AXA SA

PAR:CS

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, welcome to the 1Q 2022 Conference Call. To begin the call, I will now hand over to Anu Venkataraman, Head of Investor Relations; and Alban de Mailly Nesle, Group CFO.

[Anu Venkataraman, executive]

Thank you, operator. Good morning, and welcome to AXA's conference call on our activity indicators for the first 3 months of 2022. Our group CFO, Alban de Mailly Nesle, will take you briefly through last night's release. At the end of his introductory remarks, we'll be happy to take your questions. Alban, I hand over to you.

[Alban Nesle, executive]

Thank you, Anu. Good morning to all of you, and thank you for joining the call today.

So as you saw from our release yesterday evening, AXA delivered a high-quality growth in the first 3 months of 2022. The performance across our technical and fee-based businesses has been excellent, in particular, health, P&C Commercial lines insurance, Protection and Unit-Linked, all off to a strong start in 2022. At the same time, we have taken decisive underwriting actions to reduce nat cat exposure at AXA XL reinsurance as previously communicated. We are also maintaining a strong discipline in Life & Savings, shifting to a very high quality mix and away from traditional general account. Overall, our total revenues increased by 1%.

I am very pleased with the direction of travel as we are executing on our strategy, focusing on growing in our core technical segments. Our balance sheet continues to be very strong with a Solvency II ratio at 224%.

Let me now go through the key numbers of the press release, starting with P&C. P&C revenues were up 2% overall, with growth in both Commercial and Personal lines. Commercial lines insurance, which excludes AXA XL Re had a strong start to the year, growing by plus 4%. We continue to benefit from favorable pricing conditions across all of our geographies. Growth was particularly strong in Europe and France, with revenues up 6% and 4%, respectively.

At AXA XL Insurance, pricing and renewals remained strong, increasing by plus 10% and well ahead of loss trend. Revenues here were stable with growth in property and lower revenues in casualty. This reflects our prudent approach to managing our exposures as we remain focused on profitability.

What you also see in our market is customers trying to optimize insurance purchase by agreeing to higher deductibles or lower limits in response to higher prices. This has also impacted exposure growth. At AXA XL reinsurance, we have reduced our nat cat exposure by circa 40%, in line with our strategy. The reduction will continue for the rest of the year as the business comes up for renewal. Overall, revenues in reinsurance declined by 12%. And this includes the impact of favorable pricing momentum that continued this quarter at plus 8%.

Now on to Personal lines. Their gross revenues were up plus 1% in the quarter. We are seeing excellent growth in Personal Non-Motor at plus 5%, and this is driven in equal parts by volume and price across geographies, and the outlook is supportive. Personal Motor declined by minus 1%. Pricing, up 1%, is starting to respond to inflationary pressures. Volumes remained subdued in the first quarter, notably reflecting lower new car registrations.

We remain attentive to inflation and are being proactive in managing claims, including through procurement, partnerships and claims orientation. In addition, new ways of working have kept claims frequency below pre-COVID levels.

Now moving to other lines of business. In health, revenues overall were up 6% in the first quarter, driven by higher volumes and better pricing. Both individual and group businesses reported strong growth momentum. France performed again extremely well this quarter with revenues up 8%, notably from the continued success of its international partnerships in the U.S. In Mexico, revenues were up 15%, reflecting the strong pricing actions we have taken to restore profitability, which was negatively impacted by COVID-19 claims.

Now moving on to Life & Savings. We continue to see a favorable business mix with strong revenue growth in Unit-Linked and Protection, offset by lower general account savings. We are seeing similar trends in net inflows.

A few highlights on our 1Q revenue performance. France continued to perform very well in individual savings with a record share of both Unit-Linked and Eurocroissance products at 63%, 20 points ahead of the market. Switzerland saw strong growth in Protection, plus 5%, driven by the Group Life semi-autonomous business. Our strategic transformation continues to bear fruit. Our Protection business in Asia also delivered very good results, plus 8%, notably in Japan and Hong Kong. Finally, in Asset Management, AXA IM continued to deliver a strong commercial performance with EUR 9 billion of net inflows, notably EUR 5 billion from third-party clients. Our management fees were up 10%, benefiting from higher average assets under management and an improving business mix towards alternatives. This was offset by lower performance fees, which, as you know, tend to be lumpy by nature. As you have seen in our press release, we are now including Architas in our Asset Management segment.

