Axa’s profile has changed profoundly since 2018-2019 with, on the one hand, the takeover of Axa XL, an American company focused on property and casualty insurance for very large companies, and, on the other, the sale of Equitable life insurer, still in the United States. As Frédéric de Courtois, Deputy Managing Director of Axa, reminds us, this arbitration made it possible to have “fewer financial risks, costly in capital and which are difficult to diversify, and more insurance risks”. In fact, Equitable had marketed many unit-linked contracts with guarantees. Axa prefers savings products with little or no guarantee, such as, in France, eurocroissance contracts, the guarantee of which is at maturity and not annual like contracts in euros.
COST OF THE PANDEMIC
In the short term, this strategy, although relevant, had the consequence of a heavy impact of the pandemic due to the coronavirus, despite a lower loss experience in motor insurance due to the confinements. The provisions made in 2020 (1.53 billion net of tax and reinsurance at group level) will not, however, have to be increased. They might even turn out to be cautious.
In 2020, at Axa XL, the cost of the coronavirus reached 1.7 billion euros net of reinsurance and taxes (more than at group level), due to the coverage of business operating losses and event cancellations.
The operating profit of this subsidiary plunged into the red, to the tune of 1.4 billion, against + 0.5 billion in 2019. Fortunately, the objective of a profit of 1.2 billion in 2021 is confirmed. Formulated on the condition that natural disasters do not exceed 6% of the premiums, it will eventually be reached, although this threshold is slightly exceeded. And there is still potential for improvement, because, “For a quarter of XL’s business, reinsurance, performance was not satisfactory in 2021. It should improve in 2022, as new subscriptions at the end of the year have reduced the exposure to natural disasters and to raise tariffs by 15%”, explains Frédéric de Courtois.
Axa also has great ambitions in Europe in terms of health and provident insurance, with individual (the most profitable) and collective contracts for company employees. This sector is driven by an inflation of 5% per year in medical costs and therefore in premiums. The group is co-developing with Microsoft an e-health platform to optimize the care pathway and orchestrate the services of external partners (teleconsultation, drug delivery, etc.), based on the model of the Chinese insurance giant, Ping An. Buyer power makes it possible to negotiate prices.
But the group also exercises a business complementary to insurance, that of asset management, with its subsidiary Axa IM. Out of 879 billion euros managed at the end of September, only 170 billion relate to alternative management. But this entity, Axa IM Alts, is one of the major European players and generates a profit of 170 million, equivalent to that of conventional management in bonds and shares.
This management of unlisted assets (real estate, private debt and infrastructure, but not the private equity), with high added value, is much more profitable and higher valuation ratios apply. In traditional management, cost savings have nevertheless made it possible to accompany the erosion of commissions.
The company as a whole benefits from a solid balance sheet, an essential quality in its sector to maintain customer confidence. In addition to an AA– rating by Standard & Poor’s, Axa has a comfortable solvency ratio of 214%, beyond its target of 190%. Competitor Allianz is at the same level (216%, with a target of 180%). The dividend would only be threatened with a ratio of 120% to 130%.
Sign of confidence, a share buyback program of 1.7 billion euros was announced in early November, or 2.7% of the capital. This return to shareholders represents €0.70 per share, i.e. the difference between the coupon announced and that finally paid for 2019 due to the pandemic. Another envelope of 0.5 billion is planned for 2022, this time to neutralize the effect on earnings per share of the disposal of activities in Greece, Malaysia and Singapore, which brought 50 million in profits per year.
Also taking into account a savings plan of 500 million, the objective of the strategic plan, launched at the end of 2020, should be met. On average over three years (2021-2023), Axa is aiming for growth of 3% to 7% in its operating profit per share (net of tax, group share). This is a normalized result, excluding exceptional items, with a starting point, in 2020, of €2.56 per share, or €6.3 billion. The actual level was much lower (4.3 billion), with the effects linked to Covid-19 (–1.5 billion) and exceptional natural disasters (–502 million).
The definition of these has been tightened (from 3% of premiums collected in 2020 to 4%, now), making the objective more demanding. This year, Hurricane Ida, which hit Louisiana and then the northeastern United States, cost Axa 0.4 billion euros. We also had to reckon with the polar vortex Uri, in Texas, and storm Bernd, in Europe. Global warming could make these disasters more frequent. Enough to stimulate demand for coverage and allow further price increases.
TO BUY The stock belongs to our Invest 10 Return selection. The coupon is expected at €1.50, or 5.7%. Objective: 30 €.