AXA to increase capital at XL to take advantage of reinsurance opportunity

AXA reported its nine-months 2020 results yesterday and the re/insurers CFO revealed that a recapitalisation of its AXA XL unit is planned, so that it can take advantage of rising reinsurance prices.

At the same time, AXA reported that its AXA XL unit is set to take an above budget level of catastrophe losses in 2020, forecasting that just in the second-half of 2020 catastrophe claims may run around EUR 300 million ahead of budget, after reinsurance.

AXA has been working to integrate the AXA XL business and reduce volatility in its results over the last few years, part of which has been a reduced appetite for catastrophe risks.

The company said that AXA XL Reinsurance has lower revenues as a result of this, as they fell 6% due to further exposure reductions in property catastrophe risks.

However, the opportunity to grow the AXA XL business in the current hardening market environment is clear and AXA already reports that strong renewals, with accelerating prices, meant that in the third-quarter insurance pricing was up 20% for the company and reinsurance pricing up 10%.

For the first-nine months of the year, AXA reports that price increases were +16% in insurance and +8% in reinsurance for the AXA XL unit.

“AXA’s strategic choices in recent years, favoring technical risks over financial risks, have positioned the Group well for the future and are confirmed by the Group’s strong performance in the context of Covid-19,” explained Thomas Buberl, Chief Executive Officer of AXA. “The Group recorded a dynamic rebound of revenues in the third quarter, with our preferred segments, P&C Commercial lines, Health and Protection growing by 3%.

“The third quarter rebound in our business reflects the continued intensive engagement of our employees and distribution partners, embracing new ways of working and staying close to our clients during these challenging times. I would like to thank them for this. I would also like to thank AXA’s 108 million clients for their trust and loyalty. We will continue doing our very best to support them in this uncertain environment.

“AXA XL continued to record strong price increases6 in the third quarter, with prices up 20% in Insurance. Scott Gunter and his new leadership team are taking decisive actions to enhance profitability, including exiting unprofitable lines like Management Liability and Financial Institutions in the UK and Lloyd’s in Q3. Going forward, we will ensure the company has the resources necessary to take full advantage of these attractive market conditions and the anticipated resumption in demand across most client segments in 2021 and beyond.”

Given the improving market conditions, AXA now plans to inject fresh capital into AXA XL to fund further profitable growth at the upcoming renewals and beyond.

Speaking to the media yesterday, CFO Etienne Bouas-Laurent explained that AXA intends to redeploy some of its internal capital to ensure that AXA XL is able to capitalise on the opportunity.

He said that reinsurance in particular is looking particularly attractive right now and that it is important AXA XL can participate in the market at scale.

“We want XL to have the size to seize them,” Bouas-Laurent said of the opportunity.

The amount in question is expected to be EUR 1 billion and this is coming from internal capital and will be completed by the end of the year.

The recapitalisation is also seen as a way to fill a gap created by COVID-19 reserves, to ensure AXA XL has the size to participate meaningfully at the upcoming reinsurance renewals.

Bouas-Laurent said the recapitalisation is “business as usual” and wouldn’t affect AXA’s overall solvency.

AXA XL Reinsurance operates a third-party capital management business that is also likely to be primed for the renewals, providing the company with greater optionality for writing more catastrophe exposed business leveraging third-party capital under its ILS Capital Management operations.

This, alongside the recapitalisation, should enable AXA to make the most of the renewals this year, while continuing to moderate its own exposure to property catastrophe risks with the assistance of third-party investors.