Moving on now to Solvency II. So our Solvency II ratio was 224% at the end of March, an increase of 7 points from the end of last year. This improvement reflects notably 2 points from the positive operating return, net of accrued dividend, 3 additional points from the net positive impact from the changes in LIBOR in some geographies and negative UFR impact, plus 2 points from net debt issuance, and minus 2 points from the EUR 0.5 billion share buyback. The impact from financial markets was plus 2 points driven by plus 10 points from increase in interest rates.

So I know that in periods of heightened volatility, assessing the impact of market movement can be complex to model from the outside. Our disclosed sensitivities reflect accurately the impacts of market movements, but they are not linear for significant moves. There is some convexity embedded. We have provided in our release, estimated updated sensitivities to changes in interest rates. Our sensitivity to a 50 bps change, plus 50 bps change, is now plus 5 points versus plus 9 points previously. This clearly shows the effect of convexity. Similarly, sensitivity to a minus 50 bps decrease in rate is now minus 8 points versus minus 14 points previously.

But this favorable effect of higher rates was partly offset by the following: First, lower equity markets, minus 2 points; higher implied volatility, minus 3 points, reflecting the higher cost of options and guarantees offered to policyholders; and the effect from inflation of minus 4 points. This reflects the impact on the change in inflation expectation across the inflation swap curve. Please note that is different from CPI.

To be clear, this is a pure Solvency II model effect that does not factor any management actions that would be taken to mitigate the impact of inflation, notably through cost reduction measures or increased pricing. So overall, very strong Solvency II ratio at 224%, up from year-end level. We are very pleased with the reduced sensitivity of our balance sheet to moves in interest rates.

And so before moving on to the conclusion, I would like now to say a word on Ukraine. As a company with deep roots in Europe, AXA has been profoundly moved by the tragedy affecting the Ukrainian people. To date, reported claims from this crisis have been immaterial. Aviation and marine risks, which are written at AXA XL are very complex, and we expect claims to take time to develop and almost certainly to be the subject of litigation.

Based on our current assessment, and the current scope of the conflict, we believe that net underwriting losses, including political risks, will be akin to a midsized nat cat event. Overall, we still expect AXA XL to contribute to the group's earnings growth in 2022.

So to conclude, a few takeaways to highlight. We are focusing on executing our strategy, and it continues to produce good results across the group. AXA performed very well this quarter with high-quality growth, notably across health and P&C Commercial lines insurance. We have a very attractive business profile focused on technical risks and cash generative lines. Our balance sheet remained strong with a Solvency II ratio of 224% and with lower sensitivity to interest rates. We completed a EUR 0.5 billion share buyback and you can expect us to remain disciplined in the deployment of our excess cash resources.

So the group is in a very strong position with a very good outlook. We are well placed in the current uncertain environment. I'm now happy to take your questions.

[Operator]

[Operator Instructions] And we have our first question from Andrew Sinclair from Bank of America.

[Andrew Sinclair, analyst]

Three for me, as usual. Firstly, just if you could let us know some context on what you actually see as a mid-sized nat cat?

Secondly, I was just -- sticking on Russia and Ukraine, what context can you give us on how you get comfortable with that level of net insured losses? Is it because of reinsurance protection, types of claims you feel will actually hit the industry and maybe how that relates to the cover you provide? Is it cancellation of policies and time? What gives you that level of comfort?

And thirdly, was just on nat cat actually just I didn't see any comments on nat cat losses in Q1. Just any color you can give us there? I think you usually give a little bit of color in the quarter since owning XL.

[Alban Nesle, executive]

And thank you for your questions. So I'll start by the third one on nat cat. We didn't mention anything on nat cat because obviously, there was -- there were some natural events this quarter. You have in mind the units in Franklin in Europe, or the Australian floods, but there was no large nat cat that would be material to the group. So that's the perfect transition to your first question on what is midsize nat cat.

What we have in mind by saying that is that it's similar to the loss that we had last year with the Texas freeze, which is a CAT, which is not material to the group. And as you maybe heard and what I said, we don't -- we still expect AXA XL to contribute to the group's earnings growth despite that loss on political risk, aviation and marine due to the Ukraine war.

So on this, particularly, if you let me -- I want to spend 1 minute to describe why it's complex. But complexity doesn't mean that the loss would grow indefinitely. We know our exposures. We know our reinsurance. It's just that mechanisms that I'm going to describe are such that to put a precise number now would be difficult, but we will do that for H1, and we'll share with you then what is the -- what is our best estimate of that cost.

