Author’s Note: This is the shorter version of an Article published on iREIT on Alpha on the 5th of April 2022.
I’m a big proponent of putting money to work in safe companies – preferably multinational ones. This article is a continuation of that trend, and we’ll be looking at a company I’ve held for a number of years at this point. Here I’m talking about the French multinational insurance giant AXA (OTCQX:AXAHF) (OTCQX:AXAHY).
While many of you might not be heavily invested in French companies, I argue the best of them offer incredible diversification potential and upside – and AXA’s yield is high enough that even those withholding taxes, post-recoup, shouldn’t be too high.
Let’s establish a baseline thesis for the company AXA.
AXA – What does the company do?
AXA has a 200+ year history going back all the way to 1816, and through the course of its history, has acquired businesses left and right until changing its name to AXA back in 1985. Since 1990, the company has done over 5 major M&A’s, and following the financial crisis, is was considered the second-most powerful transnational corporation, when measured in terms of corporate control over global financial stability.
The name AXA isn’t an acronym, rather it was chosen because it can be pronounced by anyone from any country – which is a good thing when your reach looks something like this.
The company is an absolute market leader in the insurance market and is among the top/largest insurance companies on earth. It is, at the same time, also one of the world’s largest asset managers, operating under the AXA IM in Europe, and under AllianceBernstein (AB) in the USA.
For those buying AXA at appealing valuations (such as myself), the company can offer yields of over 7.5%, even now at over 6.7% well-covered by earnings. The company’s dividend policy calls for a relatively consistent portion of earnings, without much flexibility to establish a dividend tradition or continue one during poor years, as seen in 2019 when the company cut the dividend.
AXA has no worrying debt and is A rated or equivalent by every one of the major agencies out there, and has a2021 solvency II ratio of 217%.
The company is what’s known in the business as a multi-line insurer with, as I mentioned, multiple decades of M&A-based growth in its briefcase. Its start as a tiny French operation and its current status as a global leader is a testament to management skill over the past 40-50 years. The company has a historical tendency of focusing on high-growth markets to balance out their mature market incomes (which tend to be lower, but more stable). At the same time, the company is not tied to any one investment and is quick to cut an unprofitable operation from its portfolio when needed. The French giant has also acquired businesses in Colombia, Nigeria, Egypt, Azerbaijan, and Poland, one of the most attractive insurance markets in Central and Eastern Europe. Thanks to these developments, AXA now has more than 108 million customers. The company now has more than €100B in annual revenue, and almost €7B in underlying earnings for the 2021 period, an increase of almost 61% compared to 2020.
The company is currently undergoing, or almost done with, a strategic transformation where the goal was to move the company in line with a more fee-based business model. Over 90% of the company’s earnings are now fee-based/technical.
The company’s operations as of 2021 are reported in terms of Property & Casual Insurance, Life & Savings, Health Insurance, and Asset management. There is also a “Holdings & Other segment). Over the past few years, the company has slowly shifted away from a life focus due to the interest rate sensitivity that overexposure to the segment brings. Today, slightly north of half of the company’s earnings, and less than half of the revenues come from the Life segment, with the remainder coming from Non-life and asset management.
All of the company segments showed growth for 2021, with Property & Casual showing 151% earnings growth and asset management up 25% YoY as well. The other segments grew slower at 2-3%, but nonetheless showed positive direction. RoE saw significant improvements and is now at the high-end of the company’s target range, close to 15%, and the Solvency II ratio increased by almost 17% YoY. The company’s gearing is, as of 2021, less than 27%, with one payment of a Tier 1 debt of $850M in early 2022, and issuance of new debt in early 2022 as well.
The company’s re-aligning of its portfolio is paying off, with a lower reliance on capital-intensive Savings products and interest-rate sensitive Life insurance operations. Sales in these legacy segments remain solid, and the company has key market leadership in France here at close to 9% of the entire market, as well as 10% of the Swiss and almost 8% of the Belgian market.
It would be fair to, on some level, consider AXA to be a French response (and western European response) to the German giant Allianz (OTCPK:ALIZY).
In terms of health insurance, we’re seeing a shift from individual coverage/policies to group policies due to the introduction of compulsory corporate health coverage – but the ebbs and flows here are fairly nation-specific with trends like the insurance tax putting pressure on earnings in the UK specifically. To go specifically into each nation AXA operates in and the insurance/health specifics of the nation would take too long – so I will simply say that sales in health insurance continue to grow steadily, though not as fast as P & C insurance.
P&C, unlike life, has more ties to economic/GDP growth than interest rate trends. AXA has been able to record growth in this as well – massive growth during 2021, as a matter of fact, as economic conditions prior to the Ukraine war did show normalization. AXA also has major market shares in P&C – up to 14% in France, 20% in Belgium and 13% in Switzerland. These markets are recurring, and the company’s most significant markets in all of Europe. Legacy is good, and emerging markets are growing even better, with AXA focusing on P&C expansion through, among other things, the American XL acquisition, which is part of the reason the company’s growth was triple digits for the year.
Through the XL M&A, AXA is now the world’s leading P&C Commercial lines insurer, and is integral to the company’s shift from life to a broader portfolio composition.
While the asset management business seems small, it actually generates over €2B in revenues and has over €804B in AUM. AXA is, because of this, among the 20 largest asset managers in the entire world. This branch of AXA is in need of growth and scale, and Allianz is significantly ahead of AXA in this.
