AXA SA

PAR:CS

Earnings Call Transcript 2023-Q1

[Anu Venkataraman, Head IR]

Good morning, and welcome to AXA's First Quarter Analyst and Investor Call. In today's call, our Group CFO, Alban de Mailly, will cover two topics. In addition to commenting on the activity indicators for the first 3 months of '23, Alban will also review the highlights of 2022 financial information restated under IFRS 17 and IFRS 9 that we also published this morning.

In order to enable you to better assess the group's earnings trajectory under the new accounting standards, we're also providing on an exceptional basis and underlying earnings target for '23. This outlook is unaudited and subject to several key assumptions. Please review the disclaimer slide of the presentation for important qualifying information. After the presentation, our Group Chief Accounting and Reporting Officer, Grégoire de Montchalin, will join Alban to take your questions.

And with that, let me hand over to Alban.

[Alban de Mailly Nesle, Group Chief Financial Officer]

Many thanks, Anu, and good morning to all of you. Thank you for joining the call today. So as you see, it's slightly different from our usual quarterly calls. Because as Anu said, we will cover two topics to today. And therefore, we prepared a small presentation, and we will spend a bit more time so that you have enough time for your questions at the end of the call.

So let's start with Q1 2023. What are the key highlights of our results. First thing to say that we performed well in the third quarter, and the headline growth is 1%. But in fact, it masks a very strong growth in our technical lines and in particular, P&C, where we're off for a very good start in 2023. That was partly offset by the rightsizing of nonprioritized businesses and some weaker revenues in Unit-Linked Asset Management that reflects the more challenging environment.

When we look at our life and business -- Life & Health business, in particular, our priority is the quality of our business and the focus we have on capital-light products. And that's what we've seen in this quarter. And that's thanks to the very strong efforts of our distribution networks, in particular, the proprietary ones.

A word on balance sheet, but we'll come back to that later. You see that our solvency ratio stands at 217%, 2 points higher than at the end of '22. And that's supported notably by a very strong normalized capital generation of 7 points this quarter. And there again, I will come back to that later.

We have, as shown on the slide, all confidence on our asset mix, which is a high quality, which is what you want in this volatile and uncertain times. As Anu said, we are giving exceptionally guidance for the underlying earnings of this year. We believe they will be above €7.5 billion under IFRS 17 and IFRS 9, which is obviously our new framework, but I'll come back to that in the second part of this presentation.

So moving to the next slide and looking at our growth momentum. Again, I think the important message is that we are growing where we want to grow. So we're growing in P&C at 6%. First, Commercial lines. Commercial lines, we grew at 7%. On the insurance side, we see that XL had a good growth of 4%. We have clear signs of pricing reacceleration across the portfolio except for North America Professional lines. When you look at our renewal prices at XL Insurance, excluding North America Professional lines, we are up 8%. So that's better than the end of last year.

On Personal lines, there again, we have good growth at 4% with a specific focus on Motor with plus 6%. That's obviously due to the pricing efforts that we make to offset the inflation on claims cost. And non-Motor is up 2%. So both reflect there, again, an improving environment.

On Health, so Health, that we canceled or not renewed 2 large contracts that we had written at AXA France and for which the experience was not in line with our expectations. If you exclude those 2 contracts, we have good organic growth at plus 7% and both individual and group health and in all our geographies.

And finally, Protection, which is also one of the technical lines that we want to grow is up 2%. Notably, thanks to Japan and Switzerland. So that's on the technical lines. And you see that we are growing on those front in line with our strategy.

Now coming to Savings. You know that our focus for Savings is Unit-Linked and capital light G/A, and in particular, G/A at maturity. So we -- our revenues on the Unit-Linked were suddenly a bit lower than expected in the fourth quarter, mainly due to, again, the volatile environment. But what we want to highlight here is the fact that we want to work on those 2 legs, Unit-Linked on the one hand and products with guarantee at maturity such as [indiscernible] that we have in France. And when you look at the French business, in particular, you see that the net of those two is a positive, plus 5% because in times where it's more difficult to sell Unit-Linked, customers are happy to have products that give guarantees that maturity while allowing them to invest in slightly more risky assets than traditional general account.

So last point I want to highlight is the businesses that we don't prioritize, XL Re, you know that we are reducing our property CAT exposure. In volumes, that's minus 35% exposure. That's offset partially by price increases. They were strong in Q1 in property CAT reinsurance. But we also had good growth in other lines at XL Re, notably casualty, mostly coming from prices. And the other one, as I said, is traditional general account savings capital heavy. To the same extent, we do in-force transactions, like the German Bund, that you are very familiar with. We are not unhappy to see that our net flows in traditional G/A savings is negative.

So all this leads to a very good high-quality mix for Q1, focus on our technical lines and obviously very consistent with strategy, and we want to carry on growing on that basis.

So if we move to the next slide on pricing, which obviously is an important topic these days. What do we see? As I said, for XL, both insurance and Reinsurance, we see good pricing dynamic. The price increases on renewal, as I said, 6%, but 8% excluding North America Professional lines. And we do see reacceleration in most lines. Property is up 9%. Casualty is up 9%. Property in the U.S. is up 18%. So that's very good numbers.

We showed the good dynamic that we have at XL Insurance and the same on Reinsurance, but that was expected, and we discussed that already in February.

In Commercial lines, excluding AXA XL, so you saw in the previous slide that we had a 7% growth overall in France and Europe. And that mostly comes from pricing at plus 5%. Keep in mind that in Q1, the weight of Switzerland is higher than for the whole year because notably on Commercial lines, contracts are renewed at 1/1. And you know that in Switzerland, there is very low inflation, if any, and therefore, hardly any price increases.

So that's somewhat underestimates the overall price increases that we see. Same on Personal lines. You see 5% here. In fact, excluding Switzerland, we are at 7% overall. And again, and I'm sure you will have questions on this. Again, that is sufficient or more than sufficient to offset claims inflation. So you see that be it Commercial lines, all Personal lines and in whatever geographies, we managed to have price increases over and above inflation, which is obviously supportive for our technical margins.