So let me explain where we are on this. So we have received very few claims to date, first. Second, our standard property policies typically contain exclusion for losses arising from war and other hostile acts. Now as common, as you would know, that such losses would be included in coverages for political risk, aviation and marine. And in that regard, aviation is particularly complex. Aircraft and aircraft spare parts are covered by a metric of policies taken out by different parties. And what I mean by this is aircraft operators, aircraft lessors, manufacturers, finances. And they are typically separate policies covering losses from war perils and for losses caused by non-war perils.

So what happened? The sanctions declared by the U.K. and the EU on February 26 required aircraft vessels to cancel leases with Russian airlines. On March 14, Russia passed a law that enabled Russian airlines to reregister foreign aircraft on the Russian aircraft registry. And at this stage, it's unclear what affect that law might have on the ability of foreign aircraft owners to repossess or to retrieve aircraft from Russia and whether any reregistration might constitute theft or [ quantification ] or nationalization of seizures. So we need to assess whether there's been a loss as well as how and when the losses were incurred. And furthermore, we will need also to ascertain if lessors have taken action to mitigate the damages and what recoveries we may be able to get through salvage or subrogation.

So you see the complexity, and we expect that many of those issues will be subject to protracted litigation. It will take years to get to the final result. So again, complexity doesn't mean that this can drift significantly. It just means that we need more data to come to a more precise number. Hence, the -- it's not a ballpark figure, but a ballpark notion of a mid-sized nat cat event.

[Operator]

So we have another question from Michael Huttner from Berenberg.

[Michael Huttner, analyst]

Fantastic. I've got a fishing question. I hope you like it. The [ SCOR ] today, another [ tension transitioned ] gave a figure for their IFRS 17 balance sheet, including contracted service margin. I think the figure is EUR 9 billion. And I just wondered, what is your figure [indiscernible] I'm sure you have it and I wondered -- I'm sure it could be good opportunity to start discussing IFRS 17. It's not that far away.

My second question is on inflation and pricing. You made lots of different comments on inflation and pricing. Some bits were good. Some bits you didn't talk about, so they're presumably not good. I just wondered if you could kind of go back over it and give us a little bit more clarity? At the moment, I see that AXA XL is good. I'm not sure if the rest of commercial lines is good or not, not clear for me. So maybe I'm not clear. And Personal lines, it sounds like there's a big lag, but maybe you can explain what's happening? That would be really, really helpful.

And then the final one is a really small one. What is solvency expect?

[Alban Nesle, executive]

Sorry, Michael, I didn't hear the very last one. What is solvency?

[Michael Huttner, analyst]

Solvency today, as of now.

[Alban Nesle, executive]

Absolutely. So thank you for your questions. I see, I might disappoint you on the very first one because we will give you more details on our IFRS 17 numbers in Q4, probably with the Q3 activity release, and you'll have the full numbers next year. So sorry for that.

[Michael Huttner, analyst]

Can I just interrupt?

[Alban Nesle, executive]

Sure.

[Michael Huttner, analyst]

I think you might think again. If [ SCOR ] can do it, there's no reason AXA can't do it. And I imagine a lot of investors will be asking that question. So my feeling is you should accelerate that. Investors will welcome it. And if you don't, they might feel a little bit [indiscernible].

[Alban Nesle, executive]

Okay. Point taken. So inflation and pricing. We need to be very precise on this and look at the different business lines in P&C. When you look at XL, you see that the market is very hard still, and we concentrate on our profitability. And therefore, we take business where we can have still significant price increases on renewals. And you saw that, we are 10% at AXA XL insurance. And if I compare that to loss trends, loss trends -- so loss trend is not exactly inflation, but I think it will give you a good illustration of where we are. Loss trend at AXA XL are around 5%. So you see that there is still margin expansion at XL.

When now, I look at Europe, there are three different lines of business. I'll start with Commercial lines. And so we do see some inflation in Commercial lines, notably obviously, in property with construction materials. But as you saw, what we have been saying for a number of months now is that we have the ability to increase prices, and that's what we've been doing in all our countries in Europe where you see that Commercial lines prices are up by 4% in France and 2% to 4% in Europe. You will note that Switzerland, given the strength of their currency, has not had much inflation to date.

That's the same story for retail Non-Motor where there, again, we have pushed for price increases in all our geographies, and there again, Switzerland is, to some extent, an exception for the same reason. But so we are pushing for price increases, and therefore, that's a good offset to, I think, inflation.

