With XL Losses Finally, Probably, Fenced In, AXA Looks Undervalued

It has been a while since I've written on France's global insurance giant AXA (OTCQX:AXAHY). When I last wrote about the stock, I liked the shares but I wasn't sold on the wisdom of the company's acquisition of XL Group, and the intervening years have seen XL cause all manner of headaches for AXA, weighing on results and sentiment (the shares are barely up from that last article). I did like the overall shift toward P&C, though, and I still do, and I believe AXA is in a better position today.

While P&C rate growth is highly likely to slow and low interest rates make life more challenging, I like the overall growth prospects across the business, including a better-run XL and growth opportunities in Life & Savings in Asia. With a cleaner balance sheet and less reserve risk from XL, I believe management could start to get more aggressive in its pursuit of growth, particularly across Asia.

My modeling assumptions for AXA drive a long-term core earnings growth rate of around 3% to 4% relative to the pre-pandemic baseline, with mid-single-digit earnings growth over the next few years. Were AXA to get more aggressive building its business in Asia, I believe there would be upside to that growth rate, but as is, it still supports a double-digit long-term annualized total return today.

 

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With XL Losses Finally, Probably, Fenced In, AXA Looks Undervalued

AXA's Accelerated Transformation Carries Bigger Risks

France's AXA (OTCQX:AXAHY) has never been afraid to do things its own way, and the company's past efforts to shift away from more capital-intensive savings-oriented life products in favor of protection-oriented products made it an early mover in what proved to be a sound strategic shift. More recently, management has been working to strip administrative costs out of operations, grow its P&C and health insurance products, shift more capital towards faster-growing regions like Asia, and begin selling down its U.S. operations. The biggest move, though, has also been the most controversial - the $15 billion-plus acquisition of XL Group (XL).

I don't fault the reasoning for making a large acquisition in P&C insurance/reinsurance, and I can see the positive leverage opportunities in acquiring a Bermuda-based reinsurer like XL Group. I'm not sure this was the right company, though, and I think at least some of the share price weakness has been a reasonable reaction to those concerns. While AXA does appear to trade at a double-digit discount to fair value, I'd just as soon own a company like Prudential plc (PUK) or Aviva (OTCPK:AVVIY) at this point.

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AXA's Accelerated Transformation Carries Bigger Risks

AllianceBernstein Reaping The Benefits Of Past Decisions

I'm pleased with how AllianceBernstein Holding L.P. (AB) continues to perform. The units are up around 10% from when I last wrote about this company, the yield remains quite attractive, and better still the company is reporting improved revenue and profitability as decisions made years ago by prior management start to pay off for the company.

AllianceBernstein isn't, and never will be, suitable for everybody. AXA (OTCQX:AXAHY) owns a majority stake of the business and regular unitholders have virtually no say in the operation of the business. Moreover, the distributions from partnerships like this can have more complicated tax treatment than regular dividends. Even so, I believe AllianceBernstein is well-placed to continue bringing in assets under management and leveraging its existing infrastructure to generate higher margins and higher distributions for unitholders.

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AllianceBernstein Reaping The Benefits Of Past Decisions

To Be More Than A Yield Play, Zurich Insurance Needs More Self-Improvement

With a dividend yield close to 6% and a healthy capital/solvency position, Zurich Insurance (OTCQX:ZURVY) (OTCQX:ZFSVF) (ZURN.S) is by no means a bad insurance company. With high expense ratios, high loss ratios, and weak trailing premium growth, though, it is likewise hard to say that Zurich is a particularly good insurance company. The extent to which Zurich Insurance's management can execute on cost-cutting and underwriting targets will shape the company's earnings growth potential, as "more of the same" is not going to be enough to move the shares significantly higher.

I would say that I'm cautiously optimistic on Zurich's potential from here. Shifting the business mix and delivering improved underwriting results will take time, but there is a pathway to mid-teens ROE and stronger total annual investment returns from here.

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To Be More Than A Yield Play, Zurich Insurance Needs More Self-Improvement

Seeking Alpha: AXA Needs To Unlock Growth To Achieve A Higher Share Price

French insurance giant AXA (OTCQX:AXAHY) has been doing what it said it would, but investors have been slow to reward the company for its progress. The shares are down about 3% from my last update, which is better than the performance of peers like Generali (OTC:ARZGF), Aviva (NYSE:AV), and Zurich (OTCQX:ZURVY), and a little worse than Allianz (OTCQX:AZSEY), but investors shouldn't shoot for "no worse than the others" with their investments.

