AXIS Capital's Top-Line Growth Impresses, Rising Costs a Woe

AXIS Capital Holdings Limited AXS has earned goodwill in the market, building a robust product and service portfolio, which includes primary and excess products as well as property and casualty (P&C) treaty reinsurance. Its stellar record vouches for its successful servicing of the clients by catering to their diverse needs. Historically, the clients have gained a lot from the company’s bouquet of diverse insurance products and services and by retaining this bullish sentiment among investors, the Zacks Rank #3 (Hold) P&C insurer continues to evolve stronger over time and looks set to retain its purple patch in the near future.

Growth Drivers

AXIS Capital has been witnessing premium growth over a considerable period of time, driven by new business opportunities across the company’s business lines as well as its astute acquisitions. We expect the P&C insurer to continue capitalizing on such prospects and strategic initiatives going forward, which might result in improved premiums.

Apart from helping AXIS Capital to ramp up its premium growth profile, the buyout of Novae Group plc in 2017 is projected to be financially accretive to the company with targeted cost savings of at least $30-$35 million in 2018 while estimating $60 million by 2020.

Given the improvement in investment income as well as premiums, the company has displayed top-line growth and we anticipate this momentum to continue in the near term. The company remains focused on strengthening casualty and professional lines in the insurance segment, motor and reinsurance in particular.

Over the past five years, AXIS Capital has returned to shareholders in excess of 100% of aggregate operating income through dividends and share repurchases. Notably, the 2.6% hike in dividend in the first quarter of 2018 marked the 13th straight dividend increase. We hope that a sustained operational efficiency will allow the company to engage in shareholder-friendly moves in the future, thereby raising optimism among investors. Going forward, the company intends to pay back at least 200% of its six months operating earnings to investors.

Growth Projections: The Zacks Consensus Estimate for current-year earnings per share is pegged at $4.52, representing a year-over-year surge of 243.5%.  

For 2019, the consensus estimate for earnings per share stands at $5, reflecting a year-over-year increase of 10.5%.

AXIS Capital has expected long-term earnings per share growth of 8.5%.

An Outperformer: Shares of AXIS Capital have rallied 15% year to date, outperforming the industry’s 1.1% decrease. We believe, the company’s sustained operational performance, strategic initiatives, premium growth and a solid capital position will drive the stock higher in the near term.

 

 

Positive Earnings Surprise History: AXIS Capital displays an encouraging earnings surprise history, having outpaced the Zacks Consensus Estimate in two of the trailing four quarters with an average beat of 5.11%.

Attractive Valuation: Looking at the company’s price-to-book ratio — the best multiple for valuing insurers because of large variations in their earnings results from one quarter to the next — shares are undervalued at the current level. The company has a trailing 12-month P/B ratio of 1.07, falling below the industry average of 1.41.

Near-Term Headwinds

Being a P&C insurer, the company has been suffering catastrophe loss for a considerable period of time, thereby hampering the company’s underwriting profitability with the combined ratio having deteriorated in the last few years.

Also, escalating expenses, mainly due to higher net losses and loss expenses, general and administrative expenses as well as higher acquisition costs persist to limit the operating margin expansion. Moreover, the company does not expect a turnaround on this front anytime soon.

Stocks to Consider

Some better-ranked stocks from the insurance industry are Alleghany Corporation Y, The Progressive Corporation PGR and RLI Corp. RLI, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Alleghany provides property and casualty reinsurance and insurance products in the United States and internationally. The company delivered positive surprises in three of the last four quarters with an average beat of 17.61%.

Progressive provides personal and commercial auto insurance, residential property insurance and other specialty property-casualty insurance and related services, primarily in the United States. The company came up with positive earnings surprises in three of the last four quarters with an average beat of 6.23%.  

RLI Corp. underwrites property and casualty insurance in the United States and globally. The company pulled off positive surprises in each of the last four quarters with an average beat of 33.65%.

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