So what's happening in Motor? Motor is slightly different because there, again, we do see some inflation but we -- first, we are able to take measures to offset part of that inflation. And when I say part, it's at least 50% of it through better procurement, through orientation, through better fraud detection. So that allows us to reduce the impact of inflation. And very importantly, what we see is that the frequency that we have is lower than the 2019 frequency level. And we don't attribute that benefit to COVID-19. We attribute it to two things.

The first one is the fact that we have better quality cars. And the second one is that we believe that new ways of working or remote working, whatever you call it, has a positive impact as well because people use less their cars, and therefore, there are fewer accidents. And so at this stage, and obviously, we need to be prudent on this, but at this stage, we don't see the need to significantly increase prices in Motor. And you see that we are up 1%. And for us, that's sufficient to maintain profitability. But we don't want to enter into price wars. And so you've seen that from country to country, sometimes we have positive net new contracts and sometimes we have negative net new contracts, depending on the local context.

And then on your third question on where is solvency today. I think what I can tell you is you have our new sensitivity on interest rates. And we are very happy that those sensitivities, plus 5, minus 8, are lower than before because there again shows the lesser sensitivity of the group to financial markets. And then you have the sensitivity to inflation, which is 4 points for 50 bps of inflation and the sensitivities to equities has not changed.

[Operator]

So we have another question from Peter Eliot from Kepler Cheuvreux.

[Peter Eliot, analyst]

Three from me as well, please. The first one is just a follow-up on Michael's question just now. I mean, it was interesting, Alban, what you said about you can offset it through better procurement and fraud detection. I mean, I guess just playing devil's advocate, it seems those are things possibly you ought to be doing in your day-to-day business anyway. So I'm just wondering what's changed? How inflation has enabled you to do those things better? That was the first one.

Second one, on your disclosure on inflation, I found that very interesting. And I guess when I look at the factors that feed into the inflation swap curve, I'm interested in how closely you feel those are aligned with the actual drivers or risks to your business and therefore, how appropriate a sensitivity that is? Be grateful for any comments you have there.

And then the final thing, a third one, I was really interested in what's happening in Switzerland, very impressive growth in some of your autonomous products. You attributed that to your current strategy. But I mean, I think that strategy has been going on for a few years. So I'm just wondering if you could give us more detail on what's specifically driving that very strong year-on-year increase there.

[Alban Nesle, executive]

Thank you, Peter. So you're absolutely right on your first question. It's not inflation that is leading us to be more efficient. It's those programs of orientations, procurement, et cetera, that we are further enhancing. But it's continuous progress that we've had over the years, but some are linked to technology. What I mean by this is we use artificial intelligence to detect fraud. Some time ago, it was 5% of the cases that were detected through artificial intelligence. Now it's 25%. So you have to put in place those tools to have the benefit on fraud detection.

On orientation, what we see is it takes some discussion with agents, with brokers to have them accept that their customer will not be able to go to any repair shops, and that is in everybody's benefit that we take control of that. So all of this takes time. I'm just saying that we are -- we've been pushing this for some time, but we still have some way to go because it takes a bit of time and because technology helps. And we still see some room for improvement in all those actions that will help us compensate partially or totally the inflation impact.

On the inflation yield curve and the impact on business. So as I tried to say in my introductory message, the way the model is done, you take your costs and you know that we project our costs over the life of our policies. What we apply is that inflation swap curve mechanically. So it does not fully reflect our business in the sense that, as you know, we have a EUR 500 million cost reduction target for 2023 compared to 2019 and we ignore it for the purpose of projecting our cash flows. We just take inflation, whereas in real life, we are taking a number of actions to contain inflation and to stick to our EUR 500 million target. So that's short term.

Mid- and longer term, so if we take a macroeconomic view, our view is that the central banks, notably the Fed, and we've seen the powerful action they took this week, and we believe the same on the SEB, so they will take actions to curb the inflation spike that we see today. So mid to long term, we believe that the inflation swap curve that we see, and obviously, it's not the current CPI, it's much lower, does reflect more or less accurately, but does reflect what will be an inflation in the future because I get that no central banks will tolerate a high level of inflation. So I think that has -- that makes economic sense mid- to longer term.

On Switzerland, so we moved to a model where we don't have the savings component on our balance sheet, but we still offer two things that are separate. One is Protection, and we are very competitive on that business. And why are we competitive? I think it's important to understand what the change in model implied for us. When we had savings on our balance sheet, there was some cross subsidy from Protection prices to the savings business. And therefore, Protection prices needed to be higher to offset for the savings business, which was general account with guaranteed rates, which were high. Now that we have a pure Protection business, we can have more competitive Protection prices while being very profitable. So it makes much more economic sense.

