Analysts at Deutsche Bank are forecasting a €1 billion capital injection for AXA XL at year-end, in light of losses from an active hurricane season and possible costs from the Beirut explosion.
Deutsche Bank recently spoke to AXA’s management team, who reiterated that no capital injection would be necessary for XL at H1.
However, CEO Thomas Buberl and CFO Etienne Bouas-Laurent both said they would not rule out the possibility at the full-year.
Based on the loss experience in 2020 so far, Deutsche Bank believes a €1 billion injection would be realistic, but noted that the figure will likely depend on the severity of H2 catastrophes.
Buberl told analysts that XL was his “absolute focus” right now, suggesting that the business needs to show it can consistently generate its targeted returns.
AXA acquired XL Catlin back in September 2018 for $15.3 billion, later rebranding the unit as AXA XL.
The business was heavily impacted by pandemic losses earlier this year, absorbing most of the €800 million business interruption costs and €500 million event cancellation costs recorded within AXA’s P&C segment.
This resulted in P&C earnings falling by 72% to €554 million in H1, which caused AXA’s underlying earnings to decrease 48% to €1.9 billion.
However, Buberl argues that the high natural catastrophe and COVID losses could not have been foreseen at the time of the acquisition, adding that price increases should lead to better underlying results going forward.
Price rises are believed to be ahead of claims inflation and AXA management believes that they will continue through to the end of 2021, given that the industry ROE is still not clearly above required levels even on the latest pricing.
Management made it clear to Deutsche Bank, however, that the current line-sizing policy remains unchanged irrespective of price rises, meaning the group is not looking to grow volumes at this stage.
Looking forward, the €1.2 billion underlying, post-tax earnings target that was originally set for the current year has now become the implicit target for 2021, with CFO Bouas-Laurent suggesting that there should be no reason for it to change.
With or without a further capital injection into XL, Deutsche Bank believes there should be sufficient cash to pay a FY20 dividend of €1.43 (€3.4bn).
And further into 2021-2022, analysts forecast suggest an increasingly comfortable cash position, with the flexibility either to renew the CP programme or to issue extra subordinated debt as early as 2021 if this is required.
