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AXIS Capital Lags EPS, Rev. Beats

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AXIS Capital Holdings Limited (AXS - Free Report) reported first-quarter 2012 operating earnings of $1.07 per share, missing the Zacks Consensus Estimate by 2 cents and reversing the loss of $3.52 incurred in the year ago-quarter. Operating income was $136 million in the quarter, comparing favorably with a loss of $399 million in the first quarter of 2011.

Higher premiums coupled with higher investment income as well as lower expenses fueled the performance. The company also benefited from lower catastrophe activities.

Including net realized investment gains of $11.2 million, or 9 cents per share, foreign exchange loss of $20.3 million, or 16 cents per share and loss on repurchase of preferred shares of $4.6 million or 4 cents a share, the company reported a net income of $122.0 million, or 96 cents per share. This reverses the loss of $383.8 million, or $3.39 per share, incurred in the prior-year quarter.

The year-ago quarter included net realized investment gains of $30.1 million, or 26 cents per share and foreign exchange loss of $15.3 million, or 13 cents per share.

Operational Performance

Gross premiums written in the quarter decreased 2% year over year to $1.5 billion.

Net premiums earned in the fourth quarter were $846.4 million, up 7.4% year over year.

Net investment income increased 4.8% year over year to $116 million, largely due to higher income from alternative investments, partially offset by low net investment income from fixed maturities.

Total revenue grossed $977 million in the quarter, improving 5.1% from the year-ago quarter. The top line comfortably surpassed the Zacks Consensus Estimate of $956 million.

Total expenses in the quarter were $849 million, declining 35.6% year over year, largely due to a dip in acquisition costs and higher net losses and loss expenses.

The combined ratio improved to 94.8% in the quarter from 161.3% in the year-ago quarter.

Segment Update

Insurance Segment: Gross premiums written increased 23% year over year to $525 million in the quarter, driven by better performance at accident & health line of business besides increases in marine, property and professional lines of business.

Net premiums earned increased 19% year over year on the back of initiatives undertaken and exposure to new geographies.

First quarter booked underwriting income of $11 million compared with underwriting loss of $48 million in the year-ago quarter.

The combined ratio improved to 97.5% from 114.9% in the year-ago quarter.

Reinsurance Segment: Gross premiums written in the quarter declined 11% year over year to $1 billion, largely due to lower catastrophe business.

Net premiums earned slipped 1% in the quarter.

The segment had an underwriting profit of $52 million in the quarter, reversing underwriting loss of $413 million in the year-ago quarter.

The combined ratio improved to 88.6% in the quarter from 189.7% in the year-ago quarter.

Financial Position

AXIS Capital exited the quarter with cash and cash equivalents of $1.17 billion, up from $1.08 billion at the end of 2011.

Total capitalization as of March 31, 2012, was $6.9 billion, including $1.0 billion of long-term debt and $0.75 billion of preferred equity.

Book value per share was $39.53 as of March 31, 2012, up 11% from $35.69 as of March 31, 2011.

Return on equity was 10.8% in the quarter compared with negative 32.5% in the year-ago quarter.

Net cash flows from operations were $176 million for the quarter.

Share Repurchase and Dividend

During the first quarter, AXIS Capital spent $48 million to buy back 1.5 million shares at an average price of $32.41 per share. On April 26, 2012, the company had approximately $505 million remaining under its authorization for common share repurchases through December 31, 2012.

The board declared a dividend of 24 cents in the quarter, a 4.3% year-over-year increase.

Peer Comparison

ACE Limited , which competes with AXIS Capital, reported first-quarter 2012 operating income of $2.05 per share, breezing past the Zacks Consensus Estimate by 15 cents. Earnings exhibited a massive improvement of 170% from 76 cents earned in the year-ago quarter.

The quarter largely benefited from lower catastrophe activities and higher premiums. Pre-tax catastrophe losses, including reinstatement premiums, were $19 million, narrowing from $489 million in the prior year.

Our Take

We believe conservative underwriting practices will help the company remain well capitalized. New business generation and platform expansion will also aid the company to fuel its top-line growth. A solid 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.

We retain our Neutral long term recommendation on AXIS Capital. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

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