And the second component of that is that we advise the foundations, the -- so to be simple, the pension funds on their asset allocation. And we have a fee for that without taking a risk on our balance sheet. So that's a very powerful model. And as you see, a very competitive one.

[Peter Eliot, analyst]

That's great. Could I just come back on the second point? I mean if I just take, for example, you may have some non-Life reserves, which might be very exposed to medical cost inflation, for example. I'm just wondering to what extent, if at all, that is reflected in the model? I'm just thinking -- yes, you're looking at core inflation swap curve, but the reality is that your business is more granular and exposed to certain things there.

[Alban Nesle, executive]

Yes, that's perfectly clear. So on this, what we are looking at is the inflation rate that is embedded in our reserves. And we are, as always, cautious on this, and we review reserves thoroughly twice a year. And we make sure that the inflation embedded in those reserves is adequate.

There are exactly, as you said, some businesses where there is a direct indexation on CPI. And I'm thinking of, for instance, workers' comps annuities. On that one, the impact is mechanical and is not linked to inflation swap curve, but to real CPI. But those reserves and that risk are hedged through inflation-linked assets on the asset side.

[Operator]

So we have another question from William Hawkins from KBW.

[William Hawkins, analyst]

For Ukraine and Russia, what is your aviation and marine sums insured compared with the figures that you gave us of political risk when we were talking at the full year stage? I appreciate everything you say about the outcome being uncertain, but presumably the sums insured are pretty straightforward. So if you could help us on that, please?

Secondly, please, what was your insurance loss on the Texas freeze last year? I don't know that number. And then related to that, I mean, clearly, I understand you're being coy on this issue. But whatever the number is, whether it's EUR 200 million, EUR 300 million or EUR 400 million related to the Ukrainian tragedy, on the assumption that largely falls in XL, that's a very big hit against a consensus assumption of EUR 1.2 billion. And you've made a very clear statement that you're optimistic you can keep growing earnings, which is great. But what are the offsetting factors? Because again, whatever that number for Ukraine seems to be is a big number against this optimism that XL can grow earnings?

And then lastly, please, I apologize if I missed this in your interaction with Michael, but the 2 percentage point impact from markets in your Solvency II ratio, could you just help me understand how that breaks down between available and required capital, even if it's just qualitative or directional, please?

[Alban Nesle, executive]

So I'll start with the -- well, your first three questions are linked. So I will answer them in one go, if it's okay? So what we mean on Ukraine and Russia is that the -- it is not material to the group. And for XL, it is a hit. That's for sure, which is like the hit on Texas freeze last year that didn't prevent XL from achieving the EUR 1.2 billion. And we said that XL would participate in the group's earnings growth.

What are the other aspects that allow us to say that? We've been clear that we were focusing on profitability. You saw that we have a 10% price increase on insurance, 8% on reinsurance, loss trend is at plus 5%. And we have significantly reduced, and we will keep on reducing, our CAT exposure at XL Re. We've done that by 40% in Q1, and we'll carry on with that. So we have margin expansion on the attritional, and we have less exposure to CAT than last year. That allows us to be confident. I mean everything else being equal, obviously, we need to see if they are very significant -- sorry, significant CAT losses in an abnormal year, you can never predict, but that would affect also our GI entities. It's not specific to XL.

And XL budget allows for a number of severe losses. Obviously, this one, which is a man-made large loss was not predictable as such, but we have a budget for man-made losses and for nat cat. So that's embedded in XL numbers.

On the Texas freeze, so it's true that we didn't give a specific number because, as I said, it was not material at group level. When it's material, and we showed it -- we show the numbers, and that's what we had for [ event ] last year, the flood that we had in Europe.

And on the exposures to aviation and marine in Russia and Ukraine, I believe all this needs to be discussed in detail, and we'll do that at H1. I think what matters at this stage is the comments I made on the overall loss it could represent. There is -- we have obviously the exposure, but we also have a significant reinsurance on aviation that will come into play as well.

[William Hawkins, analyst]

And I'm just -- sorry, the solvency question, please?

[Alban Nesle, executive]

So on this, we'll come back to you, but it's a mix of both. It's both [ EUF ] and [ SEL ].

[Operator]

So we have another question from Thomas Fossard from HSBC.

[Thomas Fossard, analyst]

Can you hear me now?

[Operator]

Yes.