Management has done a good job of reducing expenses and boosting cash flow, and the company's relatively solid Solvency II score is encouraging for further capital distributions to shareholders. On the other hand, high-growth markets like Turkey haven't delivered the hoped-for growth, P&C premium growth has proven challenging, and inflows to both the life and asset management businesses aren't as strong as they need to be.

A key consideration, then, is whether AXA can take the steps necessary to accelerate bottom line growth from the 2% to 3% rate seen in 2015. Today's price is fair if the 10-year adjusted earnings growth averages around 3%. A growth rate of 4% bumps the fair value to $26.50 and a little over 5% a year in adjusted earnings growth supports a target close to $29.50. I believe 5% is attainable, but far from certain, so this isn't a money-for-nothing sort of investment prospect.

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AXA Needs To Unlock Growth To Achieve A Higher Share Price

Seeking Alpha: Allianz Less Robust On Growth, But Loaded On Quality

A year ago, I thought the shares of German insurance giant Allianz (OTCQX:AZSEY) (ALV.XE) were about 10% undervalued. The local shares have risen about 13% since that piece, but the stronger dollar has pushed that local return to a nearly 10% loss for the ADRs, and AXA (OTCQX:AXAHY), Aviva (NYSE:AV), and MetLife (NYSE:MET) have all done better for U.S. investors.

Absent a possible reversal in exchange rates, I'm not as bullish on Allianz at this point. Persistent low interest rates have hurt the profitability of the life insurance business and the P&C business may be challenged by the question of how to surpass already excellent results. I still like this company, and I've actually increased my fair value estimate on a constant currency basis, but it's harder to make a call that this is a must own until/unless rates turn up.

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Allianz Less Robust On Growth, But Loaded On Quality

Seeking Alpha: MetLife Muddling Through For Now

For all of the positives I can name about MetLife (NYSE:MET), only the pathetically low rate of return on money market funds keeps me from arguing that investors would have done better putting their cash there than in the shares of this leading life insurance company. I mentioned the risk of regulatory uncertainties weighing on the stock a year ago, but I underestimated the extent to which that would impact sentiment. Likewise, I had expected more action in interest rates by now, and MetLife sits with Prudential (NYSE:PRU), Lincoln National (NYSE:LNC), and AXA (OTCQX:AXAHY) in the part of the room that really needs to see higher rates to start performing better.

At the risk of making an "I wasn't wrong … just early!" call, I still do believe that MetLife shares are meaningfully undervalued today. I believe the company has done well in shifting its mix towards higher return products with lower capital requirements and I believe the shift toward more protection-oriented products has been a smart one. Additionally, I believe the company can do well both in emerging markets and with new annuity products that reduce the risk to the issuer. I've stretched out the timeline to MetLife achieving 12% ROE and have maintained a high discount rate to account for the regulatory uncertainty, but still believe fair value is in the mid-$60's today.

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MetLife Muddling Through For Now

Seeking Alpha: AXA On The Right Track

When can a call be both right and wrong? When a significant move in foreign currency saps the strong performance of a company's shares on its home exchange and the ADR goes more or less nowhere. That is what has happened with AXA (OTCQX:AXAHY), as the shares of this global insurance giant have done quite well on the local market (up more than 25% since my last article) and better than peers/rivals like Allianz (OTCQX:AZSEY), Generali (OTCPK:ARZGY), Prudential Plc (NYSE:PUK), and Aviva (NYSE:AV), but the ADRs are basically flat after the significant move in the U.S. dollar-Euro exchange rate.

AXA is executing to plan and there is a lot to like about the company's operations. The company is successfully replacing risky (for them), capital-intensive products with profitable, less capital-intensive products and the company's P&C operations are doing well. The company's significant exposure to Asia is also helping, as these operations are contributing significant growth.

At current exchanges rates these shares look like an okay holding. The ADRs do look undervalued and the company pays a good dividend that is likely to increase in the coming years. If the dollar were to weaken, investors could recapture some of that "lost" performance but that is an inherently unpredictable call.

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AXA On The Right Track

Seeking Alpha: Aviva PLC Getting Better, But Maybe Not This Fast

Aviva PLC (AV) is up about 85% since management first laid out a comprehensive restructuring plan in July of 2012. While that sounds like an impressive return, it's not quite as remarkable when compared to the 70%-plus gains for Prudential PLC (PUK) and Legal & General (OTCPK:LGGNY), and the 50%-plus gains for Allianz (OTCQX:AZSEY) and AXA (OTCQX:AXAHY). Aviva management has done a good job of turning over its senior management and progressing with cost-cutting, shedding non-core businesses, and reducing leverage. Evaluating Aviva's fair value is a little more challenging, but even with the challenges presented by a change in the key U.K. annuities market, Aviva looks about 10% undervalued today.

