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We retain our neutral recommendation on AXIS Capital Holdings Ltd. (AXS - Analyst Report), following the second quarter earnings results. Its earnings missed the Zacks Consensus Estimate but fared well year over year. Higher premiums as well as lower expenses fueled the performance. The company also benefited from lower catastrophe activities with the bottom line being buoyed by share buybacks.

New business generation and platform expansion continuously helped the company to fuel its top-line growth. A sturdy capital position, strong scores with the credit rating agencies and continued focus on enhancing shareholders value are among the other positives. However, a low interest rate environment keeps us on the sidelines.

New business opportunities across several AXIS Capital’s lines of business and geography have helped the company achieve growth in premium writings. The Insurance sector in particular, continues to drive solid numbers.

AXIS remains strongly capitalized. Its financial flexibility is robust, with a debt-to-total capital ratio of 14.9%, a debt and preferred to total capital ratio of 22.4%. The company also lowered the cost of its preferred capital by redeeming preferred share with higher coupon and issuing preferred shares at lower coupon.

AXIS Capital continues to boost its shareholder value. It spent $90 million to buyback 2.7 million shares in the second quarter and is left with $415 million under its authorization. With a strong capital position and liquidity we expect the company to enhance shareholders’ value going forward.

On the back of a solid operating performance, superior risk based capitalization, effective risk management and a strong management team, A.M. Best reiterated the financial strength rating of A (Excellent) and issuer credit rating of ‘a+’ of AXIS Specialty Limited. We believe the company’s strong ratings scores will help retain investor confidence and lead to business growth, going forward.

On the flip side, AXIS Capital continues to report lower net investment income. It declined 26% in the second quarter of 2012, attributable to lower returns from other investments and fixed maturities. The company expects net investment income to remain constrained as it expects fixed maturity book yield of 2.8% to meet the current market yield of 1.9%.  

Additionally, it has a substantial exposure to losses resulting from natural disasters, man-made catastrophes and other catastrophic events. Though the entire industry benefited from lower cat loss, yet exposure to cat activities will always remain a concern as occurrence of natural disasters can affect the results adversely.

AXIS Capital currently holds a Zacks #3 Rank (short term Hold rating) for the company, indicating no clear directional pressure on the stock over the near term. ACE Limited (ACE - Analyst Report), which closely competes with the company, also shares a Zacks #3 Rank.

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