So, concluding company structure a bit, we’re looking at a previously predominantly life-focused insurance business, that’s turned to a more appealing insurance segment mix.
Because Life, P&C, and Health are dependent on different flows in society, such as interest rates, GDP growth, and political/health trends, an overreliant insurance business will always suffer volatility or “lumpy” earnings during downtrends and uptrends.
The company’s moves have served to lessen the impact of these highs and lows. With the new business profile, the earnings structure has moved to being more weighted towards P&C and Health contributing almost 50-60% to the FY 22 pre-tax underlying result.
AXA is also reshaping the business towards Unit-linked products to increase its profitability. AXA expects substantial synergies from XL, and not all of these are fully realized as of yet.
Overall, this has turned into a very appealing insurance business since its trough valuation when I bought the company for less than €16/share. Today’s valuation is markedly different, and the company’s performance since then shows a full reversal in valuation.
Let’s look at some risks for AXA.
Risks for AXA
Some of the more fundamental and underlying risks for the company have been addressed by what I will clearly state, is a successful re-orienting of its portfolio and sales mix. It doesn’t remove the risk of a low-interest-rate environment such as the one we’ve seen for the past few years, but it surely lessens this impact.
Instead, I would point to AXA’s balance as one of its primary risks. AXA relies on mature markets, where growth is nearly impossible as well as emerging markets, where growth is easier but where risks are far higher. The company has a relatively good track record in managing these two sectors well and delivers growth as well as stability over time, but a wrong move in the emerging market direction can prove disastrous to earnings and dividends (as well as returns). The current geopolitical situation couldn’t have come at a much worse timing for AXA, given that it very recently tied up most of its capital in the XL M&A. If there were significant shortfalls anywhere, this would be visible in the quarterly and annual trends. And while this wouldn’t threaten AXA fundamentally, it would certainly trickle down to earnings and returns.
On the positive side, AXA has no material/relevant exposure to either Russia or Ukraine. AXA isn’t the only one to say this – Munich Re and (OTCPK:MURGY) Swiss Re (OTCPK:SSREY) pretty much say the same here. But it’s still moving into this sort of geopolitical quagmire with a balance sheet that’s been drawn on due to the recent M&A.
Results have been a good one on hand – the company’s buybacks are positives, as is the dividend increase. However, XL didn’t exactly deliver the blockbuster performance I expected from it, and missed earnings by 2% to my forecast. This is weighed up by strong performance everywhere else – but AXA paid good money for XL, and it’s a disappointment to see them miss the mark.
Despite being somewhat strapped for cash after the M&A, the 2021 results were excellent (minus XL), and the increased solvency ratio does leave room for the company to act on further shareholder returns here. I see the potential for a few risks with AXA, primarily tied to cash and remaining ties to interest rates, but not much beyond that.
A lot of it is tied to XL, which should deliver better results going forward – in accordance with AXA’s own expectations.
My positive stance on AXA has never been all that popular or garnered all that much attention here on SA. Most of my previous articles, or articles including AXA as a pick, really haven’t delivered or caused many comments or messages – and I do usually get some messages about my picks.
This is sad to me, because AXA, as you can see if you’d bought it dirt-cheap, could have resulted in returns, including dividends, of over 80-90% in less than 2 years.
This is the power of valuation-centric dividend investing. Now, my position was initially about €7,000 – and up about 95% including dividends and FX. When looking at AXA today, we’re seeing a very resilient company despite potentially unfavorable economic trends in the near future. The dividend yield is also offering an upside potential, thanks to a higher dividend and given the new payout range at 50-60% of adjusted earnings. With XL included, we should see continued growth in that dividend for the next few years or so.
On a peer basis, AXA’s closest peers are Allianz, Zurich, Generali (OTCPK:ARZGY), and Sampo (OTCPK:SAXPY). In this group, the average P/E lies close to 11-12X – AXA is undervalued to this multiple – and is also undervalued to P/B multiples, and offers a higher yield than all of its competitors at current valuations. From a peer-based perspective, the company is at about a 10-15% discount to averages, with the highest discount in P/B.
The average at this time is around €30.5/share, and 18 out of 20 analysts consider the company either a “BUY” or an “Outperform”. While I would say the €30.5 price is justifiable – I would go lower to a €28.5/share price target, more in line with a fair-value peer average.
Equity analysts such as Alpha value have a PT of €28.7 for AXA (Source: AlphaValue).
At an established PT of around €28.5, the current upside is around 7-8%.
AXA has an ADR as well – and while the upside in terms of reversal has faded, the upside from growth is still very much there, with an 11-12% annual CAGR based on a 7% average annual EPS growth rate.
Is it the best upside available on the market today? I would say that’s not the case at this valuation – but it still offers a high yield with an upside and an A-rated insurance company with a global profile. For investors looking for European exposure, there are a few options – and if you’re looking for French and finance – AXA is one of the best options out there, in my opinion.
With the addition of XL, the company has become a global power player that lacks the previous sensitivity to life and interest rates it once had. A rising interest rate environment should also stimulate this company’s growth profile for the next few years, and I expect between 6-9% EPS growth per year going forward, even with Ukraine and Russia as they currently are. In 2024, I expect sales revenues of €130B for the company, and delivering EPS of close to €3/share, allowing for a €1.6-€1.8/share dividend.
I currently have a €10,000+ position in AXA, and I’m in no hurry to sell here.
AXA is a “BUY” to me, and one with a good upside.
Here are my targets for the company.