[Thomas Fossard, analyst]

Yes. Sorry for that. Just one last question for me related to AXA XL insurance growth. Actually, revenue is flat, which I mean, adjusted for the price increase implied volume are still running down 8% at the present time. I think that last year, Alban, you were a bit more a bit on the capability of the primary insurance lines to show a bit more growth, I mean, at least taking the benefit of the rate increases. So you're highlighting in your press release that you're still pretty cautious on casualty lines. But maybe you can tell us what the outlook in terms of revenues for primary and if we should expect growth to pick up? Or I mean if you've changed a bit your mind given the current environment regarding inflation and maybe pricing adequacy?

[Alban Nesle, executive]

Thank you, Thomas. Several things to have in mind when looking at XL insurance revenues, which I agree were flat. So prices on renewables were up 10%. On new business, by nature, new business is the -- is less profitable than renewals, simply because, obviously, we know less of the business, simply because if it comes to us, it's probably also because the price of it by our competitors are too high. So we need to be more cautious on new business than on renewals.

What you need to have in mind as well is that Q1 is very much Europe. In Europe, we are comfortable growing on the property side, and that's what we did. But on the casualty side, I think we said at the end of last year that it needed a bit more rates to be -- to reach the level of profitability that we want. And that's Europe. And I wouldn't say the same about the U.S. So we'll see along the year, how both short-tail and long-tail lines will grow in the U.S.

And last item, what we start seeing as well is that with price increases, some customers start reducing their demand for coverage. And so they want higher deductibles, for instance. And that also links to a reduction in exposure and therefore, reduction in premiums. So it's all this combined, and notably, obviously, the price increase that leads to XL's revenue being flat in Q1.

[Operator]

So we have another question from Andrew Crean from Autonomous Research.

[Andrew Crean, analyst]

Listen, can we get a bit more clarity around nat cat and man-made losses? I think that what we're trying to get to is was the nat cat in the first quarter above or below your normal CAT load and therefore, the Russian -- the man-made Russian losses, do they come on top of a lower or an average level of nat cat? So that's what we're really trying to get to. And really we're not interested in the size of the Texas freeze other than to know in monetary terms, roughly speaking, what you are looking at for Russia, which I think is a fair question to ask.

Secondly, you said on new business that you're not writing new business for Russian-owned assets located in Russia. But two questions on that. Are you writing renewals of Russian-owned assets located in Russia? And what about new and renewals of foreign-owned assets located in Russia, are you writing those?

And finally, a question on M&A. AXA hasn't done any acquisitions since 2018. I think at the full year, you indicated that you are more open to bolt-on acquisitions. Could you define what the maximum size of the bolt-on is?

[Alban Nesle, executive]

Thank you, Andrew, for your questions. So on nat cat, when I look at the group overall, I would say that Q1 was broadly in line with what you would expect from a quarterly budget of nat cat and that our GI entities in Europe were more affected than XL because units in Franklin were in Europe. So I hope that answers your question.

On the Russian assets. So to be clear, we don't write, be it for new business nor for renewal, any policy on Russian assets on the Russian soil owned by Russians. Now if we have international programs for non-Russian companies with Russian assets, we, in the respect of sanctions, obviously, cover their assets that are on the Russian soil.

And then on M&A, I think what we want to say by bolt-on doesn't really matter what we mean is it's acquisitions that are of a limited amount that will not come as a surprise, and that are well embedded in the strategy that we have described to you where we want to use capital for both buybacks and acquisitions. So it's not like it's a maximum amount. It is something that needs to make sense and is reasonably limited in size.

[Andrew Crean, analyst]

And how -- if you did an acquisition, how are we supposed to measure whether you would have got more benefit out of buying stock back, which is [ more ]?

[Alban Nesle, executive]

Yes. So first, what we said was that we wanted to do acquisitions in countries and lines of business that made sense for us. We don't want to put new flags on the map. And so we gave the examples of countries where we want to be, such as Spain, Italy, Germany, which means that we will have synergies in those countries because the -- we are already present there.

So what we want to do when we compare to a share buyback, is to look at the amount spent for the acquisition, see what would be the impact if we expend that amount for a buyback and see, with the acquisition, taking into account the synergies and the moment they are realized so say, 2 or 3 years, how do they compare to the benefit of the buyback.

[Operator]

So we have another question from Ashik Musaddi from Morgan Stanley.

