Dear readers/followers,

Investing in European insurance is one of the reasons my portfolio outperformed vastly in 2022. I recognized early on the undervaluation to be found in A+ and AA-rated insurance businesses such as Allianz (OTCPK:ALIZY), Munich Re (OTCPK:MURGY), and AXA (OTCQX:AXAHY). Unlike many of the naysayers, I realized that despite pressure, these companies would outperform over time – even if the exact timeframe was unclear at the time.

And so AXA has.

I was surprised by the degree of outperformance offered by the company in a short amount of time – but this is the essence of value investing. Recognizing a “low” or “cheap” share price is key – even if we can’t forecast when exactly the company will turn around. Remember that – no one can forecast the market, it’s all guesswork. Anyone who claims to be able to make accurate forecasts at certain levels, points, or scenarios is pulling the wool over your eyes, no matter if it’s macro or micro. All we can do is use historical data or models to make best-guess estimates. Sometimes those estimates are pretty damn good, but much of the time, they surprise us.

The best safety I believe you can have is buying quality cheap, because if you do that, and diversify with 50 different investments of quality, then you’re fairly certain to be set over time, going by how things have been going the past 200 years.

So, back to AXA and 2023.

AXA in 2023 – a good pick?

Many investors took issue with my focus on European insurers in the past year – even though AXA is actually a very qualitative business. The company’s 200+ year history ensures stable fundamentals, at least in theory. 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. It’s not Allianz or Munich RE, but I would say the company together with Legal & General (OTCPK:LGGNY) is a solid 4 group of insurance businesses worth looking into.

The case to be made for this French giant is typically a combination of yield and upside – and so it was when I wrote about it last. The yield at the time based on conservative estimates was over 7%, with a combined yield and upside forecast well over 20% conservatively on an annual basis.

While investors in AXA must accept relatively high amounts of potential volatility – as indicated by the company’s history – this volatility is still offset by a high degree of fundamental safety. AXA has no worrying debt and is A-rated or equivalent by every one of the major agencies out there, and has a 2021 solvency II ratio of 217%, now up to 225%. In fact, not just A-rated, but A+.

The company has a current market cap of over $70B. Going by straight 2022E forecasts and what we can expect from AXA, we can expect much the same as from other quality insurance businesses – meaning premium growth and the company enjoying the benefits of higher fixed-income yields. The fact that AXA also offers banking is nothing to sneeze at either because it further enables the company to outperform with NII.

Current S&P Global analyst estimates for AXA are as follows in terms of earnings and the dividend.

So as you can see, there are no real forecast worries here, with the same trend by the way true for FactSet forecasts, and any forecasts I can find. The way I model my own estimates for AXA, I also believe the company will average mid-single-digit to high-single-digit growth rates for the foreseeable future – similar to Allianz, and not dissimilar from Munich Re.

We have 9M22 results, and these more or less confirm this thesis and the upside for AXA. Revenues are up 2%, with a sustained focus on the technical lines, and AXA managed a very good underwriting margin with continued pricing discipline. Solvency is up to 225% as of 9M22. Like MURGY, the company had hurricane impacts, though “only” at €400M due to a reduced market share from AXA XL, an advantage here.

The revenue mix is qualitative.

And pricing impacts the company’s already-excellent solvency. Anything above 220% is superb, and the company continues to show rock-solidness here.

In particular, I want to highlight the company’s low exposure to the hurricane impact, because it caught me somewhat by surprise as well. Katrina was the largest insured loss from a Hurricane in history, at around $90B, with Ian in second place at around $60B. The fact that there have been several hurricanes only over the past few years, including Ian, Ida, Sandy, Harvey, Irma, and Maria, all in 2011 and later, and all with $30B insurance losses is something that a company like AXA needs to prepare for, and the company has. The good comparison, in this case, is Irma back in 2017 because AXA had exposure back then. Take a look at the exposure change in only 5 years.

This is impressive work, and it even beats the way Allianz has handled it, which is something I didn’t think I would say about AXA – because I generally view Allianz as more qualitative.

A word on the rest of the segments.

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 – but it’s still a solid segment to keep in mind.

