Berenberg has reported that AXA should face relatively low exposure to the collapse of Silicon Valley Bank (SVB) and the shockwaves this crisis has sent through the banking sector.
Analysts note that AXA has €66 million invested in senior bonds of Silicon Valley Bank and €300m in US regional banks, and also offers directors and officers (D&O) insurance cover to smaller US regional banks of €10-15 million per case.
In total, Berenberg estimates this could represent a total charge of €100m pre-tax for the group, which would be equivalent to approximately 1% of its 2022 €8.9 billion group pre-tax profit.
SVB, which was the preferred bank for the technology sector, saw a rise in demand for its services throughout the pandemic, with many firms using the bank to hold cash for payroll and other business expenses. As the deposits grew, SVB invested a large portion, which is typical for banks.
As widely reported in the mainstream media, the issue began when SVB invested heavily in long-dated U.S. government bonds, including those backed by mortgages. While these bonds were perceived to be safe, the rapid rise in interests rates by the Federal Reserve to tackle inflation, saw the prices of these bonds fall, in turn leading to a significant drop in value of SVB’s bond portfolio.
The bank’s customers began drawing on their deposits and SVB didn’t have sufficient cash on hand, so it started selling some of the bonds at large losses, which in turn spooked investors and customers, ultimately leading to the collapse of the bank on March 10th, 2023.
Rating agencies have since assured that insurers should face little direct exposure to the failure of SVB and any other potential fallout, although AM Best warns that without US Government intervention some firms could have been facing significant financial distress.
Berenberg’s analysis of AXA’s position followed a management presentation from the insurer during which leaders reassured investors about its asset exposure, strategy and growth expectations.
In addition to comments around SVB, management maintained that AXA’s strategy remains focused on technical margins, with rate rises expected to stay well above inflation levels and its combined ratio to remain stable.
Berenberg also believes that the outlook for organic growth for the next strategic plan will also rise in AXA’s target business lines, including non-life global commercial lines, transition energy, cyber and mid-market, given the combination of low asset risk, strong margins, focused growth and low M&A risk is very attractive.
Additionally, analysts have conjectured that AXA could be looking to grow its mid-market focus, as this area has performed particularly well for it in France, where it insures one in three SMEs, and which likely contributed to a French combined ratio that was below 90%.
AXA reported a 4% increase in underlying earnings for 2022, which finished the year at €7.3 billion and were boosted by growth in the company’s Property and Casualty (P&C) segment despite significant reductions in natural catastrophe exposure for AXA XL Reinsurance.