[Ashik Musaddi, analyst]

Just one -- a couple of questions, actually. One is, again, going back to this pricing and inflation. I mean you gave very good clarity to Michael's question that you're able to offset the inflation through, say, other actions as well. But how should we read that into the combined ratio, especially from Europe? I mean, Europe, you have been hitting a combined ratio of around 92% for a reasonable time. So would you say that, that 92% is still safe, given that -- I mean, inflation is still running high but as you don't see that in the headline pricing at least what you're reporting both on Personal lines and on Commercial lines in Europe? So that's the first one.

Second thing is Solvency II, when you mentioned the reduced sensitivity on interest rates, et cetera. I mean, how much of that is management action? And how much of that is just purely mechanics of convexity, et cetera? I think for volatility, you mentioned it's purely mechanics, but does that apply to interest rates as well? And given that your solvency ratio is high at about 224%, would you take some management action to reduce that sensitivity? Or would you say you are still happy with the exposure you have to interest rates?

[Alban Nesle, executive]

So on your first question, so I'll be disappointing you because in Q1, as you know, we don't comment on earnings. So I will not comment on the combined ratio. And I believe what I said on inflation and the way we manage to compensate it should give you some idea of where we stand.

On Solvency II, there is obviously some convexity, but convexity comes from our management. In other words, we have a duration gap. That duration gap was around 0.4 years 3 months ago in December -- sorry, 5 months ago. And now it's closer to zero. But we have the ability to increase it or decrease it depending on where we want to be. So there is -- we shouldn't believe that it's purely mechanical. At some point, we might want to say that we want to be more exposed to further rise in interest rates, and therefore, that we would want to increase our duration gap. That's not on the table today. We're very happy with the plus 5%, minus 8% sensitivities that we have, but it's within the hands of management.

[Ashik Musaddi, analyst]

That's very clear.

[Operator]

So we have another question from Dominic O'Mahony from Exane.

[Dominic O''mahony, analyst]

If I could just firstly ask about back book transactions. Interest rates have obviously moved north a lot over the past 6 months or so. Has that impacted your appetite to engage in back book transactions? Has that impacted the counterparty's appetite? Has it impacted the economics? Or do you see those transactions that will lead to pricing? Any thoughts on that would be very helpful.

Similarly, on general account savings, has the recent rates had any effect on your view of sort of the strategy that you've been pursuing for the last several years of essentially trying to reduce your exposure there? Is there -- at what sort of level would you start thinking again about whether that product might be attractive?

And then just on AXA XL, you said you expect it to contribute to the group's earnings growth. Just help -- could you just help us understand what that means? Does that mean you think XL will grow its earnings or that it will be a contributor to earnings in general? I'm not sure quite how to read that statement. So your help would be helpful.

And then the final question. Clearly, a very large reduction in CAT exposure in XL Re. I'm just wondering about the mix effect that has. Is the CAT business sort of higher or lower average combined ratio on a normalized basis? And so what sort of net effect does that have on your sort of normalized combined ratio expectation?

[Alban Nesle, executive]

Let me write down all those questions. Okay. So thank you, Dominic, for your questions. On the first one, on the back book transactions. That hasn't changed -- the recent rise in interest rates. It has not changed our position and our appetite for several reasons. One is, we believe it's a strategy that makes sense because it reduces further our exposure to financial markets, and that's independent on the level of rates.

Second, we are still prudent on long-term rates. Obviously, they've gone up recently. It's not impossible that with interest rate hikes by central banks a recession might come. And in such cases, it's possible, not obvious, but not -- it's possible, that rates -- long-term rate yields would go down again. So we need to be cautious in this current environment. And we don't see any risk -- any reason, sorry, to change our stance.

Same for the buyer's appetite. We have, as you know, a transaction going on and we don't see at all any reduction in their appetite to do those acquisitions of back books.

And so it's a bit the same answer to your second question on general account. We are -- to be clear, we are not against general account business. And when you look, for instance, at Eurocroissance in France, where we have guarantees at maturity, that's the kind of general account business that we like and that we want to sell because it's obviously better for us, but it's also better for the customer because it allows us to have a more dynamic asset allocation because we don't have to be in line with our guarantees year after year, but only upon maturity. So that's the kind of general account that we want to sell. What we don't like is the traditional one, and that's why we are doing those enforced transactions.

On XL earnings, I said XL earnings growth. So we expect XL earnings to grow this year.