The company also outperforms on other levels, such as generating significant capital above guidance for 2021, and with over €4.4B in cash in holding, and still at an impressive position for the remainder of the year.

So, AXA continues to expect earnings growth – and analysts are in much the same mindset here, with growth in earnings actually increasing over the next few years.

Let’s take a look at what this does to valuation.

AXA’s valuation – it’s no longer “great”

Let’s make this clear from the get-go. AXA’s valuation is no longer what it once was. When I wrote about the company last, you could place a call to your broker and get shares for under €22/share for the native CS ticker, which I personally invest in. That was a great deal.

Today, the deal is so-so. Generally speaking, AXA trades at a native normalized P/E ratio of around 8x, reflecting the general discount applied to insurance businesses in Europe. However, today the normalized native P/E for AXA is closer to 8.75x.

Can and probably will AXA grow from this? I believe so, yeah. Will it grow substantially beyond what we’re seeing today? It can, but I don’t believe it will grow massively. My own YoC is solid – over 7.5%, and I’m mostly holding here. But I want to make clear that AXA has realized much of the potential I initially saw in the stock at a cheap valuation. With everything, dividends and all in between, I’m approaching 70%+ RoR for my position, which is a very good return for my investment. I didn’t invest as heavily as I did in ALIZY and MURGY, unfortunately.

I still don’t see a negative long-term RoR, I see it essentially going stable. On a peer basis, AXA’s closest peers are Allianz (OTCPK:ALIZF), Zurich (OTCQX:ZURVY), 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. However, at this point, we do need to point out that AXA has a historical tendency of trading lower than most of these, except Generali.

The average at this time is around €32/share, and 18 out of 19 analysts consider the company either a “BUY” or an “Outperform”. Do you recall my latest price target on AXA for the native? In case you don’t, it was €28.5. We’re at €28.26 as of the time I’m writing this article. I don’t see a significant enough reason to change my PT at this time, despite analysts having boosted theirs to represent a current upside of 14% for AXA.

Let me illustrate this with the ADR.

No matter what we think, the market has its own mind of valuing a company, and often times, we can look at normalized multiple ranges to get an idea of what’s substantially under or substantially above the company’s typical trading range. At times, there are reasons for the outperformance or the underperformance – and when this is the case, this is something I am careful about.

However, here and at this time, I don’t see a strong enough justification for why the company would be worth 14% more. I can say that it may rise, but because I don’t abandon the normalized range, this would turn our conservative upside from around 16% annualized, to less than 3% annualized including the company’s yield. This annualized upside coming to around 55% RoR (potentially) until 2025E is entirely based on earnings growth which averages around 7-9% per year until then based on current forecasts. Because the confidence here is high, I’m willing to at this time hold onto my AXA shares – but I wouldn’t be completely honest if I didn’t say I’m looking at alternative investments.

Insurance businesses are volatile beasts. You can generate substantial, triple-digit outperformance by buying them when the market hates them. I have proven this here on SA not only with Unum (UNM), but with Reinsurance Group of America (RGA), and with Allianz, Munich RE, and now AXA (on an annualized basis). However, a mistake I believe can be made is holding onto things for too long, which would start eroding away at those returns.

There are so many great companies available today – so I’m open to the possibility of looking at other investments.

As for AXA, here is my current thesis.

Thesis

• This is one of the largest asset managers and insurers in all of Europe and the world. It has rock-solid foundations and a 200-year history. Under the right circumstances and at the right valuation, this company is a definite “BUY”.
• I believe that a conservative estimate of the company’s abilities calls for at least a target of €28.5/share. This means the upside is now all but gone, and we can look at potentially harvesting profit.
• Based on this, I would consider AXA a “BUY” here, but an extremely weak one.

Remember, I’m all about:

1. Buying undervalued – even if that undervaluation is slight, and not mind-numbingly massive – companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn’t go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.

Here are my criteria and how the company fulfills them (italicized).

• This company is overall qualitative.
• This company is fundamentally safe/conservative & well-run.
• This company pays a well-covered dividend.
• This company is currently cheap.
• This company has a realistic upside that is high enough, based on earnings growth or multiple expansion/reversion.

The company is no longer cheap, and the upside here is less than 1%. Other than that, it’s a “BUY”, but a very weak one.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.