AXIS Capital Holdings Limited

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

A global specialty underwriter and provider of insurance and reinsurance solutions, with operations in Bermuda, the U.S., Europe, Singapore, and Canada.

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The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: AXIS Capital Holdings Limited (AXS) is a global specialty insurance and reinsurance provider with diverse operations. The company operates primarily through two segments: Insurance and Reinsurance. The company’s strategy aims to leverage its global platform, specialty lines expertise, disciplined underwriting and risk management. It is worth mentioning AXS’s intention to become a global leader in specialty risks, and the execution of its business strategy for the future.

Insurance Segment: This segment offers a wide range of specialty insurance products, including property, liability, marine, and aviation.
Reinsurance Segment: This segment offers reinsurance solutions, covering property, casualty, and specialty lines, including property, liability, aviation, credit and surety, marine and energy, and other specialty reinsurance products.

Industry Trends and Competitive Landscape: The insurance industry is complex and competitive. It’s characterized by:

Cyclicality: Insurance and reinsurance are cyclical, driven by fluctuations in premium rates, the level of claims, and economic conditions.
Consolidation: The industry is undergoing continued consolidation, especially among insurance companies and reinsurers.
Regulation: It’s heavily regulated, with stringent capital and reserve requirements for companies.
Competition: Highly competitive, with many large players. This makes the economic moat, the ability of a company to maintain its margins and market share, all the more important.

What Makes AXS Different?

Global Footprint: AXS has operations in many major markets, which provides diversification and access to a wider range of opportunities.
Specialty Focus: Unlike broad insurance companies, AXS focuses on specialty lines that have a higher barrier to entry, and often higher returns.
Strong Distribution Network: They provide insurance products through a broker distribution channel, which is a highly profitable distribution channel.
Disciplined Underwriting: The company aims to write policies based on a disciplined underwriting approach focusing on profitability.
Risk Management: AXS manages risks by using a sophisticated risk management system. They’re working to improve the business through a balanced approach to risk selection and pricing, along with active claim management.

Moat Analysis (Rating: 2 / 5): AXS has a narrow moat. While the company possesses a number of competitive advantages, their advantages are not quite as strong as a truly wide moat company.

Intangible Assets (Brands, Patents, Regulatory Licenses): While AXS has a well-established name, it doesn’t possess brands or patents that are particularly strong at generating a moat. Insurance brands are typically weak because customers value product attributes rather than the brand itself. AXS does, however, has some regulatory licenses, which can provide it with a narrow moat.
Switching Costs: Switching costs in the insurance sector are moderate, so customers will always leave for a better offering or value.
Network Effects: Not applicable to this business.
Cost Advantages: They’re able to achieve scale in insurance. However, the cost advantage does not appear to be too high and sustainable. They are competing in a market where their customers are not price-sensitive.

Risks to the Moat and Business Resilience:

Cybersecurity: Companies like AXIS hold customer financial information, which makes it a prime target for hackers. Security breaches could be devastating to AXIS’s brand and profitability and regulatory oversight, therefore, this risk is very high.
Economic Downturns: As a financial services provider, AXS’s financials are tied to the broader economic landscape, a downturn in economic activity could affect the performance of both sides of the business.
Natural Catastrophes: Because of the company’s insurance exposure, large catastrophes (e.g. hurricanes) can lead to major losses.
Regulation: The insurance industry is heavily regulated. Changes in regulation can impact AXS.
Interest rates: A continued increase or decrease in the interest rates will affect the profitability of the company, especially since they have a number of interest earning assets.
Claims Risk: The insurance business is, by its very nature, subject to losses through unpredictable accidents.

However, the company has shown that it can recover from the above issues. The resilience of the business has been displayed through continued innovation, as well as, constant attention to profitability. Overall, though there are many risks to the business, AXS has shown that it can manage them effectively.

Financials Analysis: AXS’s financials are difficult to predict because of the high variability in its operations. Here’s the performance that has been disclosed through its financial statements for year-ended December 31, 2022:

The total revenue stood at $12.8 billion
Net income available to common shareholders was $1.377 billion
Net premiums earned were $8.086 billion
Total assets were $33.89 billion
Total liabilities were $22.4 billion

The Q3 2023 Results and related information are as follows:

Net income available to common shareholders: $329 million, or $3.71 per diluted common share
Operating income: $258 million, or $2.91 per diluted share
Net premiums written: $1.86 billion
Net investment income: $467 million
Underwriting loss: $23 million
Total assets: $35.7 billion
Debt to total capital ratio: 28.8%
Common Shareholders’ equity per share: $66.65

The company’s most important metric, ROE, stood at 10.6% for year-ended 2022 and at 13.9% for the year-to-date 2023. This signifies good returns in a cyclical business such as insurance, however, more improvements are needed for it to be a best-in-class company. AXS’s combined ratio is good, at 98.7% for YTD 2023, showcasing efficient business operations. The net premiums written for the nine-months ended September 30, 2023 also increased by 9.7%. Overall, the financials of the company are improving and it looks to continue in the future as well.

Understandability (Rating: 4 / 5): While the overall idea of an insurance business is simple to understand, it does have many complex financial instruments and nuances that are hard to understand. The different segments, and their complexity, can also cause confusion. The regulatory landscape and all of the different tax treaties with the countries it operates in can be hard to comprehend. Despite these complexities, you do not need to know these intricacies to understand the business. However, the business model, and how AXS creates value, is fairly easy to understand from a high level perspective. This allows for good understandability of the business.

Balance Sheet Health (Rating: 4 / 5): AXS has a good balance sheet with strong liquidity and a stable financial structure. However, the company also does carry significant amounts of debt. The company has a very low debt-to-equity ratio of only 28.8%, so it is unlikely that this will cause financial issues for the company. The company also has a good history of being able to refinance its debt, which will help it if interest rates are high at the time of refinancing. Additionally, AXS’s reserves cover its claims, suggesting the company is unlikely to suffer significant financial losses from claims. Though the balance sheet has shown good signs over the past years, it still needs further improvements. Overall, however, the balance sheet is quite healthy for the foreseeable future.