AXIS Capital Holdings Limited (AXS - Free Report) has been witnessing downward estimate revisions of late. The stock has seen the Zacks Consensus Estimate for 2018 earnings being revised 0.2% downward in the last 60 days.
The stock carries a Zacks Rank #5 (Strong Sell) with an unimpressive Growth Score of D. Importantly, back tested results show that stocks with a Growth Score of A or B when combined with a bullish Zacks Rank #1 (Strong Buy) or 2 (Buy), comfortably outperform other stocks.
Shares of AXIS Capital have also underperformed the industry in a year’s time. The stock has lost 25.9% in contrast to the industry’s 21.1% rally as well as the S&P 500 index’s gain of 21.7%.
AXIS Capital is set to report fourth-quarter results on Feb 7. However, our proven model cannot conclusively show that the company is poised for an earnings beat this season. This is because the company carries a bearish Zacks Rank of 5, which lowers the predictive power of ESP and has an Earnings ESP of -4.27%. We need to have a positive ESP to be confident about an earnings surprise.
Escalating expenses have been a constant concern for AXIS Capital, mainly on higher net loss and loss expenses, general and administrative expenses, higher acquisition costs as well as an increase in interest expense and financing costs. The company experienced a rise of nearly 37% in this metric in the first nine months of 2017. Moreover, the company’s pre-tax margin has been suffering over the past few years with the metric having contracted 100 basis points (bps) in the first nine months of 2017 as compared to the same period in 2016. Therefore, rising expenses are likely to restrict operating margin expansion, which in turn might hurt the company’s overall growth.
This apart, the property and casualty (P&C) insurers faced the biggest brunt of a massive catastrophe loss, having largely impacted the industry and qualifying 2017 as the costliest year in terms of weather-related loss. In the first nine months of 2017, the company incurred such losses, amounting to about $700 million that was substantially wider than that of the same period in 2016. Further adding to the woes, the fourth quarter witnessed the Northern California wildfires resulting in catastrophe loss to dent the P&C insurers’ underwriting profitability. Hence as a P&C insurer, AXIS Capital suffered a huge catastrophe loss, weighing heavily on the company’s underwriting income and resulting in deteriorating the combined ratio.
Combined ratio in Insurance segment has been deteriorating since 2013 and in the first three quarters of 2017 the metric deteriorated 2110 bps.
Return on equity, a measure of profitability, has been declining over the last few years. Return on equity in the first nine months was (10.3%), declining from 10.8% in 2014.
In view of the abovementioned catastrophe loss, insurers are likely to experience weak underwriting results, disrupting the overall performance. But there is a silver lining in this catastrophe cloud as insurers braved price hikes, having remained flat in the past several quarters due to a not-so-active catastrophe environment.
This apart, the gradual rise in interest rates has benefited the insurance industry. The Federal Reserve delivered its promise to raise the rates thrice in 2017 and has given investors enough hope of a repeat in 2018.
Also, the recent tax cut, which reduced the tax rate to 21% from 35%, is expected to benefit the insurance industry to a large extent. A lower tax rate would aid the companies’ bottom line, boosting margins directly. Additionally, the tax cut is anticipated to make U.S. insurers more competitive globally.
Choosing the Stocks
While AXIS Capital doesn’t appear as an attractive pick right now, there are a few solid stocks in the same space promising greater returns. Also, these companies have outperformed the industry’s rally in a year.
We have narrowed down to four favorable stocks with an upside potential to enhance one’s portfolio with the help of the Zacks Stock Screener. The VGM Score of A or B coupled with Buy-ranked stocks is the best deal to offer.
Northbrook, IL-based The Allstate Corporation (ALL - Free Report) deals in property-liability insurance and life insurance business in the United States as well as Canada. The company sports a Zacks Rank of 1 with a VGM Score of B. The stock has seen the Zacks Consensus Estimate for 2018 earnings being revised 5.8% upward over the last 60 days.
Shares of Allstate Corporation have surged 36.9% in a year’s time, outperforming the industry.
Kingston, NY-based Kingstone Companies, Inc. (KINS - Free Report) underwrites property and casualty insurance products to small businesses and individuals in New York. The company is a Zacks #1 Ranked player with a VGM Score of B. The stock has seen the Zacks Consensus Estimate for 2018 earnings being moved 15.2% north over the last 60 days.
Shares of Kingstone Companies have soared 55.2% in a year, outperforming the industry’s growth.
Branchville, NJ-based Selective Insurance Group, Inc. (SIGI - Free Report) offers insurance products and services in the United States. The company is a #1 Ranked player with a VGM Score of B. The stock has seen the Zacks Consensus Estimate for 2018 earnings being raised 7.9% over the last 60 days.
Shares of Selective Insurance have gained 35.6% in the last 12 months, comparing favorably with the industry.
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