As we have said in the past, investor days can be challenging to pull off. You want a healthy mix of new and relevant information without giving away the playbook. Investor days can also be important in resetting the tone after meaningful developments, such as significant balance sheet adjustments following a management change.
Against that backdrop, Axis held its investor day last week. For reference, the previous investor day was in 2013, featuring 119 slides, and it started with a discussion of its reinsurance business, followed by insurance and A&H. Last week’s investor day featured 66 slides and began with a discussion about its North America specialty business, its global business, followed by its Axis Re business.
Much has changed in the last thirteen years, with Vince Tizzio taking on the challenge of turning around the franchise, which began to flounder from 2016 onwards (if book value is a proxy).
The investor day was well-attended, engaging, and to the point. In our view, the biggest takeaways were the discussion on book value growth, the ability of the franchise to lean into its specialty focus, overall expense improvement, and stability in reinsurance’s underwriting performance.
Among these, what stood out most was the discussion on book value growth, where the carrier indicated a mid-teens book value growth goal. When pressed on the details, the company said it was “aspirational.”
Aspirational is good. It allows us to strive towards a goal and continue to improve in the hope of hitting it. But it does seem that Axis has set itself quite a difficult target. The chart below shows Axis’s value creation or book value growth and accumulated dividends CAGR over time. The numbers show that book value growth began to decline in 2016.
Our analysis over the following few pages looks at the following three things. Firstly, and most importantly, how difficult it is to generate sustainable double-digit book value growth. Secondly, the gap between Axis’ reinsurance combined ratio and its peer group. Thirdly, a look at E&S's performance vs. its peer group.
Firstly, double-digit book value growth on a sustainable basis is a very high bar for this industry
To determine the achievability of the 15% goal, we looked at two different pieces of information. First, we looked at insurance companies’ historical book value growth to see how often insurance companies exceed the mid-teens mark and second, we looked at the incremental earnings needed for hitting a consistent double-digit book value growth target.
The chart below shows sequential book value growth for a mix of P&C companies, to see how often numbers like this goal have been hit.
Within the entire P&C space, Kinsale, Enstar, Arch, Renaissance Re, Everest, Berkley and Markel stand out by generating double-digit average book value growth. Will Axis be able to join the club anytime soon?
Another interesting takeaway is that Renaissance Re, Arch and Everest have sizeable reinsurance operations which have allowed them to withstand the short-term volatility in this segment and also benefit from rate hardening when the opportunity has presented itself. This has often translated into superior book value growth over time. For a smaller player such as Axis, it was difficult to make this volatility palatable to its investors while waiting for rate-hardening opportunities.
In addition, looking at the average column, we can see that despite some strong year-by-year numbers, only three companies, Arch, Enstar and Kinsale have managed to maintain these numbers consistently enough to get an average of 15% higher.
The table above leads us to the necessary question. What are Wall Street’s expectation of its book value growth and what level of earnings would be needed to hit those?
The analysis below starts with a few assumptions. We have street book value and earnings estimates up to 2026. Beyond that we have applied an average 13% growth factor by averaging 2024-2026 growth rates. Book value sequential change also applies the same factor.
For comparison, we have also applied a 15% growth factor from 2025 onwards to 2030. One can see in this theoretical exercise, generating a consistent mid-teens book value growth very quickly increases the incremental earnings needed to hit that mark.
This exercise shows that Axis would need 9% extra earnings in 2025 ballooning to 70% of extra earnings over the seven years to 2030, if it has to consistently hit the double-digit book value growth mark.
Taking a step back, we appreciate the desire to set aggressive aspirational targets and hold the team responsible for them. That said, hitting double-digit growth on a consistent level is a tough ask, and it remains to be seen if Axis can deliver that on a consistent basis.
Secondly, Axis has a lot of ground to cover in improving its reinsurance book’s combined ratio
Beyond the book value growth, Axis discussed the likelihood of its reinsurance franchise hitting a low 90s combined ratio. The table below shows combined ratio for insurance and reinsurance segments for the largest hybrids/reinsurers.
The median combined ratio for Axis’ reinsurance division was 98.7% vs. US hybrids in the 83-92% range. That said, Axis’ repositioning and pull back from the volatile property catastrophe classes should help the company.
What jumps out immediately in the table above is that not only are Axis’s results in its reinsurance segment consistently worse than the peer group over a period, but also the volatility of these results.
The company exited property-catastrophe and other volatile classes in its reinsurance business from 2022, and Q1 2024 results have improved sequentially. We have often said that size matters when writing volatile reinsurance classes, since investors very quickly get wary of the noise in numbers on a smaller balance sheet. Larger companies such as RenRe, Everest, and Arch have the flexibility to withstand this volatility, which has resulted in superior book value growth longer-term as shown in the table in the first point.
Thirdly, E&S results for the company remain a bright spot
Over the past few years, Axis has continued to pivot to its specialty book, a point which was repeatedly touched upon in its investor day. The chart below shows the surplus lines entities for the largest E&S companies in the US.
Axis’s E&S results appear to be in line with its peer group.
Axis has continued to lean into the E&S piece of its business, and growth has ramped up in recent years as shown by the double digit increase in 2023.
Although of late there has been a lot of debate on the sustainability of the surplus lines market, recent stamping data continues to show these trends mostly persisting. Using stamping data from three of the largest states (CA, FL, TX) we can see that the 3-month trailing premium year-over-change for May was +11.4% vs 13.6% for April and +6.6% for March of 2024. In other words, trends appear to be stable.
In summary, the biggest takeaway from our vantage point was the aspirational expectation to hit double-digit book value growth over this cycle.
Our analysis shows that this will be a tough ask, though we appreciate that the management team’s compensation is tied to the achievement of this goal. Vince Tizzio and his team do seem to be taking steps in the right direction and the noise and volatility in results seem to be behind us.
From here on, it's all about taking baby steps to hit the lofty goals that Axis sets for itself.