Let's move to the next slide. So this is our presentation of new business with PVEP and NBV. Obviously, with the changes in interest rates, there is a strong impact coming from interest rates in the minus 17% that you have, for instance, on PVEP. So it's -- it doesn't -- and the same on NBV was minus 11%. What matters for us here is that the NBV margin, which once again shows the quality of our business is up by 0.4 point at 5.6%. The fact that we decreased our PVEP or NBV because of interest rates It's not an issue because what it means, notably when it comes to new business, CSM, is that the unwind of that in the CSM will be done at a higher rate and therefore, it's positive.

And you will also have in mind, obviously, that when it comes to our Strategic lines, which are Protection & Health, the impact of higher interest rates is obviously higher than for traditional general account. That's why there again, the impact on our PVEP can look significant at minus 17%, but nothing to be concerned with.

If we move now to our Solvency II ratio, so as I said at the beginning, it's plus 2 points compared to the end of last year. That's on the basis of several positive items. The first one is the operating return. But the operating return is 7 points, and that's better than what we had in the past. And we believe that's a recurring change, which leads us to change our guidance. We believe that this year, in particular, our normalized capital generation should be between 25 and 30 points. And this is due to the fact that in P&C earnings, part of our earnings in the past was made of the release of excess reserves. Those excess reserves were already in our Solvency II capital base, and therefore, the release did not generate more solvency.

Now under IFRS 17, our P&C earnings are made of PYDs coming from mid of current year profitability, obviously, but also PYDs coming from our best estimate liabilities. And therefore, they directly go entirely to solvency creation. So that's the first point.

The second point is the fact that we have higher interest rates also means that we have a higher discount and therefore, a better combined ratio and profitability, which there again enhances our solvency capital generation.

And the last item that explains that 7 points capital generation is purely mechanical. Last year, notably thanks to higher interest rates our SCR went down, and therefore, there is a pure denominator impact in our capital generation. So the message is good capital generation overall and better alignment between Solvency II earnings and IFRS 17 earnings, so to speak.

On the other impacts that you see on the screen, accrued dividend minus 4%. That's simply last year's dividend divided by 4, as we usually do. No impact from market overall. Obviously, there were some pluses and minuses, minuses in the -- on the interest rates, but pluses in equity and volatility, net is 0. Management actions, I want to spend 1 minute on this, so it's very positive, 5 points.

We took advantage of higher interest rates in this first quarter to further reduce our duration gap. By further reducing it, we reduced our SCR, but -- and therefore, improve our solvency. But we also reduced a bit the sensitivity of our solvency to interest rates. And so that's positive also for the future.

And last, minus 6 points from regulatory and model changes, you had in mind what we had discussed in February and last year, the minus 9 points that we're losing from IBOR transition and the change to EIOPA reference portfolio, that was partly offset by some other model changes. So that's how we come to minus 6 and the 217% that we have here.

So overall, when I look at Q1, we see high-quality revenue mix. We see a very good pricing momentum, notably in P&C. And good business profile overall in the current and certain macroeconomic context and a strong balance sheet in addition to that. So that's why we are confident in our ability this year to produce attractive results and that's -- I'm going to give details on in a second as we move to IFRS 17.

If you allow me one second to have a bit of water. So let's move to IFRS 17. And one of the main messages that we want to give here, as I said, I think in February is, what matters for us is full year '22 under IFRS 4. Don't look too long at full year '22 under IFRS 17 because there are a number of elements that distort this number. And that's why we wanted to give you, again, exceptionally that guidance for 2023. So that we would all have in mind the same profit expectations for this year.

So what do we say on these lines? We simply reiterate the messages that Grégoire and I gave you last November, which are the following: one, the fact that our earnings power under IFRS 17 is not different from the one that we had under IFRS 4. And that's why we have that guidance of €7.5 billion, which is net of the FX headwind of minus €0.1 billion, coming obviously from the weakness of the U.S. dollar. So €7.6 billion, if you adjust for that and therefore, 5% growth over the IFRS 4 numbers. So that's an important message.

And as we saw with the numbers we just discussed on solvency, our accounting change does not have any bearing on our solvency. You saw that we are 217% in Q1. No will that accounting change have any consequence on the cash remitted by our entities. And that's why overall, with that guidance, we are happy to reaffirm once more, the fact that we will meet our key financial targets of this plan, and we will exceed the UEPS CAGR target of 7% that we had given ourselves and the cash remittance target of €14 billion that we had also set ourselves. So no news on this, but we are reaffirming that.

So now let's move to the next slide with a bit more detail on that guidance. And again, I will give even further details as we move to P&C, Life & Health in the coming slides. So the underlying earnings this year should be above €7.5 billion. Again, net of the €0.1 billion FX headwind, which is mostly P&C. The €4.7 billion target on -- for P&C is with obviously normalized nat cat. You know that our CAT load is 4 points of combined ratio. So that guidance is based with -- on this assumption.

And overall, it comes with improved technical results compared to '22, and we'll go into more details. But lower financial results and notably because of higher unwind on the P&C side.

Life & Health, and I insist that it's Life & Health and not Life & Savings because there could be some confusion. And here, we tend to report Life & Health together. It's €3.3 billion. It should be €3.3 billion this year, slightly above what we had under IFRS 4 in '22.

Asset Management and others, a slight deterioration by minus 100 million coming from higher interest rate expenses at holdco level and also the fact that we will have lower revenues in Asset Management. Simply, as you saw, because we had a slightly lower average assets under management in Q1. So that's what I wanted to say on this slide.

Now let's look at more details on '22. So on the left-hand side of this slide, you have our combined ratio, the actual combined ratio in IFRS 4 and in IFRS 17. So you will recognize the 94.6% combined ratio under IFRS 4.

Under IFRS 17, in '22, and you have a one-off impact, which is the following. You see that we had PYDs of minus 2.9% under IFRS 4, but these PYDs were made of the release of excess reserves. And you know because we discussed that in the past, that it was on purpose because those excess reserves disappear with IFRS 17. And so we wanted to create those PYDs out of those excess reserves. And so you have them under IFRS 4. You don't have them under IFRS 17 precisely because you don't have excess reserves, I mean, official excess reserves under IFRS 17. And when you just remove the €2.1 billion of excess reserve release that we had, you move from minus 2.9% to plus 1.7%. So that's very specific to 2022. That's not something that will happen again in the future, and I insist on this because, again, we don't have those excess reserves any longer in IFRS 17, and there will not be that distortion anymore.

