AXIS Capital: Promising niche insurance company but unclear growth drivers, needs Neutral rating | Private Equity Weekly

investment thesis

AXIS Capital Holdings Limited (NYSE: AXS) demonstrates sustained revenue growth and maintains financial strength. However, its investment potential is affected by a variety of factors. The current valuation is slightly above the industry average, indicating limited scope for significant appreciation in value. Although analysts predict strong growth ahead, A lack of clear drivers and a recent share buyback program raise questions about its sustainability. Investors may find opportunities with higher dividend yields and similar risk profiles more attractive in the market.

Therefore, I think the company is fairly valued and deserves a Neutral rating.

Company Profile

Registered in Bermuda, AXIS Capital Holdings has a presence in the insurance and reinsurance markets by focusing on a diverse range of “specialty businesses”. The lines go beyond traditional coverage to cover areas such as networking and technology, pollution, disaster and renewable energy, one of its fastest-growing areas.The focus on niche markets allows them to satisfy specific risk profiles and potentially capture higher growth opportunities.

The company operates globally, demonstrating a diverse geographic footprint with operations in Bermuda, the United States, Canada, Europe and Singapore. Their solid financial strength is supported by “A” and “A+” ratings from Standard & Poor’s and AM Best, respectively.

I found that the company has two main strategies:

• Specialization: The primary strategy is to offer a broad range of specialized insurance and reinsurance products to meet unique risk profiles within specific markets. From a financial analysis perspective, this typically results in lower costs and higher profits.
• Strategic Partnerships: The Bermuda-based insurance company has strong partnerships they are acquiring Nova Group Co., Ltd. In 2017, this allowed them to enter the Lloyd’s of London market and have a wider presence in Europe.

While more than half ((53%)) of business comes from the United States, most specialty insurance segments are experiencing growth.

The professional lines sector deserves a close look at future trends, as it is the only sector showing a negative growth rate. Interestingly, despite the decline in the reinsurance space, I see this as a positive development due to the higher associated administrative costs.

management evaluation

CEO Vince Tizzio has joined the company since January 2022 and has extensive experience in the insurance industry, having held positions at American International Group (AIG), Zurich Insurance Group (OTCQX:ZURVY) and The Hartford ( HIG) and other companies hold leadership positions.And his Glass door recognition Low, which may reflect more than just his performance. The insurance industry is known to often have high employee turnover, and these ratings are similar to other companies in the industry.

Chief Financial Officer Peter Vogt is another key figure in the company. He has been with AXIS Capital since 2010 and held various leadership positions before assuming his current role. Prior to joining AXIS Capital, he served as Chief Financial Officer of Cigna’s group insurance business.

High growth expectations, but can AXIS Capital achieve it?

While analyst expectations for AXIS Capital remain high, a closer look at their latest earnings report reveals a few key takeaways:

• Revenue growth: AXIS Capital’s revenue continues to grow, with an average annual increase of 9.89%. This beats the industry average of 5.14%.
• Relative Valuation: I have found that the key metric for insurance companies is to use the price-to-earnings ratio. AXIS Capital’s TTM P/B is 1.13x, which is slightly higher than the industry average of 1.10x. And its forward price-to-earnings ratio of 1.0x lags behind the industry average of 1.03x. Therefore, we can assume that it is fairly valued on a price-to-book multiple basis.
• Profitability: ROCE is around 7%, lower than the industry average of 10.71%; however, the growth rate is expected to be faster. Analysts once again have high expectations for the company.

The company’s financial statements also predict that AXIS Capital’s profit compound annual growth rate will reach double digits in the next 3-5 years, with a compound annual growth rate of 22%, exceeding the industry median of 9.12%. This positive outlook translates into “Grade A Growth” for Seekingalpha.

Another important profitability metric for an insurance company is the “combined ratio,” which reflects the ratio of claims costs and expenses relative to premiums earned. While there are no official industry estimates, I found from other competitors that their combined ratio was around 104%, which I used as a benchmark.

AXIS Capital’s latest earnings report showed that their total combined ratio was 99.9%, slightly skewed by the fact that the reinsurance business had a standalone combined ratio of 107.6%, while the insurance business had a standalone combined ratio of 92.5%.

Building on its past track record of beating analyst expectations, the company recently beat consensus estimates by a wide margin, sending shares up 12%. However, beating consensus expectations by such a large margin is difficult to replicate.

Valuation

As mentioned above, I find AXIS Capital to have growth potential, but there are several factors that impact its investment appeal:

– The company’s price-to-book ratio is close to the industry average, suggesting the stock may not be undervalued

– AXIS’s dividend yield on capital is lower than the industry average (2.82% vs. 3.44%), making other options more attractive and thus warranting Seekingalpha’s “Dividend Yield C Grade”:

Additionally, analysts expect earnings per share to grow at a CAGR of 22% over the next 3-5 years, but the recent low double-digit growth in premium revenue from 2022 to 2023 has raised concerns about their execution of the business behind the ambitious forecasts. Questioning strategic capabilities.

The recent $100 million stock repurchase program may indicate that the company has limited organic growth opportunities. This is consistent with comments made by the CFO in the transcript of the latest earnings call:

Pete Vogt

Thanks for your question, Yaron. The first thing I will say is that we believe our capital position is very strong. So with that strong capital position, we also believe we want to grow our business. First and foremost, Capital’s first priority is to continue to grow into these attractive markets that we see, but we also believe equally that right now our stock is priced at what I would call value. With the $100 million authorization, we will repurchase some shares as we believe they are priced attractively for us. By and large, we do both. I do think that as we look into 2024, our insurance business will continue to grow and we have sufficient capital to do that.

The recent share buyback program and subsequent stock appreciation suggests to me that the market may have priced in some future growth potential. Their latest earnings report showed a book value of $54.06, an increase of $7.11, or 15.1%, from a year ago. The stock is currently trading at $62.64, with the market already offering a 15% premium to the stock’s book value.

The lack of clear catalysts beyond current expectations is not enough to warrant a higher rating at this time, so my investment view on AXIS Capital is neutral but positive, with an investment range of $58 to $69

risk

There are two potential risks with my investment thesis.

This was an unforeseen acquisition, and while current valuations are in line with the industry and an acquisition at a substantial premium is unlikely, such an event could severely impact my neutral investment thesis.

Management’s increased emphasis on shareholder returns through higher dividends and share buybacks, while likely leading to short-term price increases, may limit long-term capital appreciation opportunities.

take away

AXIS Capital makes a compelling case based on its strong and sustained revenue growth and specialization in the lucrative niche insurance market. However, I think expectations are too high. While the potential for double-digit earnings growth forecasts is promising, the lack of clear drivers beyond these expectations and the underlying valuation make higher ratings unconvincing, leading me to the $58-69 range Give it a neutral but positive rating.