Insurance Analysis: AXA Is Our Favorite (OTCMKTS:AXAHF)

Exterior view of the headquarters of the insurance group Axa

HJBC

Here at the Lab, we very much like the insurance business. Why? The reason is always the sameinsurers receive premiums in advance (and in case events occur) they will reimburse the claim later on. Our most devoted readers know that we prefer a stock picking selection (we provided a detailed 10-year analysis of AXA, Allianz and Zurich), however, today we will scrutinize and stress the sector with a top-down approach.

All in all, our internal team is forecasting a recession in the 2022-2023 period (in Europe, the United States and also in the United Kingdom). However, our internal team is confident that insurance players are well equipped to navigate the ongoing challenge. In aggregate, if we take a look at the leading indicators, we see that capital requirements such as Solvency II ratios are at a historic high. The combined ratio is also very strong and insurance companies are in good shape at the cash level, delivering superior performance in operating cash flow. More importantly, we should emphasize how these corporations were able to revise upward commercial contracts to pass through inflation expectations, pandemic and cyber risks. On a positive note, higher interest rates mean that re-investment yield will increase again and will be a positive tailwind within the sector.

Scenario analysis

According to our calculation, insurance players have more than a 10% upside with a recession. In the worst-case analysis, forecasting a higher combined ratio by 160 basis points, a higher income from the reinvestment yield and a 5.5% less in policy income, on average, we still derive an implied upside. Whereas, assuming a best-case scenario, our internal team is confident that an economic slowdown would not likely affect the insurance business model. In a bull-case scenario, we forecast a 50 basis point lower combined ratio, the same increase in the reinvestment yield (considering inflation expectation) and a 6% decrease in net profits over 2022. At the aggregate level, if this best-case scenario was priced in by Wall Street analysts, they should reverse expectations by more than 12%.

Bottom down approach

After having analyzed the sector, we can clearly say that AXA (AXAHY, AXAHF) is the one that offers the highest yield among the European insurance companies (Zurich came in second place). There is no Generali Insurance. Because of the favorable trend of the P&C commercial business, this should continue to support the growth in EPS and dividends of the two insurance companies. In a market increasingly focused on the general macro picture, these two drivers will support the share price development of both Zurich and AXA.

Looking at the company specifically, AXA continues to be traded at a substantial discount compared to its “quality” competitors. Our internal team believes that the French insurer will continue to surprise on the ROE and will deliver above-average EPS and dividend growth. We are estimating a 10% and 13% increase respectively for 2023. Regarding Zurich, aside from the Swiss quality exposure in the P&C division, we view the farmer segment as a valuable source of profit that will drive revenue growth and margin expansion over the next two years.

We confirm our buy rating in AXA at €29 per share based on an 11x P/E ratio in 2023 and also Zurich valuation at CHF 475 per share.

Q2 insurance performance recap:

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