AXA shares: solid fundamentals and return of dividends (AXAHF)

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So far, the news feed from Omicron has been mixed. On the other hand, the new variant seems to have more mutations than the previous one, which makes it extremely transmissible. On the positive side, the spectrum of symptoms reported by most infected people is not severe and in many countries reported hospitalizations have been less acute.

Our view of the equity markets remains strategically positive, even if the uncertainties linked to the pandemic and the choices of central banks could fuel phases of volatility and loss of course.

Regarding the insurance sector, we analyze AXA, one of our favorite companies in the European insurance industry. Last year, the Company suffered from EIOPA’s decision to suspend the dividend payment out of caution, while other European peers, for various reasons, made the dividend payment possible. This resulted in a significant drop in the share price.

However, this change in dividend policy for AXA did not reflect the state of the business and did not indicate different fundamentals or outlook compared to its peers. It is therefore clear that the market has preferred the dividend of European insurers to freezers, simply because they continue to offer income.

Last year, we rated the stock as a buy during the correction for two reasons. First, because it was one of the companies that paid the most on canceling event management and therefore presented a greater buying opportunity. Second, with Assicurazioni Generali (OTCPK:ARZGF), the dividend was deferred but then paid later. It turned out to be a win-win decision.

How does AXA work?

In view of the results for the third quarter, AXA recorded a dynamic rebound in its turnover, confirming a positive trend in all its businesses. This is mainly due to an increase in premiums. Regarding the net result, no information was presented to the investment community for the first nine months, but looking at the half-year report, the company posted a solid combined ratio.

Semestrial report

AXA

AXA’s Solvency II ratio strengthened further to 214% in Q3. Given the strong cash generation, the Company announced the launch of a buyback program of up to €1.7 billion and its intention to buy back €0.5 billion of additional shares in 2022 to compensate earnings dilution from the recent divestment.

Look to the past for a future idea

When we analyze the insurance industry, there are a few metrics we constantly monitor:

  1. the combined ratio: a measure of profitability used by insurance companies that measures performance in its day-to-day operations. It is calculated by dividing the sum of losses and expenses incurred by the bonus earned. As we can see in the first image, AXA’s combined ratio has shown a strong performance over the past decade, rising from over 100% to 94%.
  2. the solvency ratio: this is what an insurance company must hold to meet its obligations towards policyholders and beneficiaries with a certain probability. The higher the ratio, the better for regulators. As you can see in figure 2, AXA has a strong solvency ratio and it is clear that the company can withstand some turbulence in the future.
  3. Return on reinvestment: Since an insurer is paid up front, the company must invest and reinvest the money. “The reinvestment rate is the return an investor expects to receive after reinvesting the cash flows of an investment.” Unfortunately, AXA’s reinvestment yield is decreasing year on year, this is due to lower interest rates on government bonds. Here we see an interesting benefit in what the company calls alternative assets. An example can be seen in the third quarter results of Assicurazioni Generali, where they opened a new line of business to show the investment community the progress of the division. More and more insurance companies are turning to private equity and real assets, and we are confident that earnings will be positively impacted by this trend.

Combined report

Mare Ev. Laboratory team

Solvency ratio

Mare Ev. Laboratory team

Return on reinvestment

Mare Ev. Laboratory team

Return of the AXA portfolio

AXA

Risks

COVID-related claims during travel. AXA is one of the most exposed players in the event industry; however, we see the effects of the pandemic lessen as we progress through the COVID-19 timeline.

AXA XL, the insurance and reinsurance business in the United States, is highly exposed to natural disasters.

Conclusion

The insurance sector will benefit from the macro environment regarding inflation expectations. We are concerned about the new COVID-19 variant and the impact AXA may have on travel management, but AXA is well managed, the expense ratio has gone down over the last decade and in the meantime we can enjoy a juicy dividend payout. We rate the company as neutral at this time.

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