A World-Class Insurer Showing Strength in the Pandemic Economy

Today's company is another member of the "world's best business"...

Longtime Stansberry Research readers know that means property & casualty ("P&C") insurance.

These companies provide "property" insurance, like auto or fire insurance. They also provide "casualty" insurance, which covers the risk from negligence, such as medical malpractice.

What makes them such great businesses is their cost of capital. P&C insurers are the only companies that enjoy a positive cost of capital. In every other business, companies must pay for capital.

It all comes down to "underwriting"... Underwriting is a company's ability to accurately forecast and price risk. So, the best insurance companies can consistently estimate their risk. This allows them to take in more in claims than they pay out. This difference is called an underwriting profit.

One way insurance companies get access to capital is through something called float. Float is the premiums collected that haven't yet been paid out in claims. While it holds these premiums, insurance companies invest the money. They get to keep all of the investment income in the form of interest, dividends, and capital gains.

This float doesn't cost them anything as long as they don't end up paying out more in claims than the premiums they collect. The best P&C insurance companies consistently generate underwriting profits. So, not only do they get free access to capital, they get paid to hold it.

Legendary investor Warren Buffett knows the power of these businesses. He used these companies to build up his Berkshire Hathaway holding company.

To single out the very best P&C insurance companies, we created the Insurance Value Monitor...

Using this proprietary system, we rank P&C companies using hundreds of data points for dozens of fiscal periods. We focus on 12 attributes, including underwriting discipline and float.

We've covered this theme in the past with great P&C companies like Travelers (TRV) and W.R. Berkley (WRB). Today, we're looking at a company that consistently finds itself near the top of our ratings...

Axis Capital (NYSE: AXS) is a $3.8 billion P&C insurer. Axis traces its roots back to 2002. Three titans of the P&C industry – a group we dubbed the "Bermuda All-Star Team" – helped found the company to take advantage of favorable pricing trends in the aftermath of 9/11.

Axis has 28 offices on four continents. About half of its revenues come from the U.S., with the rest in Europe and Bermuda. It calls itself a "hybrid" insurer because around 60% of its business is insurance and 40% is reinsurance.

The company covers a wide variety of business lines, including property, professional, liability, and marine. In 2019, Axis wrote more than $6.9 billion in gross premiums.

And Axis has an experienced management team. The company's CEO, Albert Benchimol, has been in his role since 2012. And he's been an insurance executive since 1994.

Even better, Axis is among the most generous companies – in any industry – with stock buybacks. Since the start of 2010, Axis spent has $3.1 billion on buybacks. That reduced its shares outstanding from about 150 million to around 84 million today.

On top of that, Axis paid more than $1.8 billion in dividends over the same period. The company has paid a dividend every year since going public in 2003. That includes the past two quarters, which were hit hard by the COVID-19 pandemic. And it has increased its dividend every year since 2006.

That's a testament to how well this business is run. Axis generates profits by earning healthy returns on its investments and writing profitable business. It understands both sides of the insurance "coin." This has helped the company pull in tons of free cash flow. More importantly, its free cash flow more than covers the cash outflow from dividends and buybacks.

And Axis' business is still strong, despite the pandemic. On its most recent earnings call, Benchimol said the company "saw the best market conditions in more than 10 years, with tightening terms and conditions in addition to higher pricing."

In a recent update for its third quarter, Axis said these trends have continued in the second half of the year. Axis also noted improvement in both its insurance and reinsurance businesses.

Axis consistently sits at the top of our proprietary P&C insurance rankings. It's a strong underwriter, has an experienced management team, and loves to reward shareholders. And its business is still strong in the face of the pandemic.

Sometimes investing is simple.