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AXA to further reduce earnings volatility with increased use of reinsurance: Analysts

2nd April 2019 - Author: Luke Gallin

Following its acquisition of XL Group last year, global insurer AXA has been de-risking its catastrophe exposure, a trend that J.P. Morgan analysts expect to continue in 2019, with the help of alternative reinsurance capital.

AXA logoDuring last year, AXA and XL Group ceded increased volumes of catastrophe exposure to reinsurance and retrocession counterparties, reflecting a promise to significantly reduce their combined exposure to natural catastrophe events.

AXA’s full-year 2018 results were significantly impacted by costly catastrophe events, leading the firm to report a loss of €233 million for the year. In fact, natural catastrophe charges in the fourth-quarter of last year exceeded the normalised level by approximately €500 million.

During its investor day, AXA reported volatility of underlying earnings relating to nat cats of +/-€0.5 billion, with its full-year 2018 results revealing actual 2018 volatility of -€0.4 billion, net of tax (-€0.5 billion pre-tax), which is mostly a reflection of XL’s U.S. hurricanes and U.S. wildfires exposure.

Towards the end of last year, the insurer noted a significant reduction in catastrophe exposure within the acquired XL Catlin portfolios, through a combination of underwriting actions, and also the use of more reinsurance protection. This reduction, said AXA, will continue in 2019.

As highlighted by J.P. Morgan analysts, at full-year 2018 the firm capped its nat cat exposure at €1.45 billion, the result of a new Group aggregate cover which forms part of its 2019 integrated reinsurance program. The integrated 2019 reinsurance program is comprised of the Group aggregate cover; a segment that protects the insurance business of AXA and XL; and a reinsurance segment, which includes alternative capital and catastrophe bonds.

Despite its new and expanded 2019 reinsurance program, analysts warn that because the contract features a €50 million per event deductible, an accumulation of many smaller events means AXA would still have the +/-€0.5 billion earnings volatility.

In light of this, analysts expect AXA to leverage more alternative reinsurance capital to further reduce its volatility.

In November 2018, the combined AXA XL acquired all third-party ownership interests in its already majority-owned insurance-linked securities (ILS) asset management affiliate, New Ocean Capital Management Limited.

At the January 1st, 2019 renewals season, the firm increased the ILS assets under management (AuM) of New Ocean to $1 billion.

“We believe that AXA is likely to use part of the capacity of New Ocean to further reduce its own tail risk volatility,” say analysts.

Analysts expect that AXA will use the $1 billion of New Ocean capital to reduce its tail risk from nat cats to +/-€0.2 billion going forwards.

J.P. Morgan expects AXA to announce the further reduction of its nat cat exposure, via increased use of reinsurance protection, in its first-half 2019 results, which is after the important mid-year U.S. reinsurance renewals.

It will be interesting to see the development of AXA’s nat cat exposure in 2019 and beyond, as the firm appears comfortable leveraging varied sources of capacity to offset earnings volatility in a still challenging and competitive operating landscape.

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