AXIS Capital Holdings Limited (AXS) reported fourth-quarter operating income of $1.41 per share, beating the Zacks Consensus Estimate of $1.22. Results however, fell short of $1.83 earned in the prior-year period. Operating income was $187 million in the quarter, down 32% from $276 million in fourth-quarter 2009.
Strong performance at Insurance as well as Reinsurance segments helped the company deliver better-than-expected results.
Including net realized investment gains of $77 million or 58 cents per share, the company reported net income of $264 million or $1.99 per share compared with $282 million or $1.87 in the prior-year quarter. The year-ago quarter included net realized investment gains of $5.8 million or 4 cents per share.
For full year 2010, operating income came in at $4.60 per share, surpassing the Zacks Consensus Estimate of $4.41 but lagging the year-ago earnings of $5.10. Operating income declined 18% year over year to $626.7 million in 2010.
Including net realized investment gains of $193.1 million or $1.42 per share, the company reported net income of $819.8 million or $6.02 in 2010 compared with $461 million or $3.7 in 2009.
Operational Performance
Net premiums earned were $758.9 million, up 6% from $757.3 million in the prior-year quarter. 2010 net premiums earned increased 5.6% from prior year.
Net investment income declined 9% year over year to $107.9 million, largely due to lower reinvestment yields. 2010 net investment income declined 12% to $406.9 million from 2009 level.
Total revenue increased 9% year over year to gross $943.3 million in the quarter. Total reported revenue beat the Zacks Consensus Estimate of $871 million. Full year 2010 revenue was $3.6 billion, improving 26% from 2009 and surpassing the Zacks Conse nsus Estimate of $3.4 billion.
Total expenses in the quarter were $658 million, up 18% year over year while 2010 total expense increased 17% from 2009 level.
The combined ratio deteriorated by 810 basis points to 85.6% in the quarter while it deteriorated 940 basis points to 88.7% in 2010.
Segment Update
Insurance Segment: Gross premium written increased 6% year over year to $497 million driven by higher premiums from professional lines. Net premiums written in the quarter increased 34% year over year while net premiums earned increased 8%. The increase stemmed from changes in ceded reinsurance purchasing on renewal during the second quarter and the increase in gross premiums written.
Fourth quarter underwriting income of $68 million declined 21% from year ago quarter. Combined ratio improved 210 basis points from the year-ago quarter.
Full-year 2010 underwriting income more than doubled to $210 million from 2009. Combined ratio deteriorated 140 basis points from 2009.
Reinsurance Segment: Gross premiums written in the fourth quarter improved 34% from the year-ago period driven by strength at property reinsurance lines.
Net premiums written in the fourth quarter increased 42% year over year while net premiums earned increased 5%.
Underwriting income in the quarter totaled $65 million, down 50% year over year. Combined ratio of deteriorated 1660 basis points from the year ago quarter.
Full-year 2010 underwriting income was $199 million, less than half of the 2009 level. Combined ratio deteriorated 1550 basis points from 2009.
Financial Position
Cash and cash equivalents of AXIS Capital at the end of 2010 improved 18% to $929.5 million from $788.6 billion at the end of 2009.
Total capitalization as of December 31, 2010, was $6.6 billion, including $1.0 billion of long-term debt and $0.5 billion of preferred equity.
Book value per share was $45.60 as of December 31, 2010, up 20% from $41.54 as of December 31, 2009.
Return on equity was 12.4% in 2010 compared with 17.1% in 2009.
Share Repurchase and Dividend
AXIS Capital spent $277 million to buy back 7.8 million common shares at an average price of $35.63. For full year 2010, the company bought back 21.8 million common shares for $699 million at an average price of $32.02.
AXIS Capital is left with an authorization of $593 million as of February 4, 2011.
In December 2010, the board of directors of AXIS Capital increased the quarterly dividend by 10%. The increased dividend now totals 23 cents per share.
Peer Comparison
ACE Limited (ACE), which competes with AXIS Capital, reported fourth-quarter 2010 operating income of $2.05 per share, beating the Zacks Consensus Estimate by 20 cents. Full year 2010 operating income was $7.79 per share and surpassed the Zacks Consensus Estimate of $7.56.
Our Take
We believe conservative underwriting practices, solid capital position and positive ratings from ratings agencies as well as share buyback programs and dividend hikes strongly position AXIS Capital going forward. Also, the company’s substantial investment in the underwriting platform will help widen its scale of operations.
However, the low investment yield environment as well as a challenging property and casualty market keeps us on the sidelines. We maintain our “Neutral” 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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