That's why we wanted to provide you with what would be a normalized combined ratio in '22. And there, we normalize for 2 things. We normalize for nat cat, which, as I say, should be around 4 points of combined ratio, and we normalize for PYDs. So on this, our new guidance for PYD is that we've said in the past that it would be in line with long-term experience, now we are a bit more precise. And we're saying they should be between 0.5 points of combined ratio and 2 points of combined ratio.

So for illustrative purposes and illustrative purposes only here, we put 1.25% of combined ratio, which is simply the midpoint of that range. And you see that with that normalization of nat cat, the loss ratio that you know, the discount that you now have under IFRS 17 and the PYDs, the comparable combined ratio for -- under IFRS 17 for '22, would have been 93.7%.

I draw your attention to the fact that we have only normalized nat cat and PYDs. We didn't normalize anything. For instance, the Ukraine loss is still in that number. So that's for the technical part.

On the investment income part -- sorry, the financial result. The financial result is made of 2 components: one, the investment income, which is very much in line under IFRS 17 with what it was under IFRS 4, but there is a certain component, which is the unwind of discount. And that unwind cost us in '22, €500 million of earnings pretax.

So our financial results under IFRS 17 in '22 is lower by €400 million than where it was under IFRS 4. So the global picture, which is true in '22 and which will be true in the future, is that you have obviously a better combined ratio under IFRS 17, but you will have a lower financial result because of the mechanics that we have just seen.

Now if we move to the next slide, so that's where we go into the reasons where we believe that our P&C earnings in '23 should be at least equal to €4.7 billion. So we -- first, we believe we'll see an improvement in our technical result. You saw the numbers for Q1 in terms of pricing. And the -- this is supportive for our technical results and our loss ratio.

Second point nat cat load of around 4 points, so less than what we had under IFRS 4 in '22. Obviously, this is an assumption, but you may have seen in our press release that to date, our CAT experience is in line with expectations.

Third, assumption underlying that number is, as I said, the fact that PYD release should be within the range of 0.5 to 2 points.

Fourth, hopefully, we -- I mean, we had the loss coming from the Ukraine war last year. And hopefully, we will not have a similar loss in '23.

And finally, the discounting of current year claims reserves at a higher rate in '23 than in '22. So that will support our technical result. Conversely, as far as the financial result, is concerned. The unwind of the reserve discount will be higher in '23 than it was in '22, simply because we accumulate reserves and -- discounted reserves at a higher rate year after year. So the unwind is by construction higher.

There is a second effect, which has nothing to do with accounting, which is simply that last year, we had an elevated level of funds distribution, notably private equity and in '23, that amount will be lower. And all in all, as I said €4.7 billion.

Now moving to Life on the next slide. So this is the 2022 earnings. As you could -- as you know, our Life & Health earnings are mostly driven by CSM release. You see that out of €2.9 billion of earnings that we had in '22, €2.5 billion come from the CSM release.

In addition to that, we have slightly negative long-term technical results. What you -- what will you find there? It's the fact that it's mostly the experience, and it's also the nonattributable expenses. In '22 we had a positive experience variance, which reflected our prudent approach to reserving. We think that it will be -- that's why it came as an offset to the nonattributable expenses at minus €0.1 billion.

Short-term technical results in Life, that's mostly our protection business in France, which is accounted for under PAA and not VFA. That's why it comes here as short-term technical result. And you add to that the non-VFA financial result, which is there, again, the investment income that we have minus the unwind of the discount on nonparticipating business.

And there, in '22, like in P&C, we had -- we have benefited from a high level of fund distribution, and therefore, the -- our investment income in '22 is higher -- was higher than what we can expect in '23. And so overall, we have €2.9 billion of underlying earnings in '22 as opposed to €2.6 billion in IFRS 4. As you know, the mechanics are different, so we can compare the numbers, but we cannot really compare the various components. But what you should have in mind is that there is no accounting distortion on the Life side as opposed to what we saw on the P&C side. But our Life earnings were probably at a high level, given some positive one-offs that we had on the actuarial side and the fund distribution that we also enjoyed in '22.

Moving to the next slide on the stock of CSM. So here, I think the important part is what is in the box and what we call recurring items. The way to think about CSM and CSM release and new business CSM is the following. New business CSM is built on a risk-neutral basis. So it will come and increase the stock of CSM. But in addition to that, year after year, you will also have the unwind of the stock of CSM at the risk-free rate plus the fact that you have investment income in excess of that risk free rate. And that comes from risk premium on the equity side that comes from spread on bonds and so on and so forth. So that's a natural component of the CSM increase.

And then you have the CSM release. And you see that when you take those 3 elements, we are neutral. The first 2 offsetting the third one, which, as you know, is released on a real-world basis, and that's why the new business CSM and the CSM release are not directly comparable. You need to add in addition to that, the unwind and the excess investment income. Then if I move to the other components, you -- we had some economic variance which was down -- which was minus €0.6 billion in '22. This is the same economic variance that we saw last year in our solvency. So nothing new on this. And there again, it's quite comforting to see that solvency and accounting are more aligned than before. So you know that we last year benefited from higher interest rates, but we also had higher volatility, lower equity and so net-net, it was a negative, but there again, very much in line with our solvency.

And we had a positive operating variance of €1.3 billion, and that's mainly coming from one-off model changes. So that's the dynamic of our stock of CSM in '22. And in total, it increased from €24.6 million to €25.5 billion.

Now if we move to the next slide on Health. So that's very much the same mechanic as the one we had for Life, so I will be shorter. There again, our Health profits come mainly from CSM release. The only thing I want to comment here in addition to that is the fact that the long-term technical experience, which you see here as a negative, that's the COVID claims that we had in Japan last year that we told you about. That's something that should not repeat in '23.

And the short-term technical results, so that's €0.2 billion. That comes from our Health businesses that are short tail, such as, for instance, the U.K. And last year, it was impacted from those 2 famous international contracts that we had in France and that we did not renew and that had a negative impact on our Health earnings in '22. But overall, underlying earnings on the Health side, very much in line with what we had under IFRS 4.

So on the next slide, if I do the same exercise of going through the CSM stock on the Health side, the same box. We have the new business, CSM, we have the underlying return earning source. We have the CSM release. You see that on a net basis, that's very balanced.

