Allianz May Buy Out IVA Fund's Holding of Euler Hermes

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- By Holmes Osborne, CFA

Euler Hermes (EUHMF)(EURHY) is the largest insurer of accounts receivables in the world. The company has been a slow grower but has good financials. There are talks of a buyout from Allianz (AZSEY).

The stock trades for 98.89 euros ($118.06), there are 42.64 million shares, and the market cap is 4.2 billion euros. Earnings are 6.57 euros, and the price-earnings (P/E) ratio is 15. The dividend is 4.68 euros, and the dividend yield is 4.73%. The stock seems to trade at a reasonable valuation.


According to the Financial Times, net profit margins are 14.14%, and operating margins are 18.37%. That's a nice profit margin. The return on equity is a decent 11.12%.

Sales have been flat over the past few years. Revenues were 1.977 billion euros in 2014 and 2.009 billion euros in 2016. Net income fell from 302 million euros to 287 million euros over that time frame.

At the end of June, the investment portfolio had 4.379 billion euros. The liability side of the balance sheet shows 254 million euros and liabilities related to insurance contracts of 2.379 billion euros. The combined ratio for the first half of the year was 80.3%. That essentially means that for every dollar the company takes in premiums, it pays out 80.3% in costs and claims. That's excellent. Euler keeps almost two dimes for every dollar it takes in. Standard & Poor's gives the company an AA- rating. That's about as strong as it gets.

The breakdown of revenues is: 13% Americas, 13.6% Middle East/Africa, 15.7% France, 48.1% Europe, 3.8% reinsurance and 5.8% Asia. As you can see, Euler gets much of its revenues in Europe; 85.4% of revenues are debt collection and credit insurance, 8.1% bonding and 6.5% other. From 2006 to 2016, premiums collected grew 2.5% per year. I wouldn't say that Euler is a growth company.

Trade credit insurance is a financial tool that manages both commercial and political risks. It provides businesses with protection against their customers' failure to pay trade debts which can arise because customers become insolvent or fail to pay within the agreed upon time frame.

The company has 1,100 credit analysts and underwriters. The debt collection division handles 380,000 debt collection files in more than 130 countries. Bonding is when a company like Euler assumes liability for the beneficiary exposed to third parties, such as when a construction company is working on a project.

Euler holds 34% of the receivables insured market. Other large competitors include Coface with 19% and Atradius with 22%. The French insurance giant Allianz owns 63% of Euler's stock. Allianz calls the shots. IVA International holds shares which is how I found the stock. It's been rumored that Allianz may buy Euler and fold it in.

As the credit insurance market has slowed, Euler is spreading into other areas looking for growth. Euler has received approval to insurance municipal bonds in the U.S. It looks like Euler won't insure Sears (SHLD). Smart move. There are other recent instances of Euler dumping a customer.

I'd only be interested in Euler on an Allianz buyout. Other than that, I wouldn't be interested. Why buy a company when the markets haven't pulled back in years? It almost seems like it's too late to get into Euler. Increased bankruptcies will obviously hurt this company. Having stated this, the stock is barely covered in the U.S.

Disclosure: We do not owns shares.

This article first appeared on GuruFocus.


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