AXA Discounted For The Sin Of Following Regulatory Recommendation

When the markets were rife with uncertainty about the breadth and depth of the COVID-19 crisis, EIOPA issued a statement urging to cease dividend payments in order to shore up their finances so theta the insured could be confident in their solvency. Companies like AXA (OTCQX:AXAHF) and Generali (OTCPK:ARZGF) complied, while Zurich Insurance (OTCQX:ZURVY) and Allianz (OTCPK:ALIZF) did not, continuing to pay out their generous dividends. The decision to pay out the dividend now constitutes the distinction between the firms that recovered from March lows and those that didn’t. We believe that this bifurcation is not meaningfully substantiated by fundamentals, and that once the dividends are reinstated this issue will be forgotten about with the discounted members of the peer group rerating. There are pressures on insurers as a whole from the investment side, but strong performances so far indicate that the attractive pay-outs from before COVID-19 remain feasible. For both the capital appreciation and income opportunity, we rate AXA, one of the discounted players, a buy.

Booked Resilient H1 Performance

Despite COVID-19 impact, AXA’s gross revenue was down only by 2% at constant FOREX. The company recorded 1.5bn EUR reserve negatively impacting underlying earnings due to effects associated to solidarity measures and Property and Causality claims which was in line with management guidance in June.

(Source: AXA Investor Presentation Half Year Result)

Earnings were also impacted by US riots which led to an additional minus 100m EUR in profit. Nonetheless, the company demonstrated resilience in an unprecedented macro context and weak financial market. Moreover, the P&C impacts forecast are similar to that of Zurich Insurance on the BOP (business operating profit) which has rerated substantially ahead of AXA from March lows.

(Source: Zurich Insurance H1 2020 Presentation)

The Dividend and the Discount

Indeed, exposures of Zurich Insurance and AXA aren’t so different, and the reserves anticipating the COVID-19 impacts are not that different either, with similar declines in operating profit resulting. In fact, the only real difference is the fact that one froze the dividend in line with EIOPA guidelines and the other didn’t. Certainly differences in solvency wasn’t the reason for AXA suspending the dividend, as its solvency ratios are similar to that of Zurich Insurance.

(Source: Zurich Insurance H1 2020 Presentation)

(Source: AXA Investor Presentation Half Year Result)

Despite the business fundamentals and prospects being similar, the businesses are trading at substantially different levels. Referring to the chart below, it’s clear that Zurich has traded far ahead of AXA after the initial drops in March. Indeed, the comps that paid the dividend are all trading ahead of those that didn’t.

(Source: Tradingview)

Risks and Conclusions

Since pay out policies have no bearing on value, and they do not even indicate differing fundamentals and prospects in this case, it is clear that the market is preferring the group of dividend payers over freezers for the mere fact that they continue to offer income. Since AXA can easily sustain their previously paid dividend if they so choose given their strong balance sheet position, we see no reason to not buy AXA now relative to its peers given the good value proposition. Eventually, their income will resume, and it’ll be ample at over 8% yield. Although there are risks on the investment side of insurance businesses, where returns are difficult to generate in low-yield instruments, we still think that there is value in AXA and in the cash generative insurance business model. With the possibility of a high yield once the dividend is reinstated, we see AXA as attractive on both a value and income basis, and rate it as a buy.

Disclosure: I am/we are long AXAHF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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.

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