And the new business, CSM and the underlying return offsets the CSM release. Economic variance. So here, it's more negative than on the Life side, and that's completely normal. Health is, first and foremost, a technical margin business as opposed to a financial margin one. And so as you discount at a higher rate, those technical margins in the future, that will have more significant consequence for Health business than for Savings business. That's why you have a minus €1 billion here.

But there again, it's not bad news as such. It's like the comment I made earlier on our PVEP and new business this year as it just means that the unwind will be done at a higher rate in the future. And you know that be it for Life or Health, the message we gave you in November is that the amount of CSM release should be very stable even if we have some ups and downs in the stock of CSM.

So moving now to the 2023 target that we have for Life & Health, that it's a slight increase, €3.3 billion compared to €3.2 billion under IFRS 4. Again, we have a lot of visibility on those 2 businesses, thanks to the CSM mechanism. And so we have a good view on the CSM release.

We -- in addition to that, we will not have the health claims that we had last year in Japan and France, but we also had some positive model changes in Japan on the Life side last year. That will not review themselves in '23.

And on the financial results, exactly like in P&C, we will have an unwind of our reserve discount, which will be done at a higher rate, and we will not have the same level of funds distribution. So same mechanism, same impact as on the P&C side, good level of technical results, driven by CSM for Life & Health, but lower financial results for the reasons I explained.

Quick word on net income. So I will not comment the impacts directly related to the lower underlying earnings. You know that we took the options as far as equities are concerned, not to have the volatility of equity in our P&L. And it will be booked through shareholders' equity. But it doesn't mean that capital gains on equities disappear. They simply go directly to retained earnings without going to P&L. And when I comment our realized gains on equities and our shareholders' equity in a few seconds, you will recognize that amount. So no equity capital gains in an IFRS 17 P&L. So what will you see in the future? You will see capital gains coming mostly from real estate.

We could have occasionally capital gains and losses coming from fixed income, but you know that it's not a practice to realize fixed income gains and losses simply because of ALM constraints. So that's the main impact. The last one on the other is simply because it comes from assets that were no longer eligible for mark-to-market in OCI and that go to P&L.

A word on shareholders' equity. So you have side by side, the movement in shareholders' equity under IFRS 17 and under IFRS 4, the main difference and by far, is naturally the change in OCI. That was minus €27 billion under IFRS 4 because of higher interest rates mainly. You see that it's only minus €5.4 billion under IFRS 17, simply because most of the changes that we had on the asset side because of interest rates, was offset by the same impact of interest rates on the liability side under IFRS 17.

And so you see that our OCI and therefore, more globally, our shareholders' equity is much more stable under IFRS 17 than it was under IFRS 4. The other 2 differences: one, the realized gains on equities, what I've mentioned a second ago that you see here now directly in retained earnings.

And the other one is the change in pension benefits. It's simply because part of the positive impact that we had under IFRS 4 was already taken into account in our opening balance sheet at 11/22 and therefore, did not go to the change in shareholders' fund in IFRS 17. That's the overall impact, but you see that in total, our shareholders' equity at the end of '22 was very similar to what it was under IFRS 4.

And as a conclusion before we go to your questions, so you see that bit on the P&C side or on the Life side, we are very confident in 2023 underlying earnings target. That is thanks to -- well, first, the quality of our business, the fact that it's extremely resilient in this environment. The fact that we have good pricing dynamic in the first quarter.

And finally, on Life & Health, the fact that we have good visibility on the CSM. Shareholders' equity, as I said, broadly stable versus IFRS 4. And I reiterate the fact that I think you all know this, that those accounting changes have absolutely no bearing on our cash remittance and our Solvency II ratio.

And that's why we reiterate again the fact that we will either meet or exceed our driving progress '23 key financial targets, as we explained before. We will exceed too that concern, the UEPS CAGR and the cumulative cash remittance. I stop here.

[Anu Venkataraman, Head IR]

Operator, we're ready to take questions.

[Operator]

The first question is from Andrew Sinclair from Bank of America.

[Andrew Sinclair, Bank of America]

Thank you, and everyone, and thanks for the new disclosure of the new financial disclosure supplement is really good. For me, please, first, I just wanted to understand a little bit more about account budgets for the year. I know it's 4 percentage points at group level. But what's the budget for XL for the year for nat cats? And at both XL and Group level. How much seasonality should I think about when you're saying you're in line with expectations for Q1? That's my first question. Second, I was just looking at the discounting impact on the combined ratio in 2022. When I was going through the [CAT] quickly this morning, it looks like you're getting about double the discounting benefit in France compared to broader Europe, 3.6 percentage points compared to 1.9. What's the driver of that? And similarly, why did XL get less discounting benefits, say, than France? I might have thought XL might be a bit longer to tail and maybe get more U.S.-focused higher yields than elsewhere. So just keen to understand that. And third was just on capital. The reduced duration gap, you mentioned some lower sensitivities. Just wondered if you can put any numbers around that, how they would look today?

[Alban de Mailly Nesle, Group Chief Financial Officer]

So thank you, Andrew, for your questions. The -- generally, the way to think about our CAT load is to say that P&C in France, in Europe and XL Insurance, that's roughly the same cat load, around 0.6%, 3.6%, 4.7%. And the difference is made with XL Re, which, by definition, has a higher CAT load given the nature of the business. And that's how you get to the 4% overall.

On the discounting impact, so when you compare France and Europe, bear in mind that in Europe, you have Switzerland. And Switzerland obviously has lower interest rates and therefore, the discount and the unwind is made at a lower level. And on the XL -- one second -- yes. So on the XL's rate for that, you should -- have in mind that XL is a business which is more heavily reinsured than the rest of our P&C business.

And therefore, the unwind applied to lower reserves and therefore, as such, is lower than what you would see typically in France and Europe. And on your last point on the reduced duration gap. So the sad thing is that we have not put it officially in our Q1 numbers, I can't disclose it. I don't want to risk a selective disclosure here. So it is a reduction. It's not massive, but it goes in the right direction.

[Andrew Sinclair, Bank of America]

The first question I get it but -- just to confirm, what is the CAT budget and percentage points for XL for the full year? Is that -- that's more than 4 percentage points that you have at a group level. And just seasonality, I mean, should we be thinking we're around about that 3.6% points for most of the units and 4% points overall for Q1 or is it a bit less because of that seasonality?

