AXIS CAPITAL

AXIS CAPITAL   5.75% COUPON DUE 12/01/2014 @ 7.50% YTM
MOODY’S RATING: Baa1      S&P: A-

Axis Capital is a global insurance company providing specialty coverage and reinsurance in onshore & offshore energy, aerospace, marine industry, commercial property and worker’s compensation.
The company sells its products through brokers like Marsh McClennan and AON. Axis Capital has operations in Bermuda, Canada, Ireland, Switzerland, the UK and the United States which generated revenue of $USD 2.9 billion in 2008.

The non-life insurance industry has been the recipient of a couple quarters of low catastrophe losses that has resulted in solid earnings being reported. The absence of weather related events has allowed companies in this sector to beat many earnings estimates. For example, the NOAA statistics for tornados indicate a total of 464 reported through the second quarter of 2009 compared with 650 in the same period in 2008. This scarcity of insured damage claims has forced a rethinking of earnings going forward. Estimates for the industry indicate overall insured damage in 2009 has been very manageable and will probably not require entering the reinsurance market.

One of the more important indicators of insurance company performance is a statistic called the combined ratio. This measures the percentage of premiums an insurer has to pay out in claims and expenses. It is a combination of expense and loss ratios. Let’s say that you have a combined ratio of 104%. This means you are underwriting at a loss; you are taking in $1.00 in premium and paying out $1.04 in claims. Axis Capital has taken in approximately $1,162 mln in premiums through 1st qtr ‘09, a 6.50% increase over the same period in 2008. Their combined ratio is 86.6%; for every $1.00 premium received, only $.86 cents was paid out in claims!

Additional support from the improving financial markets should mean better than expected growth in book values. The company had net investment income of $99 mln in the 1st qtr ’09 vs. $86 mln in the same period 2008; an increase of 15.9%. This positive surprise helped drive earnings per share to $1.05, a bit below consensus $1.11 but well above forecasts in the low 90 cent range. Book value improved to $26.35, an increase of 2.2%.

How does Axis Capital compare to its peers? Chubb Corporation is a company similar to Axis Capital offering specialty insurance as well as property and casualty coverage.

	Year End 2008
	AXIS CAPITAL		CHUBB CORP
Total Debt	499 mln		3,975.00 mln
Total Assets	14,282 mln		48,429.00 mln
Debt / Assets	3.50%		8.21%
Debt / Total Capital	10.07%		22.84%
Cash	1,820.67 mln		56.00 mln
Short-Term Debt	682.16 mln		2,288.00 mln
Operating Cashflow / Total Liabilities	15.5		7.27

What do these numbers tell us? Axis debt to asset ratio tells us that only 3.5 cents of each asset dollar was financed using long-term debt. The liquidity of the company is very strong with cash on hand of $1.82 bln and only $682 mln of short term liabilities. The long-term solvency appears to us to be quite good. Axis Capital is expected to generate a stream of cash inflows sufficient to maintain productive capacity and make interest and principal payments on long-term debt. In fact, we calculate they can generate enough cash from operations to repay all borrowings in about 6 ½ yr. (1 year / 0.155) while Chubb would require 13 ¾ yrs. (1 year / 0.0727).

Compare the following two offers:

Axis Capital 5.75% coupon due 12/01/14 @ 7.50 YTM
Moody’s rating: Baa1
S&P rating: A-

Chubb Corporation  5.20% coupon due 4/01/13 @ 5.20% YTM
Moody’s rating: A2
S&P rating: A+

We believe that the Axis Capital is undervalued while the Chubb offering is fully valued. Since our goal is to identify “mis-priced” securities, here is an opportunity for investors to capture an above market return.

We believe the reason for such positive performance from Axis Capital is due to their quality management and the solid position in their niche. We expect to see continued improvement in various financial metrics from a very depressed level. This should result in decent price appreciation. Some keys to maintain positive financial performance include future catastrophe losses, changes in investment portfolio income, and their continued ability to access the reinsurance market.

Please contact us at 800 454-1628 or email info@jwkorth.com for more information and to purchase these securities.

Michigan: 800 454-1628 x1 | Orlando: 800 454-1628 x2 | Maryland: 800 454-1628 x4 | Miami: 800 454-1628 x3