The insurance industry is polarising into two camps. At one end of the spectrum are small, niche operators who offer speed, tailored services and be-spoke products. At the other are full-line behemoths whose economies of scale and geographical reach allow them to offer cheap, standardised policies to the masses. Those firms trapped in the middle are being forced either to bulk up, or ship out.
AXA, Europe’s second-largest insurer, was one of the first to cotton on to this ‘barbell’ trend, and looks perfectly placed to exploit the demise in the mid-tier players. It has been acquiring businesses for years, and tidied up its portfolio in June by disposing of its sub-scale British business for €3.3bn to Clive Cowdery’s consolidation vehicle, Resolution.
The deal provides AXA with extra firepower to redeploy in other, more lucrative, areas, and bolsters its solvency ratio (a measure of an insurer’s capac-ity to absorb losses) to a hefty 188%.
The end-result is that AXA now operates profitable, mega-franchises in most of its target markets. These are Life Assurance (50% of profits), Property & Casualty (38%) and Asset Management (with €862bn under management). It also boasts a small yet rapidly expanding business in Asia (11% of revenues).
Gamble of the week: AXA SA ( Euronext: CS )
In terms of the numbers, analysts are forecasting 2010 sales and underlying EPS of e89.8bn and e1.68 respectively, rising to e93.3bn and €2.03 in 2011. Hence the stock trades on miserly p/e ratios of 8.2 and 6.7. It also offers a prospective 5.1% dividend yield and sports a robust balance sheet with comfortable gearing (debt to equity) levels of 27%. What’s more, AXA should be able to deliver a 15% return on (risk-adjusted) capital employed over the cycle. That compares favourably to today’s more subdued levels of 11.2%. Consequently, I would rate the stock on at least one times its book value, or around €21.4 per share – that’s 56% upside.
AXA is not risk-free. Like most of its large-cap peers, it is still exposed to the inherent dangers of poor investment returns, catastrophic loss (eg, earth-quakes) and ageing populations. Additionally, its sovereign bond book contains loans to the Irish (€1.7bn), Greek (€1.1bn) and Spanish (€9.1bn) gov-ernments, all of which could go bang in th e unlikely event of the ECB withdrawing funding arrangements. However, the upside is far greater than the downside and so, overall, this stock rates as a buy for the more adventurous investor.
Recommendation: BUY at €13.70