Insiders have been feeling a bit queasy about the rally we have had. We get that feeling based on the ratio of insider sales to insider buys. It is true that insiders, in general, sell more stock than they even think about buying. But the ratio of the two gives a hint of how they feel about the stock market. Today, it appears that we will need a bigger chart to plot this.
Notice the opposite happened in March, a fact we pointed to at the time as an indicator of good buying opportunity.
While that chart does tell a story, just like Sherlock Holmes, we are interested in the dog that did not bark. While insiders are headed to the exits, who is actually stepping up to buy? We looked for modestly bullish insider activity in our watch lists. To meet that criteria, insiders would need to buy at least small amounts on price weakness and sell less than that on price strength. We found one interesting pick that we want to share.
AXIS Capital Holdings Limited (AXS)
Since the pandemic lows, insider activity has been very interesting. Initially, 3 different insiders stepped up to the plate and bought shares.
Source: Market Beat
Post that point there was just one sale.
Source: Market Beat
But, later in the year, insider activity really took off. The numbers were so off the chart that we had to check more than one site that reports these, just to be sure.
Source: Guru Focus
So, AXIS has one of the best ratios that we have seen, and insiders did not even jump on the recent price increase to sell their shares. What do they see?
AXIS is a global specialty insurer and reinsurance provider that has been delivering for more than 18 years.
Source: AXS Presentation
While the company has steadily grown book value over the years, 2020 was rather rough.
Estimated pre-tax catastrophe and weather-related losses, net of reinsurance and reinstatement premiums were $240 million ($205 million, after-tax), (Insurance: $132 million and Reinsurance: $108 million) or 22.2 points, primarily attributable to Hurricanes Laura and Sally, the Midwest derecho, wildfires across the West Coast of the United States, the Beirut port explosion and other weather-related events this quarter, compared to $160 million (Insurance $41 million; Reinsurance $119 million), or 14.1 points in 2019.
Source: Q3-2020 Press Release
Despite what was a very difficult year, AXIS managed to deliver positive overall results.
Adjusted for dividends declared, the book value per diluted common share increased by $0.13, over the past twelve months.
Source: Q3-2020 Press Release
Why This Is Set Up Well
Reinsurance tends to have bad years and very good years. The bad years tend to wipe out the poorly capitalized operations, and the stronger ones come out even stronger. Pricing improves materially, and the returns are fantastic as all excess revenues flow to the bottom line. Two back to back years of tough times for reinsurance business have created a very strong premium cycle. AXIS brought this up in their Q3-2020 conference call. The list is rather long but shows the extent to which price increases are flowing through.
Let’s do a brief overview of market conditions and outlook and then we’ll open the call for questions. We continue to see acceleration across virtually every line of business that we write. Within insurance, we saw average rate increases of more than 16% across the book in the third quarter. This compares to about 15% in the second quarter, 10% in the first quarter of this year and 8% in the third quarter of 2019. Through the first 9 months, the average rate increase was a little more than 13%, that’s more than double the average increase in the first 9 months of last year. In our U.S. division, we saw average rate increases of more than 16%. Within that, excess casualty reported average rate increases in excess of 25%, while primary casualty averaged over 15%. E&S property rates were up almost 20%. And our U.S. programs business, which focuses on homogeneous books of smaller accounts, saw increases of about 6%.
Moving on to our North American professional lines division, pricing there also continued to accelerate and rates were up by close to 17% in the quarter. Our commercial management solutions unit, average rate increases of over 35%. We saw particularly strong rate action across public D&O, where we are essentially an excess writer at more than 55%. In addition, private equity was up more than 40% and privately held companies up more than 30%. In addition, we are seeing rate increases of about 25% in our Canadian specialty business and 20% for Bermuda excess.
Source: AXS Q3-2020 transcript
At present, we believe that the earnings estimates for 2021 are just plain wrong. If we have anything that remotely looks like a normal business year, AXIS could deliver 15% return on tangible equity. That would translate into over $7.00 in earnings for the year ahead.
While 15% may seem high to some, AXIS has delivered that in the past on far more modest premium increases.
Funnily, estimates for next year peaked at the beginning of the year and have trended down.
This has to do with more recency bias, in our opinion, as AXIS has had a difficult 2020. The company is repositioning its portfolio as it focuses on the most profitable businesses.
Analysts are deriving estimates based on recent revenue trends, but we think they are underestimating both revenues (because of premium increases) and earnings. Insider activity confirms our view.
A Steady Dividend Payer
While the insurance business can be volatile, AXIS has at least delivered steady income for its shareholders. The current annual dividends represent about 32% of consensus earnings estimates for next year and are closer to 24% of our estimates.
The remaining should help AXIS grow book value per share as it has steadily done over the years.
It is rare to find such strong conviction among insiders, especially after a rally. Granted that AXS has perhaps not appreciated as much as the technology plays, but we are still impressed. We played this through Cash Secured Puts on October 10. The contract offered us decent returns for a flat price (AXS was $45.30 at the time).
Source: Author’s App
If AXS pulls back, we will likely sell more Cash Secured Puts to generate high income on this company.
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Please note that this is not financial advice. It may seem like it, sound like it, but surprisingly, it is not. Investors are expected to do their own due diligence and consult with a professional who knows their objectives and constraints.
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Disclosure: I am/we are long AXS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.