellent) and ICR of ‘a+’ of AXIS Specialty Limited.

The outlooks were upgraded to positive from neutral. We believe, the company’s strong ratings scores will help retain investor confidence and grow its business going forward.

The Zacks Consensus Estimate for fourth-quarter 2011 is $1.09 per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, a loss of 62 cents and earnings of $3.99 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 - Analyst Report).

Read the full analyst report on ACE

Read the full analyst report on AXS