[Alban de Mailly Nesle, Group Chief Financial Officer]

So I don't have the number for XL in total because that's not the way I think about it. Again, I think about it as insurance versus reinsurance. That's why I gave you the 3.6%, 3.7% for XL insurance from which you can deduct by having the sum and the fact that it's 4% for the whole group, what it is for XL Re. And in terms of seasonality, obviously, you have probably given our portfolio, a higher level of CAT losses in Q3 because of hurricanes in the U.S. Now you saw that in Q1, we had a significant earthquake in Turkey.

And despite that, and there is obviously no seasonality on for earthquakes, despite that, we had a good quarter.

[Operator]

Next question is from Peter Eliot from Kepler Cheuvreux.

[Peter Eliot, Kepler Cheuvreux]

First one, just to follow up actually on that duration gap. I mean given you said the sensitivities hadn't come down massively, I'm just -- suggest there's more you can do there. So I'm just wondering if you could comment on that. And sorry if I missed it, but are you able to tell us what the duration gap is at this stage? Second one on capital management. I'm just wondering if you can share your latest thoughts on capital management.

And I'm thinking there the lower SCR gives you opportunities especially going forward? Or whether you've updated your thoughts on the appropriate debt gearing at all. And maybe on that one, any thoughts -- any discussions you've had with the ratings agencies as to how they will think about their definition might be helpful. And then finally, likewise from me as well, thank you very much for the concise and clear financial supplement. I think I'm right that you've given us analysis by line of business and by geography, but not the sort of the granular detail of P&C lines of business.

So for example, I don't think we have French commercial, so it's great to have a concise and reduce things up, but I guess the downside is that it makes it difficult to build a bottom-up model that simultaneously forecast both line of business and geography. So I guess the question is there, can we assume maybe that going forward, your focus might be a bit more on liner business? So we maybe don't have to worry so much about forecasting geography. Just any thoughts or help you give there would be helpful.

[Alban de Mailly Nesle, Group Chief Financial Officer]

Okay. Thank you very much for your questions, Peter. So on the duration gap, it was 0.5% at the end of last year, it's 0.3% now. But what you should have in mind is the way we think about duration gap is the economic one between our assets and liabilities. What we don't hedge, what we don't take into account in that duration gap is the management of the risk margin or the fact that some of our SCR and parts of our SCR are sensitive to interest rates. And so because we want to have an economic hedging of our interest rate risk, we don't take the risk margin. Therefore, even with such a low duration gap like 0.3%, you still have a sensitivity coming from the variation of the risk margin in our solvency or that if our SCR.

I hope that explains the difference, which also means by the word that, at some point, we could move to a duration gap where assets would be longer than liabilities, which is not the case today, which, to some extent, would cover also the sensitivities that I just mentioned from risk margin. But today, our assets are slightly shorter than our liabilities.

So on capital management -- and I'll start with debt gearing. On that one, you saw the range that we gave. That's until the end of the year. In early next year, we will give you our next plan. I don't think the debt gearing should change as a target, but we will give you more on this next year. I think we're comfortable with the level of gearing that we have today. On the lower SCR, I'm not sure exactly what your question was.

[Peter Eliot, Kepler Cheuvreux]

No. It's just whether that gives you more flexibility and maybe where the scope for it to reduce it a further in the future. I guess it was an open question, but just if there was anything you could add, then they will not be.

[Alban de Mailly Nesle, Group Chief Financial Officer]

I mean not really. I think the lower SCR is the combination of the fact that, as I said, we had lower interest rates and the fact that our growth in our technical lines does not necessitate more capital and also because we reduced our SCR by reducing our exposure to capital light G/A account. So that's the dynamic at stake. On rating agencies, it's a discussion which is taking place because they are adapting their models to the new accounting framework and that has not yet -- this is not yet finalized. And finally on the detail, effectively, we wanted to give you clarity on quite a few numbers, but we will not go into the details of, say, commercial lines in France or personal line in Germany, we will not do that.

[Operator]

Next question is from Will Hardcastle from UBS.

[William Hardcastle, UBS]

The first one is just whether you can update on lapsed experience in the quarter, any geographies or distribution channels? Any comments there would be helpful. Second one, look, there's a fair bit of distortion on that P&C pricing from the mix. You mentioned pricing is generally ahead of inflation when we're talking about Personal Motor. Is there any geographies where this isn't the case or where it's not being passed through by the market? And any update you can say on inflationary trends and whether they're sort of remaining stubbornly high or easing in any geographies quicker than others?

[Alban de Mailly Nesle, Group Chief Financial Officer]

Thank you. So the lapsed experience, the general answer is no change to our lapsed experience, but for two small pockets, one that's in France some corporate business that we have. So it's not corporate pension, to be clear. It is the fact that in the past, we used to have some corporates generally family holding companies that would simply invest their cash into insurance policies.

And so they are pretty sensitive to the interest rate that we can offer and as they can find better rates elsewhere, there were higher lapses there. But it's a small business and the remaining reserves on this are €3 billion. So you see that it's not an issue. The other place where you had higher lapse rates that was in Italy, in some of the business coming from BMPS for somewhat identical reasons. In other words, the customers of BMPS, like of other banks are offered Italian government bonds that have a yield higher than what we can offer. And there again, you saw some increase, but nothing alarming. And at the end of the day, it's a rather small business for us.

In general, we don't see, as I said, an increase and that's mainly for two reasons. One is the focus that we've had over the years is on long-term business for our customers. They are saving for their pension generally. And therefore, their insurance policy is not like a bank deposit, and they would not move every time there is up and down on the interest rate. And very often, they also have a unit-linked policy with that.

And the second aspect is that most of our business is done through preparatory distribution. When I look at France, for instance, 80% of it comes from proprietary distribution. And there, we are able to give advice to our customers and they see the value of that advice. They see the value of having an insurance policy, notably with tax benefits and so on. But that's why we haven't seen changes in our business. Now in P&C pricing, so the first part of the answer, which is simple, is that everywhere we have seen price increases that were sufficient to offset or more than offset inflation. The only exception to that is North America professional lines where there, there is a significant competition and prices are down.

That being said, the line is still very profitable even with that kind of price pressure. So let me now take you through something I also gave you in the other times we talked about inflation, which is a comparison between the claims inflation that we had in Motor and the pricing measures that we have taken.

