EUR 850.00 For Business Accounts Only

Morningstar | AXA 1H Misses; Fundamentals Look Good; Shares Undervalued.

AXA reported underlying earnings of EUR 3.3 billion for the first half of a very noisy 2018. This is slightly below our expectations, but to be fair, AXA has had a pretty good start to the year, especially considering all the work to which management has been tending. We maintain our EUR 26 per share fair value estimate and our no-moat rating.

Since the start of the year, AXA has passed through a flurry of transactions. These include peripheral units, such as the sale of operations in Azerbaijan and purchase of Maestro Health, but there have also been more significant deals and capital management transactions. AXA announced the acquisition of XL group in March 2018, a related EUR 2 billion of subordinated debt placement, and the launch of the IPO for AXA Equitable Holdings in April 2018, bringing EUR 3.2 billion to the parent. The business subsequently announced its desire to transform the Swiss group life business in April 2018, and then entered discussions on the potential disposal of its European variable annuity book, AXA Life Europe, in August this year. AXA is essentially aggressively pursuing a capital-light strategy.

From a strategic perspective, AXA has identified preferred segments, such as health, protection, and commercial property and casualty. These are segments of insurance that we like, though experience has taught us that commercial can be dicey. The issue in commercial is that the potential pie is so large that there tends to be overly aggressive expansion, driving down pricing and underwriting standards. We have seen peer businesses take charges. One of these peer businesses in particular has had heavy work to do, and it is this business, Zurich, that we think AXA is trying to emulate with the XL acquisition.

The XL closing is still expected in second-half 2018, and AXA clearly thinks it can reduce potential catastrophe impacts by 40% per year with synergies of owning a reinsurance operation. We are very cautious on this target. Reinsurance is not an easy business, and we believe AXA knows a lot less than it thinks. We also believe it is more likely that AXA will sell off these reinsurance operations and keep hold of commercial property and casualty. This makes a lot more sense in terms of working towards its target of comprising predominantly health, protection, and general insurance. We think savings will probably have to stay for its cross-sell and points-of-sale contact.

However, we also think that AXA may have timed this XL transaction well. Rate has been put through quite heavily within the United States commercial property and casualty market, and we have penned that we think previous troughs in standards may have reached lows. We therefore think that when AXA finalises this purchase, due diligence notwithstanding, we should continue to see an improved profitability profile.

Underlying earnings are up high single digits in all core markets, and all combineds have been bettered, across health, protection, and general. We anticipate that the business will drive improvements in expense on commercial property and casualty, and in the current environment, we should see better loss ratios in health and protection. Alongside better capital allocation with VA and Swiss Group Life reallocations, we continue to see an improved profitability profile.