Over the last six months, AXIS Capital’s shares have sunk to $93.32, producing a disappointing 7.7% loss - a stark contrast to the S&P 500’s 18.4% gain. This might have investors contemplating their next move.
Is now the time to buy AXIS Capital, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is AXIS Capital Not Exciting?
Even though the stock has become cheaper, we're swiping left on AXIS Capital for now. Here are three reasons we avoid AXS and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
Big picture, insurers generate revenue from three key sources. The first is the core business of underwriting policies. The second source is income from investing the “float” (premiums collected upfront not yet paid out as claims) in assets such as fixed-income assets and equities. The third is fees from various sources such as policy administration, annuities, or other value-added services.
Over the last five years, AXIS Capital grew its revenue at a tepid 4.9% compounded annual growth rate. This was below our standard for the insurance sector.
2. Net Premiums Earned Point to Soft Demand
When insurers sell policies, they protect themselves from extremely large losses or an outsized accumulation of losses with reinsurance (insurance for insurance companies). Net premiums earned are therefore net of what’s ceded to reinsurers as a risk mitigation and transfer strategy.
AXIS Capital’s net premiums earned has grown at a 3.4% annualized rate over the last two years, worse than the broader insurance industry and slower than its total revenue.
3. Previous Growth Initiatives Haven’t Impressed
Return on equity (ROE) serves as a comprehensive measure of an insurer's performance, showing how efficiently it converts shareholder capital into profits. Strong ROE performance typically translates to better returns for investors through a combination of earnings retention, share repurchases, and dividend distributions.
Over the last five years, AXIS Capital has averaged an ROE of 9.7%, uninspiring for a company operating in a sector where the average shakes out around 12.5%.
Final Judgment
AXIS Capital’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 1.3× forward P/B (or $93.32 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
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