AXA XL is expected to produce an underwriting profit despite losses caused by Hurricane Ian, according to a recent report by analysts at JP Morgan.
Ahead of the release of the third quarter Activity Indicators on 2nd November JP Morgan is lowering its underlying earnings estimates for AXA by ~2%-6% over 2023E-24E, as well as its price target, from €31 to €30, according to the report.
The firm noted: “A 6% reduction in underlying earnings estimate for 2022E is mainly due to the inclusion of a $500mn loss from Hurricane Ian. However, we still expect an underwriting profit at AXA XL and at the Group P&C level, supported by its reinsurance protection and actions to de-risk the business, in our view providing further evidence that AXA has successfully turned XL around on to a path of better underwriting stability.”
Additionally, JP Morgan believes that conditions for strong pricing improvements in commercial lines remain in place, given natural catastrophe losses, high inflation and a continued positive inflection in reinsurance pricing.
It said: “With the stock trading at ~6.5x P/E, a strong Solvency II capital position and our forecast of a €500mn share buyback announced at FY22E results, we reiterate our Overweight rating. Our 2022E underlying earnings estimates are ~3% below consensus (we believe due to consensus not yet fully reflecting estimates for Hurricane Ian), but are 3% ahead of consensus from 2023E onwards.”
The report highlighted that the $500mn estimate for Hurricane Ian assumes a ~2% market share of Hurricane Ian losses, with a global insured loss of $67bn. JP Morgan stated that in AXA XL’s primary insurance operations a $350mn retention should limit losses in this business, adding that gross losses are estimated to be higher.
Additionally, the re/insurer also benefits from a 25% quota share for North Atlantic Hurricane losses, the report noted.
JP Morgan said: “Allowing for this, and the ~40% reduction in property-catastrophe risk exposure at AXA XL Re over 2022E, we estimate a further $150mn loss from Hurricane Ian in AXA XL’s reinsurance division.
“We forecast a 2H22E combined ratio at AXA XL of ~99% and a FY22E combined ratio for AXA XL of ~97%. Hence, we expect AXA XL to generate an underwriting profit in spite of Hurricane Ian, which we believe demonstrates the extent of risk reduction and underwriting improvements at AXA XL. We forecast a Group P&C combined ratio for FY22E of ~95% and believe AXA is on track for a ~93% combined ratio from 2023E onwards.”
