Can AXA Put All Of The Pieces Together?

By Stephen D. Simpson, CFA | June 10, 2012 AAA

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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Recent Results Fairly Mediocre
Although AXA's first quarter update was positive overall relative to sell-side expectations, the absolute performance wasn't all that remarkable. Revenue was up about 2% as reported, or up 1% on a comp basis. Life and savings was pretty flat, though new life insurance business grew more than 5%. Property and casualty (P&C) was up about 3%, while asset management revenue dropped 7% due to ongoing outflows in assets under management.

SEE: Intro To Insurance

Continuing to Build the Global Footprint
It's fairly common for specialized P&C insurers or reinsurers to operate on a global basis; investors need look no further than names like Arch Capital (Nasdaq:ACGL), Berkshire Hathaway (NYSE:BRK.A) or Chubb (NYSE:CB), and even smaller companies like W.R. Berkley (NYSE:WRB) have targeted the international market as an important avenue to growth.

AXA takes that to a different level, though. AXA is a top-five insurance company in much of Western Europe, but also has a significant presence in the United States, Japan and emerging markets like Asia and Latin America. In fact, AXA recently agreed to buy HSBC's (NYSE:HBC) P&C business in Hong Kong, Singapore and Mexico in a deal that will make AXA the top P&C company in Hong Kong.

The arguments for international diversification are pretty straightforward. Not only is AXA taking advantage of markets where people have reached a level of economic prosperity where insurance makes sense, but operating on a global basis diversifies both loss risk and rate risk.

SEE: The Risks Of Investing In Emerging Markets

Still Reasons to Worry
AXA wouldn't be AXA if there still weren't some problems to worry about.

One of the things that significantly hurt the company back in the credit crisis days was the company's large variable annuity (VA) business. When the markets crashed, so too did this business. AXA has since fixed up its VA business and de-risked it to some extent, but now the company has to contend with large exposures to the sovereign debt of countries like Italy and Spain.

SEE: 10 Risks That Every Stock Faces

The Bottom Line
P&C insurance is a pretty good business, and one that can produce sustainable long-term returns provided the company has good underwriting policies, sound capital management policies and rational regulation. Life insurance, though, is a tougher business and one where it's hard to establish a defensible product differentiation. Likewise with asset management; many customers care about nothing more than performance after fees.

The value proposition in AXA really just comes down to whether or not you think AXA can deliver on the potential it has had for so many years. There's no reason to believe that AXA is going to suddenly find a stable path to long-term growth, but so long as the company's long-term performance can produce an average return on equity in the high single digits (which it has over the past decade), the stock looks significantly undervalued today.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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