On Jul 24, 2013, we downgraded our recommendation on
AXIS Capital Holdings Limited
) to Neutral from Outperform as substantial losses from
catastrophes coupled with a low interest rate environment are
likely to weigh on operational results. This Bermuda based
insurer currently carries a Zacks Rank #3 (Hold).
Why the Downgrade?
AXIS Capital has substantial exposure to losses arising from
natural disasters, man made catastrophes and other catastrophic
events. The company has incurred significant losses from
catastrophes from 2010 through 2012. Although AXIS benefited from
lower catastrophe losses during the first quarter of 2013, the
second quarter will likely face the brunt of catastrophes,
weighing on its underwriting results.
AXIS Capital estimated cat loss of $140 million stemming from
tornadoes and hailstorms in the U.S. and flooding in Argentina,
Europe and Canada in the second quarter.
Over the last 30 days, most of the estimates were revised
downward sinking the Zacks Consensus Estimate for the second
quarter by 41.5% to 69 cents. It also translates to a
year-over-year decline of 24%.
Additionally, weak interest rate environment has been a drag on
the investment income of AXIS for the past few years. After a
prolonged decline in investment income, although the company
witnessed an improvement in net investment income in 2012, the
first quarter of 2013 again came up with a decline. This was
mainly due to lower reinvestment yields. Given the poor interest
rate environment, we expect net investment income to remain soft
or at the most report a meek improvement over the coming period.
However, amid these negatives, strong financial position of the
company has led it to engage in share repurchases and dividend
payouts, thereby retaining investor confidence. Its strong score
with credit rating agencies, and new business generation and
platform expansion are also expected to help AXIS combat the
aforementioned negatives in the upcoming term.
AXIS Capital delivered three straight quarters of positive
earnings surprise with an average beat of 70.7%. We will wait to
see if the property and casualty insurer will continue to
maintain the trend. AXIS is scheduled to release its second
quarter 2013 results on Jul 30 after the closing bell.
Other Stocks to Consider
Among other insurers,
Hilltop Holdings Inc.
State Auto Financial Corp.
) carry a favorable Zacks Rank #1 (Strong Buy) and are worth
AXIS CAP HLDGS (AXS): Free Stock Analysis
HILLTOP HLDGS (HTH): Free Stock Analysis
PROASSURANCE CP (PRA): Free Stock Analysis
STATE AUTO FINL (STFC): Free Stock Analysis
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