AXA: Strong Fundamentals And The Return Of The Dividend
Summary
- The dividend is back along with a share repurchase program.
- We don't see significant negative effects due to event cancellations.
- All that matters is the combined ratio.
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The Omicron news flow so far has been mixed. On the downside, the new variant appears to have more mutations compared to the previous one which makes it extremely transmissible. On the positive side, the spectrum of symptoms reported by most infected individuals is not severe and in many countries, reported hospitalisations have been less acute.
Our view on the equity markets remains strategically positive, even if the pandemic's uncertainty and the central Banks' choices could fuel phases of volatility and loss of direction.
Regarding the insurance sector, we are analysing AXA, one of our favourite companies across the European insurance industry. Last year, the Company suffered from the EIOPA decision to suspend the dividend payment for prudency, whereas other European peers, for various reasons, made the dividend payment possible. This led to a significant decline in stock price.
However, this change in dividend policy for AXA was not a reflection of the state of the company and did not indicate differing fundamentals or prospects compared to peers. Therefore, it is clear that the market has preferred the dividend paying European insurers over the freezers, merely because they are continuing to offer income.
Last year, we rated the stock as a buy during the correction for two reasons. Firstly because it was one of the companies that paid the most on the event management cancellation and therefore presented a greater buying opportunity. Secondly, with Assicurazioni Generali (OTCPK:ARZGF) the dividend was postponed but then paid later on. This turned out to be a win-win decision.
How does AXA perform?
Looking at the Q3 results, AXA posted a dynamic rebound in the top-line revenue confirming a positive trend in all their business lines. This was mainly due to an increase in premiums. Going down to the bottom line, no disclosure was presented to the investor community for the first nine months, but looking at the half-year report, the Company posted a strong combined ratio.
AXA's Solvency II ratio further reinforced to 214% in Q3. Taking into consideration the strong level of cash generation, the Company announced the launch of an up to EUR 1.7 billion buyback program, and an intention for a further EUR 0.5 billion share repurchase in 2022 to offset earnings dilution from recent disinvestment.
Looking to the past for a future idea
When we analyse the insurance sector, there are a few metrics that we are constantly monitoring:
- the Combined ratio: a measure of profitability used by insurance companies which gauges performance in its daily operations. It is calculated by dividing the sum of incurred losses and expenses by the earned premium. As we can see in the first image, AXA's Combined Ratio posted a strong performance over the last decade moving from higher than 100% to a 94%.
- the Solvency ratio: which is what an insurance company should hold to meet its obligations to policyholders and beneficiaries with a certain probability. The higher the ratio, the better for the regulators. As you can see in figure 2, AXA has a strong solvency ratio and it's clear that the company can sustain turbulence in the future.
- Reinvestment Yield: as an insurer is paid upfront, the company needs to invest and reinvest the money. "The reinvestment rate is the return an investor expects to receive after reinvesting the cash flows from an investment." Unfortunately, AXA's reinvestment yield is going down year on year, this is due by the lower interest rate on Government bonds. Here, we see an interesting upside in what the Company calls Alternative Assets. An example can be seen in the Assicurazioni Generali's Q3 results, where they opened a new business line to show to the investor community the progress of the division. More and more insurance companies are looking to Private Equity and Real Assets, and we are sure that earnings are going to be positively impacted by this trend.
Mare Ev. Lab Team
Mare Ev. Lab Team
Mare Ev. Lab Team
Risks
COVID-related claims on the trip. AXA is one of the most exposed in event management; however, we see the effects of the pandemic reducing as we continue to move through the COVID-19 timeline.
AXA XL, the US insurance and reinsurance business has significant exposure to natural catastrophes.
Conclusion
The insurance sector is going to benefit from the macro-environment regarding inflation expectations. We are worried about the new COVID-19 variant and the impact that AXA might have concerning travel management, but AXA is well run, expense ratio has been down over the last decade and in the meantime, we can enjoy a juicy dividend payment. We rate the Company as neutral right now.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of AXAHY, AXAHF either through stock ownership, options, or other derivatives. 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.