So what you see in Q1 '23 is claims inflation growth of any element, any actions we take to offset it, which is around 7%. It's 7% in France. It's probably 6% in Germany. It's 8% in the U.K. In Switzerland, it's less than 2%. But if I take the example of France, so you have that clear installation of 7%. As I told you the other times, we take some measures like procurement, orientation and so on, which allow us to reduce the cost of that inflation by 2% points. So we're left with 5%. Frequency in France is relatively neutral. It is a headwind in Germany. It's a tailwind in Belgium. But overall, in Europe, it's neutral.

But coming back to France, you have those 5% points of claims inflation. You have minus 1% point coming from business mix. And then are price increases that represent 4% points. So all in all, we maintain our margin in France. I gave you France, the same is true for Germany, for Switzerland, for Belgium. The -- obviously, the country which is remarkable is the U.K. for many reasons. But on that one, because price increases are very high.

We're talking about north of 25% year-on-year, which means that today, I believe our -- the business that we write today is profitable on an underwriting basis which was not the case last year.

[William Hardcastle, UBS]

Thanks Alban, very helpful. I'll say as a compliment that we're remarkable.

[Operator]

Okay, next question is from Farooq Hanif from JPMorgan.

[Farooq Hanif, JPMorgan]

Firstly, going back to operational capital generation. So you've talked about how there are various impacts that have raised you to 25 to 30 points, one of which is the SCR, but the others are obviously kind of own funds related. So can I just confirm that what you're saying is that your operational capital generation in nominal terms in euro amount is actually also increasing. But could you just talk about that? Second point is, again, going back to the comment you just made to Will on pricing with inflation. I mean, you gave the impact of France is broadly neutral. Do you think your combined ratio overall at the group level is going to expand in '23 and '24 due to pricing versus inflation. So do you see a positive margin impact in 2023? And then two very quick questions, really sorry. But the discount rate effect in P&C, how sensitive is that in '23, we've seen yields come down. How should we think about that? And lastly, the CSM release is 9%. So it's the lower end of your range. Should we also think that there's upside there going forward? How does that work?

[Alban de Mailly Nesle, Group Chief Financial Officer]

Thank you, Farooq. So operational capital generation. So yes, in nominal terms, there is an increase. I think if we say that we are at 25 points over the year, that's -- which is the low end of our range, that's 5 to 6 points above the previous range.

And I would say 1 to 2 points comes from the fact that the SCI is lower and the rest comes from the simple fact that we generate more capital in absolute terms. On the combined room.

So as I said when I talked about the guidance, I think the pricing environment is supportive. And so overall, I believe that, yes, there is room for improvement in our combined ratio. I'm talking undiscounted combined ratio, everything else being equal, and leaving aside obviously, CAT volatility and so on, so yes, I think it is supportive.

Third, on the discount rate impact, so I'll give you two things. The first thing is the fact that we use rates on a quarterly basis in one quarter in advance, i.e., at the end of December of any given year, you will know the rate at which we will discount Q1 and so you have those rates in our documents that we gave you for Q1 and Q2. So that already gives you half of the year for -- as far as discount is concerned. Then I will give you my own rule of thumb on how I approximate discount. Fundamentally, so the discount applies to the net claims of the year.

So if you start with a hundred of premiums, you have 55% of net claims at AXA in P&C. And the discount applies to the part, which is nonpaid.

And the part which is nonpaid is another 55% of those 55%. So that's the basis to which you should apply the discount. And then the duration of those claims is around 4 years. So with that, I think between the rates, the duration and the basis you have everything that you need to approximate the discount impact on any given year. To be clear, that's my rule of thumb. It's not the precise calculations, but that's reasonable enough. And on CSM release, the -- as we said, what is stable and growing, obviously, is the amount of the CSM release.

And that's because it's done on a real-world basis. So if you have a higher stock of CSM, then probably the release ratio will be lower and if you have a lower stock, then the release ratio would be higher. And what matters, obviously, is the new business contribution year after year. That's what will drive in the end, the amount of CSM that you will be able to release. I hope I was clear on all those technical issues.

[Operator]

Next question is from William Hawkins from KBW.

[Alban de Mailly Nesle, Group Chief Financial Officer]

William, we don't hear you.

[Operator]

Maybe apparently William is having problems to get connected.

[William Hawkins, Keefe, Bruyette & Woods]

Sorry, can you hear me?

[Alban de Mailly Nesle, Group Chief Financial Officer]

Yes, we can.

[William Hawkins, Keefe, Bruyette & Woods]

Apologies for connection. Can you just -- the 217% solvency ratio, what were the numerator and the denominator for that, please? And also within the roll forward, what's the new margin behind the 0 percentage point from financial markets because I know the net is 0. I am a bit confused on what's happening top and bottom. I think you already gave some...

[Operator]

William, we can't hear you.

[Alban de Mailly Nesle, Group Chief Financial Officer]

But I will -- I hope you can hear me, and I will answer the first question that we have heard on solvency. So the 217%, the denominator of €27.4 billion, which is slightly above what it was in full year '22, €27.2 billion and the numerator is €59.6 billion. And I understand your other question was on the market impact, which was Zero overall.

So it's minus 2% from interest rates, minus 2% from spreads net of VA, plus 2% from equity markets, plus 1% from implied volatility, plus 1% from ForEx, so 0 overall. I hope you could hear me.

[Operator]

Next question is from Henry Heathfield from Morningstar.

[Henry Heathfield, Morningstar Inc.]

Just going back actually to slightly on Farooq's question on the discount rate and the unwind seems to have quite a big impact on your earnings in P&C. And so I was wondering if there is like a long-term rate that you might be using in kind of strategic planning, whether that has any bearing or impact or whether the change is just put through to adjust profitability somehow and no impact on long-term planning.

And then you mentioned as well that there's a higher discounting impact on technical business, this with regard to the health business, first is discounting impact on the savings business. I was wondering if you just might be obviously illuminate me a little bit on that. And then finally, on capital generation, just on the nominal [indiscernible]. Would it be fair to assume a number of around €6.5 billion annualized, give or take a couple of €100 million?