And finally, on the reduction in nat cat exposure and what impact it has on our normalized combined ratio. So it's -- as you know, it is very specific to XL Re. We are not reducing our exposure to nat cat at XL Insurance or in our GI entities in Europe. At XL Re what we said, including last year, was that even with the price increases, we think that the CAT market is not yet adequately priced on the reinsurance side. So it's not the only reason why we are reducing our CAT exposure. We believe it brings too much volatility. But nevertheless, it gives you an idea of what we think about the profitability of the reinsurance CAT business.

[Dominic O''mahony, analyst]

That's really helpful, Alban.

[Operator]

So we have another question from Farooq Hanif from JPMorgan.

[Farooq Hanif, analyst]

Just firstly, on COVID-19 reserves. So if I remember, in 2H '21, the ability to release some of those reserves was a great benefit to get TO your target. Can you tell us your latest thoughts there a few months on [indiscernible] you had yourself?

Second question, [indiscernible] in casualty. Can you remind us what kind of areas of business maybe in London market and other [indiscernible] that you're going back from?

And then lastly, to clarify again on numbers. You gave some numbers [indiscernible]. Can you keep [indiscernible]

[Anu Venkataraman, executive]

Farooq, sorry, we're having trouble -- Farooq, we're having trouble hearing you. You keep breaking up. Would you mind just summarizing your questions for us again, please? We didn't catch the first one.

[Farooq Hanif, analyst]

Yes, of course. So first one was COVID-19 reserves. Do you still have buffers there because I know that helped you at -- in 2021? So is that an area of padding that you could use?

Secondly, which areas of casualty are you pulling out of and which regions?

And thirdly, political risk. Can you remind us of the numbers I'm assured that you told us and just update us on those numbers, net of reinsurance?

[Alban Nesle, executive]

So on COVID-19 reserves, the -- so I'll remind you the numbers we gave at the end of last year. And so we still had, within XL, 25% of IBNRs on COVID, 25% of the total loss. We will update you on this at H1.

On casualty, if I understood your question. So it's a European casualty that we have renewed at 1/1 and with some degree of prudence, as I said earlier, but I want to make sure that I understood your question well.

And your third question, sorry, was it on...

[Farooq Hanif, analyst]

On political risk, so could you remind us the numbers?

[Alban Nesle, executive]

So the total exposure was EUR 300 million for both Ukraine and Russia, and that was 50% quota shared. So the net, you half that amount.

[Farooq Hanif, analyst]

And on casualty lines [indiscernible] liability? If you can give us those areas?

[Alban Nesle, executive]

Sorry, again, you're breaking up. I'm very sorry, Farooq.

[Farooq Hanif, analyst]

Really sorry. Which lines of casualty are you pulling back from?

[Alban Nesle, executive]

So in Europe, the market is structured differently from the U.S. So it's commercial casualty, but you don't have the same distinction as between the primary access and so on, on this side of the ocean. So it's -- the typical group programs or company programs that we have in Europe that would be on products or environmental and general casualty. It's not specific. It's whether the prices make sense or not. But there's no specific line that is targeted.

[Farooq Hanif, analyst]

And just going back on the COVID-19 reserve, are you able or willing to give a number for how much of the initial reserves that you set aside, the EUR 1.5 billion, how much of that has been used?

[Alban Nesle, executive]

So you -- no, the only number we mentioned is the EUR 1.5 billion that we had set side and the EUR 400 million reserve release that we had at the end of last year. And as I said, we'll update you on this in H1.

[Operator]

So we have another question from Andrew Sinclair from Bank of America.

[Andrew Sinclair, analyst]

Just a couple more to follow up. We've heard lots about underwriting losses from Russia, Ukraine, but I just really wondered if you could give us any color on asset exposures. I think you mentioned a Nord Stream 1 investment amongst others. I just wondered if we could get an update there.

And secondly, just on the -- on your Reso stake. Any update there?

[Alban Nesle, executive]

So -- and I guess that will have to be the last question. On FX exposure, nothing's changed. What we said on February 24, was that we had less than EUR 50 million of exposure to Russia on the asset side. And we have EUR 140 million of exposure to Nord Stream 1 through a debt instrument. And there again, nothing has changed since then.

On the Reso, so the -- there again, the only change is that we had two Directors on the Reso's Board, and both Directors have resigned. But apart from that, we still consider Reso as the financial participation. We don't have management control there, and we have 38% of the company. So nothing specific to report on that, apart from the fact that the two Directors resigned.

[Anu Venkataraman, executive]

Well, thank you very much for your questions. If you have any further questions, please feel free to reach out to the Investor Relations team.

[Alban Nesle, executive]

Thank you, all. Have a good day.