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AXIS Capital Keeps Neutral Rec

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We retain our Neutral recommendation on AXIS Capital Holdings Ltd (AXS - Free Report) based on its high exposure to catastrophic losses and increasing expense trend. However, sustained efforts to improved premiums, increasing investment income and continued focus on enhancing shareholders’ value overshadow the negatives.  The property and casualty insurer presently carries a Zacks Rank #3 (Hold).

Why the Retention?

AXIS Capital is highly exposed to losses resulting from natural disasters, man-made catastrophes and other catastrophic events. The severe and frequent occurrence of such events caused a poor trend of underwriting income for the company in the recent quarters.

AXIS Capital has been witnessing rising expenses over the last few years primarily due to higher net losses and loss expenses, general and administrative expenses and also higher acquisition costs. This rising expense level is hurting the operating margins of the company.

Additionally, we believe increasing competition in insurance industry and recent alternative products issued by capital market participants to replace reinsurance products can result in slow growth and lower profitability for AXIS Capital.

Nonetheless, AXIS Capital is experiencing solid top-line growth riding on the back of improved written premiums results across both insurance and reinsurance segment.

The company is also engaged in enhancing its shareholders’ value through share repurchase and dividend payments. With respect to dividend increase, the approval of 8% dividend hike in Dec 2013 marked the 10th consecutive year of dividend increase by the company.

The dividend of 27 cents per share currently yields 2.34%, which is better than other industry majors like Allied World Assurance Company Holdings, AG with a dividend yield of 1.82%, and State Auto Financial Corp. (STFC - Free Report) with a dividend yield of 1.81%.

AXIS Capital also continues to benefit from rate increases on the back of improved pricing scenario in the insurance market.

The company also scores well with rating agencies owing to its strong risk-adjusted capitalization, continued better operational results, robust enterprise risk management, and continued focus on delivering solid underwriting profitability, along with a balanced risk profile.

We expect new business and product generation, and platform expansion to aid AXIS Capital’s performance going forward.

Investors interested in the industry may consider better-ranked peer Maiden Holdings, Ltd. (MHLD - Free Report) with a Zacks Rank #1 (Strong Buy).

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