We are downgrading AXIS Capital Holdings Limited (AXS) to Underperform from Neutral as we expect the company to suffer majorly from catastrophic losses.
AXIS Capital has a substantial exposure to losses resulting from natural disasters, man-made catastrophes and other catastrophic events. AXIS Capital suffered huge catastrophe losses in 2010. Also, the combined ratio deteriorated 940 basis points to 88.7% in 2010.
The company expects first quarter 2011 preliminary losses from natural catastrophes to be between $275 million – $315 million. The total amount comprises $185 million – $215 million attributable to the New Zealand earthquake and $90 million – $100 million for the Australian floods and Cyclone Yasi.
Besides, AXIS Capital is also in the early stage of estimating losses related to the recent earthquake and tsunami in Japan. AXIS Capital expects its losses to the reinsurance segment not to exceed 1.3% of the industry losses (industry is expected to suffer losses between $12 million and $35 billion).
Counting on the other negatives, AXIS Capital continues to face a slow top line growth. Most of the business lines in insurance, especially casualty, continue to see price declines.
The financial crisis has significantly impacted the company’s three books of business – credit and bond reinsurance, professional lines insurance and professional lines reinsurance. We would expect volatility to continue, global lending and trading activity remains weak, and therefore, opportunities in this line are expected to remain limited.
Investment income at Axis has been in a secular decline for the past five quarters. We expect the line item to remain stretched in the near term given the continuing low interest rate environment.
A strong capital position, favorable rating from the rating agencies and continued focus on enhancing shareholders value are among the positives.
AXIS Capital’s fourth quarter earnings surpassed the Zacks Consensus Estimate, as strong performance at Insurance as well as Reinsurance segments helped the company deliver better-than-expected results.
Over the last 7 days, 2 out of 10 analysts covering the stock lowered the estimate for the first quarter of 2011. Over the last 30 days, 9 out of 10 analysts covering the stock nudged the estimate downward for first quarter 2011.
For 2011, over the last 7 days, 2 out of 10 analysts lowered the estimates while over the last 30 days, 10 out of 10 analysts lowered the estimate. However, for 2012, over the last 7 days period, 1 out of 14 analysts covering the stock raised the estimate. Over the last 7 days, 1 out of 14 analysts covering the stock lowered the estimate for 2012 while over the last 30 days, 6 out of 14 analysts lowered the estimate.
The Zacks Consensus Estimate for first-quarter 2011 is a loss of $2.59 per share. For full years 2011 and 2012, the Zacks Consensus Estimates are, respectively, 81 cents per share and $4.27 per share.
The quantitative Zacks #4 Rank (short-term Sell rating) for AXIS Capital indicates downward pressure on the stock over the near term.
Headquartered in Pembroke, Bermuda, AXIS Capital is a global provider of specialty lines of insurance and treaty reinsurance. It competes with ACE Limited (ACE).
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