AXAHY - AXA: Positive H1 With A Solid Solvency Ratio

2023-08-10 22:56:18 ET

Summary

• AXA is considering selling its $2 billion reinsurance division to reduce exposure to climate change. The company aims to make profits more predictable.
• Positive evolution of our three main ratios. Solid Solvency, higher reinvestment yield, and better profit thanks to a lower combined ratio. Supportive M&A in a secure segment.
• The company increased its 2023 guidance, so we confirm our buy rating target.

Last week, Our Favorite insurer AXA SA ( AXAHY , AXAHF ) released its H1 financial figures. Here at the Lab, we already comment on the company's ' Driving Progress ' strategic plan, and we believe that next year (February 2024), AXA might disclose a new plan to drive revenue growth and higher cash remittances. Our supportive buy rating was backed by a higher earnings growth trajectory and lower volatility based on the new accounting standards IFRS17/9.

Before analyzing its H1 results, and in line with our investment thesis, we understood that AXA is looking to sell its $2 billion property reinsurance business. The French company is reportedly discussing various options for its XL reinsurance unit, including a possible private sale or listing on the stock exchange. AXA aims to reduce its exposure to natural catastrophes, as climate change makes effective risk assessment increasingly difficult. Last year, in the USA, Hurricane Ian was the third costliest storm in history and prompted some insurers to shut down this line of business. Companies continue increasing rates within our coverage (Generali, Zurich, and Allianz) to protect their earnings from adverse events. However, we pretty much like the AXA view, and including XL in a potential transaction is likely to make the company's earnings more predictable.

In addition, we should also report the new AXA acquisition. The new AXA's EU CEO, Patrick Cohen, has closed the first investment. AXA acquired Laya Healthcare Limited by Corebridge Financial (a company of the US AIG group) with €800 million premiums and a market share in Ireland of around 28% in the health segment. With a deal worth €650 million valued at 11x P/E, AXA is growing in the Ireland insurance market and is now number one in the P&C division. Laya is a well-recognized and appreciated brand and offers a unique opportunity to strengthen AXA's presence in the EU. According to our analysis, Laya might represent less than 1% of AXA's total EPS.

Source: AXA Q2 results presentation

Mare Upside

Following our AXA's 10-year performance analysis, we report the three key metrics:

1. The combined ratio : AXA's strength arose from the technical margin and its combined ratio evolution. The insurance revenue was lower than estimates (still growing), but the combined ratio was 90.9%. This was a remarkable beat thanks to lighter cat losses (Fig 1);
2. The reinvestment yield evolution: as a reminder, the yield is "t he reinvestment rate is the return an investor expects to receive after reinvesting the cash flows from an investment." AXA's reinvestment yield was going down on a yearly basis, and now we are back at an exciting level. In the latest Q2 results, the average reinvestment yield is 3.8% (exceeding 2012 results) (Fig 2). We should also consider AXA's ' Immaterial Exposure To AT1 Bonds;'
3. The Solvency Ratio reached 235%, exceeding the Wall Street consensus estimated at 222%. ALM management actions and healthy operating profit drove this. This is a very impressive beat and, if permanent (as suggested by the Q&A call), could increase AXA's buyback by up to €2 billion over the ' Driving Progress ' strategic plan execution (Fig 3).

Fig 1

Fig 2

Fig 3

Q2 results

Overall this was a positive quarter, with underlying earnings 3.7% ahead of Wall Street. As mentioned, the beat was driven by P&C performance, while the other segments were minor misses. In particular, the average asset under management was 3% lighter compared to the consensus, which was expecting net inflows of €5 billion, and the company achieved a minus €7 billion —however, AXA's earnings level aligned with analyst expectations (€188 million).

Conclusion and Risks

Here at the Lab, we believe in a positive reaction to AXA's stock price. Solvency II Ratio evolution might drive the share price performance with an upside due to higher share repurchase. We also estimate a higher DPS next year, from €1.7 to €1.79 per share. In addition, there was a minor marginal change in tone for 2023 guidance. The CEO is now confident in exceeding €7.5 billion in earnings compared to a previous forecast of €7.5 billion. We were already ahead of management indication, and continuing to value AXA with a P/E of 11x, we confirmed a buy rating target at €31 per share ($32 in ADR). This value is also in line with Laya Healthcare's acquisition price. The upside to our target price is related to P&C UK's strong pricing power and better commercial loss ratio development.

On the downside, AXA is exposed to various risks, including regulatory changes, lower reinvestment yield given the volatility in interest rate, debtor default risk, and acquisition with execution risks. Additional downside risks include the Life business evolution due to lower sales on unit-linked policies, given higher rates and better returns on Govies. In addition, there is an alliance with MPS which expires in 2027.

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