AXIS Capital Moves Higher

We are upgrading AXIS Capital Holdings Ltd. (AXS - Analyst Report) to Outperform from Neutral on the back of its better-than-expected third quarter performance, with both the top and bottom line surpassing the Zacks Consensus Estimates and year-ago numbers. The quarter experienced a low level of catastrophe and large loss activity as well as favorable impact of strong equity markets on investment returns with the bottom line being buoyed by share buybacks.

After a long hiatus, AXIS Capital enjoyed higher investment income in the third quarter. Net investment income more than doubled year over year to $103.6 million, largely driven by alternative investments.

New business opportunities across several of 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. The company noted improved pricing scenario in insurance market place extending across classes and geographies and also expects the momentum to continue.

AXIS Capital also spent $179 million to buyback 5.2 million shares that buoyed the bottom line. It is left with $236 million under its authorization.

Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. A.M. Best Co. reiterated the issuer credit ratings of the company while Fitch Ratings, on the other hand, reiterated the Issuer Default Rating. We believe the company’s strong score with the credit rating agencies will help it write more business going forward.

However, exposure to cat losses always remains a concern. Though the entire industry benefited from lower cat loss, the occurrence of Superstorm Sandy in the final quarter of the year will weigh on the results. Catastrophe loss modeling companies project the loss to be approximately $20 billion for the industry.

Additionally, AXIS Capital’s total expense is on a rise. If the magnitude of increase in revenue fall is below the magnitude of expense increase, the resultant effect is contraction in margins and lower income.

AXIS Capital carries a Zacks #3 Rank, implying a short-term Hold rating. ACE limited (ACE - Analyst Report), which competes with AXIS Capital, shares the same Zacks Rank.