This past weekend was the 150th Kentucky Derby. Mystik Dan won a photo finish and was the 18-to-1 odds to win. Before the race, Fierceness was the favored horse to win with 5-to-2 odds. However, it is not always about the horse, but the jockey guiding it to the win. This demonstrates that the actual execution matters vs what might look strong on paper.
Just like jockeys, the right CEO can also make a material difference between the success and failure of a franchise. For every Steve Jobs or Mary Barra, there is a Marissa Mayer or a Dick Fuld.
CEO transitions are even more critical when viewed against the lens of promoting within or bringing in outsiders. Both Everest and Axis brought CEOs from the outside who were tasked with executing a turnaround. We often compare turning (re)insurance franchises to turning a large ship or a tanker around. This is a multi-year effort, and corrective actions take a while to bear fruit.
Since some time has elapsed since the new CEOs arrived at these franchises, we thought it would be interesting to look at stock price, results, management compensation, and value creation to give us an insight into how everything is coming along.
The chart below looks at Everest Global's stock price performance benchmarked against the S&P 500 since the announcement that Juan Andrade was going to be its new CEO in August of 2019.
The stock reacted positively to the announcement before the impact of Covid-19 dragged the sector down. Things took a turn in late 2022 and early 2023 when the company reported strong earnings, with the stock outperforming the S&P 500 before reversing course in recent months over the year-end reserve charge.
On the other hand, Axis’ stock vs S&P has shown relative outperformance due to its valuation gap before the management change. Axis also had a lengthy transition period with its past CEO, Albert Benchimol, who eventually relinquished the reins on May 4, 2023.
If the stock price is a barometer, the story it is likely telling is that investors are beginning to accept that Axis’ results are on the right trajectory. On the other hand, Everest stock had already reacted to Andrade’s arrival and his subsequent actions. However, the recent reserve adjustments at Everest might have resulted in a wait-and-see attitude regarding how the rest of the year develops.
But stock prices are imperfect proxies in the short term. The appendix also shows stock performance for Everest and Axis on a relative basis since their respective announcements. Consequently, we look at results and growth, management compensation and goals, and conclude with value creation.
First, both franchises show the positive impact of corrective actions
The chart below shows the impact of corrective actions on both companies’ portfolios, amid the pivot towards a more hybrid, diversified play. Again, we would note that compared to Everest, Axis’ Vince Tizzio has been at the helm for a shorter time. Nonetheless, the lack of reserve development for both Axis and Everest in Q1 of 2024 is an important metric to watch going forward. The same can also be said for catastrophe losses, which have declined materially for Axis following its exit from the volatile property catastrophe classes of business.
The table below shows the growth for both Everest and Axis over time. The re-underwriting efforts at Axis are evident compared to Everest, which is leaning into its market leader position.
Taking a step back, both Everest and Axis continue to build out a hybrid business mix, which should theoretically limit the volatility in results. The re-underwriting decisions should also lead to a stable underlying loss trend, and lower or no adverse development over time. Please refer to the appendix for a shift in business mix and sub-categories.
Second, both are outpacing expectations set in the proxy
It is common practice to ascertain how management, including a company’s CEO, performs by looking at compensation over time and metrics set in the definitive proxy statement. A proxy statement is a document that gives insight into how the company compensates its management vs the industry.
The table below shows annual compensation for both the Everest and Axis CEOs, and we would note the decline in CEO pay vs median employee for Axis since Tizzio’s arrival.
On the other hand, Everest CEO to employee pay ratio has generally been stable over time.
The table below shows Everest performance metrics targets sourced from the company’s proxy statements. We would highlight that management compensation typically includes multiple factors, and eventual compensation is a mix of these factors that can vary from year to year. Compared to the targets, one can see that Andrade is mostly meeting or exceeding the goals on a near-term basis.
The table below shows Axis’ targets from its proxy, and we would note the higher bar set for Tizzio, whose CEO tenure began in 2023 vs prior management.
Taking a step back, the shift in hurdles for both Everest and Axis bode well for overall results. We would also note the hard market in recent years; hence, the actual change in hurdles might be less pronounced than the reported hurdles.
Third, total shareholder returns exhibit a vast gap
The chart below shows value creation over multiple periods for both Everest and Axis. We would note that both these companies had different trajectories before the change in management. Everest did a decent job, with Andrade’s role mostly of optimizing the franchise. On the other hand, Axis was a troubled franchise that never really delivered over the longer term.
Additionally, Tizzio has only been at the helm for a year, so the impact of his changes is only recently beginning to play out.
To demonstrate this shift better, the chart below shows the quarter-over-quarter book value shift over time. Is Tizzio pulling ahead in this race based on Q1 2024 results? It is tough to say, but one quarter does not make a trend.
In summary, it appears that we are still in the early stages of this pivot derby. Everest has clearly benefited from Andrade’s arrival, although its recent reserve charge has led to a bit of wait-and-see as to how this year develops and if there is any additional reserving noise.
On the other hand, Tizzio is barely out of the gate, although galloping fast, so it is too early to come to a definitive conclusion on his performance (yet). However, the true barometer of their performance will be total shareholders return over time, and it is clear that Axis has a lot of catching up to do to its peer.
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