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Still Neutral on AXIS Capital


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Given the substantial exposure to catastrophe losses and low interest rate environment weighing on net investment income, we retain our Neutral recommendation on AXIS Capital Holdings Ltd. (AXS - Analyst Report).

AXIS Capital’s fourth-quarter earnings surpassed the Zacks Consensus Estimate but fell below the year-ago results. Higher premiums were more than offset by lower investment income and elevated expenses, thus inducing lower earnings in the quarter. The company also suffered high catastrophe losses due to the Thai floods, which weighed on the results.

In 2011, the company suffered pre-tax net losses (net of reinstatement premiums) of $910 million, out of which, they suffered losses of $135 million in the fourth quarter itself. 2011 marked a year of natural catastrophes with each quarter suffering hugely from either of  Australian flood, New Zealand earthquake, Japanese earthquake, Tsunami, U.S. storms, Hurricane Irene, Tropical Storm Lee Danish flooding or Thai flooding.

Underwriting loss incurred was $327 million compared with income of $409 million in 2010.  The combined ratio deteriorated substantially to 112.3% from 88.7% in 2010.

Low interest rate environment continues to weigh on net investment income and the recent fourth quarter and overall 2011 was no exception to it. Lower returns from alternative investments and lower reinvestment yields on our fixed maturities drove 11% reduction in net investment income in 2011. The lower net investment income was also a primary reason of lower operating earnings in 2011.

On the brighter side, new business opportunities across several AXIS Capital’s lines of business and geography have helped the company achieve growth in premium writings.

New business from accident and health unit (attributable to continued investments made over the past several quarters), geographic expansions in Canada and Australia have helped the company deliver 11% higher gross insurance premium while better performance at trade credit and bond reinsurance lines as well as an increase in motor reinsurance business aided the company to post 8% increase in gross reinsurance premium in 2011.

AXIS Capital continues to buyback shares to return more value to its shareholders. The company spent $50 million to buyback 1.6 million shares during the fourth quarter of 2011, and is left with $544 million in its authorization. With a strong capital position and liquidity we expect the company to enhance shareholders value going forward.

The Zacks Consensus Estimate for first-quarter 2012 is $1.09 per share. For full years 2012 and 2013, the Zacks Consensus Estimates are, respectively, $3.85 and $3.89 per share.

The quantitative Zacks #3 Rank (short term Hold rating) on the stock 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. The company competes with ACE Limited (ACE - Analyst Report).

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