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Aviva PLC Getting Better, But Maybe Not This Fast

Seeking Alpha: Defensive Allianz Not Feeling The Love

Germany-based multinational insurance giant Allianz (OTCQX:AZSEY) has amply demonstrated that it is a well-run insurer with strong underwriting policies and capital allocation discipline. Unfortunately, it's a lot of what investors don't seem to want these days - it's focused on slower-growing Western European markets when investors want to tap the growth in Latin America and Asia, it's defensive when investors want offense, and it hasn't been particularly aggressive in keeping up with AXA (OTCQX:AXAHY) or Aegon (AEG) in terms of new product development. Although I do like AXA more, I think the market is underestimating the value of this lagging giant today.

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Defensive Allianz Not Feeling The Love

Seeking Alpha: AllianceBernstein Paying Investors To Wait For A Turnaround

About the only positive thing you can easily say about AllianceBernstein Holding LP (AB) is that this limited partnership pays out a large portion of its earnings as a distribution to unitholders - not that management has any choice, given the rules that govern the taxation of limited partnerships. To be sure, AllianceBernstein doesn't immediately leap out as a great play on the investment management industry, given the company's troubles growing assets under management and maintaining a consistent payout.

Management does not seem to be kidding itself about the need to change and improve performance. Better integration between Alliance and Bernstein, as well as the addition of W.P. Stewart gives hope for better results in equity investments, and a greater focus on costs could lead to impressive earnings growth if better investment results can draw in more AUM. With a fair value in the range of $22 to $23, I don't think AB shares are all that cheap, but a 7% yield holds some appeal.

As is the case with all limited partnerships, the taxation of these investments is different than for normal equities and not appropriate for all investors/accounts. Look into the tax ramifications of owning units in a partnership like AB before investing.

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AllianceBernstein Paying Investors To Wait For A Turnaround

Investopedia: Steady Progress And Underapperciated Value At MetLife

With low rates and an uncertain regulatory environment still troubling investors, MetLife (NYSE:MET) shares have been on a slow boat to nowhere over the past year. Operating performance continues to improve faster than analysts expect, though, and MetLife's strong international operations should help build value in the coming years. While the risk of a MetLife position is asymmetrical (there's a higher likelihood of something going much worse than much better), I do believe these shares are undervalued and priced to deliver good returns over the long term.

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Investopedia: Allianz In Relatively Good Shape

Investors are understandably reluctant to put money into companies tied to the health of the European financial system. As one of the biggest, but also one of the best, insurance companies in Allianz (OTC:AZSEY) might be a company worth an exception. While low rates do compromise the company's ability to grow, quality underwriting and a healthy balance sheet make Allianz a value-priced name worth considering.

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Investopedia: Can AXA Put All Of The Pieces Together?

For this writer, global insurance giant AXA (OTCBB:AXAHY) has always felt like a company that struggles to keep everything on the straight and narrow. On those rare occasions when everything has come together, the results have been quite impressive. More often than not, though, there's a brush fire here or a lagging unit there and the share performance chops around wildly. With the stock close to intra-crisis lows, though, it's worth asking if these shares are worth another look today.

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Investopedia: The Japanese Earthquake's Effects On Insurers

Although it is still far too early to fully assess the scale and impact of the severe earthquake that struck northeastern Japan, and all of us at Investopedia wish our friends and readers in Japan the best, the fact remains that markets have to digest this information and move forward. To that end, it seems quite likely that major reinsurance companies are going to face large claims in the wake of this disaster. 

The Scale of the Disaster 

As of this writing, which is only hours after the quake struck, it is all but impossible to get a firm sense of the damage in the Tohoku region of Japan. While the reported magnitude of this quake is considerably higher than that of Great Hanshin quake that struck Kobe in 1995, it does not automatically follow that this quake will surpass the fatality (over 6,000 dead) or economic damage (roughly $100 billion) of that prior disaster. Let us all hope it does not.

Nevertheless, there are many major manufacturing facilities in this region owned by companies like Sony (NYSE:SNE), Toyota (NYSE:TM),and Nissan (Nasdaq:NSANY) to name a few. What's more, given the reports of infrastructure damage that have already come in (roads, bridges, and the like), it seems probable that there has been significant economic damage.

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