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This Company Insider Put $1 Million on the Table

John Nichols, who became CEO of Axis Capital Holdings Limited (NYSE:AXS)’s reinsurance division earlier this year, purchased 30,000 shares of the company on August 30th at an average price of $33.60. Axis is an insurer providing products such as property insurance, professional liability insurance, and reinsurance. These 30,000 shares were a substantial increase in Nichols’s holdings: he had previously owned 50,000 shares of the company. Like in other insider transactions, then, he is sacrificing potential gains from diversification and tying his wealth even more tightly to the same company that pays his salary; this is why, on a statistical basis, insider buying tends to be a bullish signal. Year to date the company’s stock is up about 8%, underperforming the S&P 500, and it currently trades at just above $34, only slightly above the price at which Nichols purchased most of his shares.

Ron Gutfleish

The announcement of the insider purchase comes shortly after hedge funds’ 13F filings were released. In these documents, the top three hedge fund holders of Axis Capital Holdings Limited all reduced their positions. Elm Ridge Capital cut its stake 21% to 1.1 million shares (see more investment activity from Elm Ridge Capital) while Adage Capital Management now owns about 900,000 shares (find out more about Adage Capital’s positions). Billionaire Ken Griffin’s Citadel Investment Group also sold many of its shares last quarter.

The total revenues for Axis were down 2% last quarter compared to the same period in the previous year, but this was primarily driven by a fall in investment income as net premiums were slightly up. Thanks to falling expenses, the company turned in earnings per share of $1.35, up from 79 cents in the second quarter of 2011 (a 71% increase). Due to heavy loss expenses in the first quarter of 2011, Axis Capital Holdings Limited also reported considerably stronger earnings in its first half this year than it did last year, with revenues up slightly as well. Both the insurance and reinsurance segments reported underwriting earnings against an underwriting loss in the first half of 2011. The company’s expenses are certainly risky going forward, but on the revenue side it appears to be doing well and we aren’t concerned about its core business prospects.

Axis trades at eight times trailing earnings despite a 2.9% dividend yield at current prices, suggesting that if an investor is willing to take on industry risk it could be a good value stock. Its forward P/E is 9, and this is based on estimates of stagnant performance over the next several quarters. Axis carries some macro risk at a beta of 0.8, but this figure is considerably lower than what we would see in many other stocks. If Nichols is fairly confident that, for whatever reason, Axis’s business is not about to decline, then it makes sense for him to be buying into the stock.

ACE Limited (NYSE:ACE) is the closest peer for Axis. ACE trades at 12 times trailing earnings and 9 times forward earnings estimates, as it has taken hits to its business recently (earnings fell 45% last quarter compared to the same period a year ago) but in this case sell-side analysts expect the company to bounce back. ACE also pays a dividend yield- 2.7% at current prices- and carries a beta of 0.7. The two companies are quite similar, but we would prefer the company that is seeing insider buying and also carries a lower valuation multiple on its historical earnings (as opposed to being more dependent on achieving growth targets). XL Group plc (NYSE:XL), Cincinnati Financial Corporation (NASDAQ:CINF), and The Travelers Companies, Inc. (NYSE:TRV) are three other comparable companies. XL is in the same territory as ACE and Axis in terms of valuation, trading at a forward P/E of 10, while Cincinnati Financial’s trailing and forward earnings multiples are both greater than 20 (the company does pay a 4.2% dividend yield, but the valuation is still fairly high). We would prefer Axis over these two stocks as well. Travelers trades at 10 times forward earnings estimates, has a 2.8% dividend yield, and is considerably larger than Axis. We would prefer the stock bought by insiders here but Travelers seems more stable and might be a lower-risk, lower-reward pick.

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