Published on February 8th, 2018 by Bob Ciura
The past year has been a very challenging one for Axis Capital Holdings (AXS). The company has incurred significant losses in recent quarters, due to the impact of Hurricanes Harvey and Irma, as well as two earthquakes in Mexico. As a result, the stock has declined approximately 25% in the past one year.
However, the stock could now be a buying opportunity. Its declining share price has brought Axis down to an attractive valuation. And, it is a strong dividend growth stock.
Axis Capital has a 3.1% dividend yield, and has increased its dividend for 13 years in a row. It is a Dividend Achiever, a group of 261 stocks with 10+ consecutive dividend increases. You can see the entire list of all 261 Dividend Achievers here.
With 2017 in the rear-view mirror, the road ahead should be much smoother for Axis Capital. As a result, we view the recent share price drop, as a potential buying opportunity. Axis Capital has broad appeal for investors interested in buying high-quality dividend stocks on the cheap.
Axis Capital Holdings Limited is an insurance holding company. It specializes in property and casualty insurance, as well accident and health insurance. The stock has a market capitalization of $4.2 billion. The company has two operating segments: Insurance and Reinsurance.
Source: Investor Presentation, page 5
On February 7th, Axis reported fourth-quarter 2017 earnings results. The company incurred a net loss of $38 million, or $0.46 per share. As expected, the loss was due to catastrophe and weather-related losses, which totaled $133 million net of reinsurance and reinstatement premiums.
On an adjusted basis, which strips out non-recurring factors, earnings-per-share of $0.24 declined significantly from $1.14 in the same quarter a year ago. For 2017, the full-year loss totaled $4.94 per share, which reversed a profit of $5.08 per share in 2016. The company ended 2017 with a diluted book value per share of $53.88, a decrease of 7.5% from year-end 2016.
Still, fourth-quarter earnings-per-share of $0.24 were higher than analysts were expecting, by $0.01 per share. And, net premiums written of $729.42 million rose 57% year-over-year, and surpassed analyst forecasts by $180 million. Growth of premiums written was broad-based, with a 65% increase in the reinsurance segment, and a 47% increase in the insurance segment.
The progress seen in the fourth quarter is an important step for Axis, which had previously delivered a very weak third-quarter earnings report. In the third quarter, Axis reported a net loss of $468 million, due to insurance losses. On a per-share basis, the company reported a huge net loss of $5.61, and it was then that the company guided investors to expect a net loss of approximately $2.00 per share for the full fiscal year.
All things considered, it was a good sign that the results for the fourth quarter were in-line with previous guidance. At the very least, the company can put 2017 behind it, and position itself for a return to growth in 2018 and beyond.
Despite the challenging operating climate of 2017, Axis is still investing in future growth. One way it does this, is through acquisitions. On October 2nd, 2017, Axis acquired Novae Group plc, a diversified property and casualty reinsurance business, located in England and Wales.
Source: Investor Presentation, page 6
The acquisition allows Axis to expand on multiple growth initiatives. First, the deal boosts Axis’ global footprint, and provides further international diversification. In addition, Novae is a highly complementary company. The transaction allows the combined company to write new and larger lines of insurance, and benefit from an expanded distribution platform.
Separately, the recent announcement of a new business unit, could be an additional growth catalyst. On January 23rd, Axis announced it is launching an enterprise-wide Global Underwriting and Analytics unit. The new business will partner with the company’s existing underwriting, claims, and actuarial teams, to provide them with greater resources and tools. The Global Underwriting and Analytics unit will leverage data and analytics capabilities to improve portfolio management and capital allocation activities. Embracing new technologies is a promising step for the future growth of the company.
Axis is in strong financial position. The company holds an A+ rating from Standard & Poor’s. A solid balance sheet will help the company keep its cost of capital low, and leave more cash flow each year to reinvest in future growth initiatives. Axis also has a long history of growth, which bodes well for the future. From 2012-2016, the company grew total assets from $18.85 billion to $20.81 billion, which indicates a strong business model.
Valuation & Expected Returns
The biggest risk for insurance companies, are massive losses, such as the loss Axis experienced in 2017. The good news is, losses from natural disasters are non-recurring events. For valuation purposes, we will look beyond the 2017 losses, to evaluate Axis from the perspective of its long-term earnings power.
ValueLine analysts expect Axis to generate earnings-per-share of $4.80 in 2018. As a result, the stock trades for a price-to-earnings ratio of just 10.5, based on forward earnings estimates. This is actually above the company’s average price-to-earnings ratio of 9.4 in the past 10 years.
Source: Value Line
However, we believe price-to-book is a better valuation metric for insurance companies, due to the high earnings volatility from year to year. Axis traded at an average price-to-book ratio of 0.91 over the past decade. The company generated diluted book-value-per-share of about $54 for 2017, which gives a fair value estimate of $52 per share, using the company’s long-term average book value multiple. Since the stock currently trades for $51, Axis is slightly undervalued right now.
If the company can return to growth in 2018 and beyond, the stock is likely to generate satisfactory returns for shareholders. According to ValueLine, the company grew earnings-per-share by 4% over the past 10 years. This is a reasonable baseline for future growth assumptions. Therefore, a potential breakdown of future returns is as follows:
- 4%-6% earnings growth
- 3% dividend yield
Earnings growth will be accomplished through a combination of insurance premiums, investment income, and share repurchases. Along with the 3%+ dividend yield, total annual returns could reach 7% to 9%, with room for upside if earnings growth comes in higher than this projection.
Insurance companies have unique risks, particularly the risk of loss from catastrophes and natural disasters. These risk factors made 2017 a very difficult year for Axis. However, in normal operating climates, insurance is a very lucrative business model. Insurers like Axis make money not just from writing policies, but also from investing accumulated premiums that have not been paid out as claims (known as the float).
Insurance is an important financial planning tool for many consumers. This creates steady demand, and due to acquisitions and new investments, Axis has positive growth prospects moving forward. With a low valuation and 3%+ dividend yield, Axis appears to be an undervalued dividend stock.