[Alban de Mailly Nesle, Group Chief Financial Officer]

So on the first one, the discount and the unwind, the way we think about it, the unwind will increase as we will pilot, so to speak, generations of different discount rates year after year. And given the trend in interest rates, that will increase. That being said, it should be offset by the increase in the investment income because we will also invest at higher investment income.

There is a specific effect in '23 that I mentioned quite a few times on private equity funds distribution, but that has nothing to do with the fact that our investment in fixed income also done at a higher rate year after year. On the discount impact, this is obviously a very sensitive assumption in our business. There will be some volatility. Now there is -- there are other aspects of the P&L. I'm thinking of PYDs, for which there can also be some volatility up or down. And so I don't think that overall, we should have too much volatility in our earnings. And very clearly, our aim is to provide our shareholders with regularly growing earnings and cash generation. So that's the philosophy of our strat planning.

On the technical margin -- on the technical margins versus savings. So on technical, the combined ratio that I have on health is independent from interest rates. And so for a given level of combined ratio that will be projected, the earnings will be discounted at a higher rate and therefore, will be worth less. Now when -- interest rates are higher for Savings business.

You know that the discount rate in a risk-neutral environment is the same as the investment rate. And therefore, what you have is a better yield, better theoretical yield on your assets with higher investment rates, which, in particular, means that the value of your options and guarantees goes down. And therefore, in many instances, for savings business, the higher interest rates will be -- will have a positive impact. So it's more positive for savings than it is for protection and health. I hope it's reasonably clear.

And your third question, sorry, I'm not sure I got it.

[Henry Heathfield, Morningstar Inc.]

Sorry. Just on the third question, I was wondering whether -- just on the capital generation, whether around a €6.5 billion annualized -- normalized annualized figure, people will take a couple of €100 million would be a decent ballpark number to be thinking about?

[Alban de Mailly Nesle, Group Chief Financial Officer]

I think the best way to think about it is the 25 to 30 points of capital generation applied to our SCI. That's the way to get to the right level.

[Operator]

Okay. Next question is from Michael Huttner from Berenberg.

[Michael Huttner, Joh. Berenberg, Gossler & Co.]

On the -- you're talking about pricing in France, I didn't -- I'm looking at your press release. The figure, I see in personal lines is not 4%, it's 1.9%. So I'm guessing I'm reading something wrong. Maybe you can explain the mix of your businesses in France and how that -- how you see that?

And the second is on the operating capital generation. So we've spoken a lot about that. So you're kind of saying it's now beginning to convert with earnings, which is I think what [Jamie] was saying, what you are saying maybe we're getting close to €7 billion and €7.5 billion. But within that, I had a question. The feeling I have, and this was from the previous conference call today, is that in a period of rising interest rates, you do have -- because the discounting comes before the unwind of the discount, which interest rates were higher than last year. However, that you do have earnings which is slightly above the normal run rate. Would that -- is that roughly fair? Will that explain the difference between the underlying earnings and the operating capital generation?

And then the -- I had one silly question and one even silier question. So the silly question is the deals. I'm not sure if you can speak about that, but 217% sounds you've got plenty to look at such and I just wondered if you can give an update on what's happening there? And then the final question, and here is really it's the annual planning means that is a really simple company to understand that.

Thank you very much. And -- but does it mean that machines can do it. I was speaking with somebody and they said that the LSE has a program of building models automatically. And I was thinking " Oh, that means that I don't really have a job anymore.". How do you see that?

[Alban de Mailly Nesle, Group Chief Financial Officer]

Okay. Thank you, Michael. On the first one, no, I understand your question on the reconciliation of numbers. The 4%, I mentioned is the number you mentioned on the price increase divided by the loss ratio. In other words, what it's -- as if you dedicate the full amount of price increases in France to claims. And why do we do that? Simply because the expenses are addressed separately and we put a lot of pressure on expenses so that they do not increase with inflation. So that's -- that approach is specific to France, not for the other countries. But that's the reason why we say it's the 4% price increase in France because that's the part that goes to claims.

On the convergence with earnings, so there is a slight impact coming from the higher discount and that's what I highlighted as well. So I agree with you. But the main impact in our greater capital generation comes from the fact that underlying earnings, notably on the P&C side, are extremely close now to solvency capital generation and they were not in the past because of that distortion coming from excess reserve release. On the 217%, I guess, you were alluding to some potential capital management initiatives on this as we said in February, the Board looks at our capital management, in particular, at share buybacks once a year. And so don't expect another share buyback this year except the one to offset the dilution coming from our German Inforce transaction. And on the fourth one, I'm not completely sure what you meant.

[Michael Huttner, Joh. Berenberg, Gossler & Co.]

It's a really silly question, but we now have a really very simple framework. If I were a generalist, I would be selling lots of chocolates on you. I mean, tons of chocolates. I know [indiscernible] Because you really can build a model very, very simply now but it doesn't mean that you don't need analysts anymore. And I just wonder how -- this is a really silly question, but if you certainly, just press buttons.

[Alban de Mailly Nesle, Group Chief Financial Officer]

That's your modestly speaking. I'm pretty sure that generalist, though we try to make it simpler and clearer will need your help to understand IFRS 17, the link with Solvency II and so on. You still have good days of work with your clients.

[Operator]

All right. Next question is from Andrew Crean from Autonomous Research.

[Andrew Crean, Autonomous]

In my age, I'm not as worried as Michael is that being supplanted by a machine, never mind. A few quick numerical questions then a slightly more fundamental question. So numerical questions, what was the rate decrease in North American professional lines? And secondly, in Euros, millions or billions, what was the impact of elevated fund distributions, both in the P&C and Life businesses last year? So did you get that right for this year. Thirdly, I just want to see, obviously, people's Solvency II coverage ratios are going to go up. You obviously beat in the first quarter, and now you're looking at higher levels of operating capital generation. Does that flow through to higher levels of cash remittances to group level so that we can then have a look at the amount of buyback, which is annually possible.

And finally, I'll reiterate what Michael said. I think it's fabulous. You've got this thing, the financial spent down to 23 pages. And one bit that I would like to see or a couple of bits I'd love to see is, one, a reconciliation between underlying earnings and operating capital generation by both, I understand what you said I just meant to get that you're very much aligned on the P&C, will be good to have that. And secondly, whether or not you're going to continue with net flows analysis.

