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On Jul 24, 2013, we downgraded our recommendation on AXIS Capital Holdings Limited (AXS - Analyst Report) 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. (HTH - Analyst Report), ProAssurance Corporation (PRA - Analyst Report) and State Auto Financial Corp. (STFC - Snapshot Report) carry a favorable Zacks Rank #1 (Strong Buy) and are worth considering.

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