Description

AXIS Capital Holdings Limited (AXS) offers an attractive buying opportunity.  AXIS is a $4.2B market capitalization Bermuda-based hybrid insurer and reinsurer with a focus in insuring specialty risks on a global basis.  AXIS is part of the “class of 2001,” a group of reinsurers that was founded in late 2001, post the events of September 11th in the midst of rapidly hardening commercial insurance market.  The company was originally backed by Marsh and McLennan, Blackstone, DLJ, Thomas Lee, J.P. Morgan and G.E.  AXIS issued 15.5MM in shares of stock in June of 2003 at $22 per share.  In 2003, AXIS wrote $2.3B in net written premiums and they are likely to write over $5B in net written premiums in 2107 although ceded premiums have grown substantially.  AXIS operates through two segments – Insurance (48% of 2016 net premiums earned) and Reinsurance (52% of 2016 net premiums earned).  Primary lines written in the insurance segment are Property, Marine, Terrorism, Aviation, Credit and Political Risk, Professional Lines, Liability, and Accident and Health.  Primary lines written in the Reinsurance segment include Catastrophe, Property, Professional Lines, Credit and Surety, Motor, Liability, Agriculture, Engineering, and Marine & Other.  

The investment thesis for Axis is based on the following points:

1. AXIS is an attractive absolute value trading at 91% of book value and 93% of tangible book value.  The stock trades at 10.7x my estimate of 2018 EPS, 8.1x my 2019 estimate and 6.9x my 2020 estimate. Of note, I am modeling combined ratios of 98.3%, 96.4%, and 95.3% in these three years – far above the company’s historical averages.  While these valuation levels are below the company’s historical averages, they are at all-time historical relative lows.  While not a large sample size, at a minimum such historically cheap relative valuations have led to outperformance.

Price to Book Value

Relative Price to Book Value

Relative price to book ratio correlated with relative price performance