[Alban de Mailly Nesle, Group Chief Financial Officer]

Okay. Thank you, Andrew. So we don't communicate on the rate decrease in North American professional. It's -- how should I qualify it. It's important, but not to the point that line is not profitable any longer or that overall, our pricing would not be above loss trend. And it was really very profitable in the past. So I don't see that as an issue. On the fund distribution, I think what you should have in mind is a couple of €100 million difference between '22 and '23.

On cash remittance, the -- obviously, the fact that on the P&C side, our earnings are made of best estimate PYDs, gives us comfort on the fact that the remittance can grow and you know that we said it will grow. So we have full confidence in this year to be at the upper end of the range we had given you, which was €5 billion to €6 billion cash remittance for '23. And we believe that it can grow further in the following years because we grow earnings because of what we've just said. And because, as you know, we are working on the couple of entities that were not yet at the right level of remittance. And Anu, do want to take the one on the reconciliation?

[Anu Venkataraman, Head IR]

So Andrew, we will take on Board your suggestion to reconcile UE and OCG. But you will see that when you map our Solvency II capital generation and match it with UE, it should be very similar, but we will provide that.

On the net flow, we do provide Life & Savings net flows, were you thinking more account value roll forward?

[Andrew Crean, Autonomous]

No, I was just flicking through the supplement and couldn't see the old reconciliation we used to have between start year and end year life reserves.

[Anu Venkataraman, Head IR]

Yes. No, Yes, I think, but that's actually a function of IFRS 17. We are in BFA and BBA contracts are sort of -- which cover both GA as well as UL reported through CSM. We're showing the CSM roll forward, and we show PVFCF, but we are not showing the reserve roll forward. But we are giving your net flows on a quarterly basis in the activity indicators.

[Alban de Mailly Nesle, Group Chief Financial Officer]

And a qualitative comment on the reconciliation between earnings and capital generation. I mean obviously, you would know that, Andrew. But just for the benefit of everyone, on the P&C side, it will be very close, as we said. On the Life side, the difference is the following. What creates solvency is new business and unwind of discount and additional investment income in excess of risk-free rate, whereas what creates earnings is the release of the CSM. It so happens, as you saw in our numbers, that they are reasonably similar, if not equal, so there is not a big difference. But there is a difference in the way a solvency is created versus earnings.

[Operator]

All right. Last question is from Dominic O'Mahony from BNP Exane.

[Dominic O'Mahony, BNP Paribas Exane]

Just two left, if that's all right. So on the cap gen from this, is the end of the releases from the potential margin. Could you give us a sense of which geographies this effect is most pronounced? I'm trying to work out whether this is something that's going on mainly in the Solvency II jurisdictions or for instance, in the Bermuda jurisdictions. And by implication, whether it actually has a tangible impact at the local level or whether this is really about the way the group reporting works. And then the second question is just on the duration gap. Just wondering why you're closing it now? And I guess the context is that when I talk to folks about managing lapse risk, one of the things that I've been told is that you want to sort of structurally remain a bit short in order to sort of manage that risk. It sounds like that just isn't a problem at the moment. But why closing the duration gap now given where we are on the rate curve?

[Alban de Mailly Nesle, Group Chief Financial Officer]

Thank you, Dominic. On your first question, so if I understood it well, the difference between '22 and '23 come from the release of excess reserves or not. And we had no such excess reserves or almost in AXA XL. So effectively, it will be more the European entities for which there will be a difference in terms of capital generation coming from the better alignment between earnings and Solvency XL that will be very, very similar. On the duration gap, for us, there are two different things.

The first one is the duration gap as such, which is an ALM issue, and we thought that the level of rates that we reached in the first quarter was such that it would be interesting to take benefit of that and lengthen the duration of our assets. Overall, I believe that the neutral position that an insurance company should have is to have slightly longer assets than liabilities because that's the one thing you would benefit from in case of market crash because you gain money on the interest rate side, while you will lose on equities and other assets.

So that's my belief. And today, we're not there yet, but we wanted to close further the duration gap. And then there is another aspect, which is liquidity and how you manage potential surrenders and lapses. So on this, we have a very strict liquidity framework. And the first source of liquidity is obviously the incoming premiums, the coupons, the maturities from your bonds. And that's already a very significant source of liquidity. And then we take measures regularly to make sure that even in stress scenarios, we would have the ability to cater for additional surrenders or lapses without triggering capital losses.

[Operator]

Okay. We have one more question from Benoit Valleaux from ODDO.

[Benoit Valleaux, ODDO BHF]

One short question on my side on France and more specifically on your combined ratio. When I look at your Page 8 of your financial supplement, you are adopting [105%] common ratio in '22 and IFRS 17. So there is a huge gap versus the 89% reported under IFRS 4. And when you take your reserve releases, it was a 6.5 percentage point last year. So I just wanted to understand why do you -- about it should grab you to change your best estimate last year in France. For example, and maybe linked to this, I know that you don't provide any guidance in terms of combined ratio going forward. But do you see any reason why combined ratio in French should be higher than the combined ratio in Europe?

[Alban de Mailly Nesle, Group Chief Financial Officer]

So thank you for your question. what do you see for France is what I described in one of the slides on IFRS 17, when I showed that overall, in '22, we released excess reserves and those excess reserves do not exist under IFRS 17. And that's why at group level, we had a higher combined ratio, and that's why you see it as well in France.

And when I combine that with a previous question on the fact that those excess reserves were not at XL, but mostly in Europe, it's normal that France and some other European entities, may be more impacted. But again, it is a one-off in '22. We wanted to release PYDs from excess reserves in '22 because precisely did disappear under IFRS 17, and we will have PYDs in the future coming from best estimate liabilities and in the range of 0.5% to 2% for the whole group. On your second question on France versus Europe, France is one of our largest markets with very good profitability and there's no reason far from it, why its combined ratio should be higher than others. Obviously, we want a good combined ratio, and we have it in France.

[Anu Venkataraman, Head IR]

Operator, do we have any more questions?

[Operator]

No more questions on our side.

[Anu Venkataraman, Head IR]

Okay, then I thank everyone for joining the call this morning. If you have any follow-ups, then don't hesitate to reach out to the Investor Relations team. Have a good day.

[Alban de Mailly Nesle, Group Chief Financial Officer]

Thank you very much. Have a good day.