AXA SA

PAR:CS

Earnings Call Analysis

Strong Q1 Performance with Solid Growth Across Segments

The company reported a robust Q1 with total revenues up 6% to EUR 34 billion, driven by strong growth across all business lines. Property & Casualty (P&C) revenues increased by 7%, while Life & Savings grew by 6%, and Health by 7%. Solid pricing and volume growth in Europe and the U.S. contributed significantly. The Solvency II ratio rose to 229%, reflecting strong capital generation. Additionally, they announced a reinsurance agreement with Munich Re, expected to reduce earnings by EUR 20 million, offset by a EUR 200 million share buyback. Management remains confident in their strategic plan, forecasting continued growth and profitability.

Strong Start to the Year

The company kicked off 2024 with impressive performance, reflected by a 6% increase in total revenues, reaching EUR 34 billion. The firm's balance sheet remains robust, boasting a Solvency II ratio of 229%, indicating strong capital generation capacity. This solid start underpins confidence in the company's new strategic plan outlined in February.

Performance in Property & Casualty (P&C)

P&C revenues climbed 7%, driven by growth in both Commercial and Personal lines. Notably, Commercial lines, excluding AXA XL Re, also grew by 7%, thanks to favorable price effects and higher volumes, particularly in Europe and at AXA XL. In North America, the property market is hardening with a 15% price increase, while casualty lines saw a 5% rise. Personal lines experienced a 6% revenue increase, with Motor and non-Motor segments growing by 3% and 9% respectively, supported by a strong pricing strategy.

Life & Health Sector Gaining Momentum

Life and Health experienced significant growth, with premiums rising 6%. Life premiums saw a 19% increase in capital-light GA savings, particularly in Japan and Italy. Health premiums were up 7%, driven by favorable pricing effects across group and individual businesses. Overall, the company's business mix in Life & Health remains high-quality, despite challenges like lower interest rates.

Challenges and Strategic Adjustments

Despite the progress, the company faced setbacks, such as the failed German transaction due to market condition changes. However, they managed to secure a reinsurance agreement with Munich Re, covering EUR 3 billion in variable annuity reserves, resulting in an underlying earnings reduction of EUR 20 million per annum from 2024. This will be offset by a EUR 200 million share buyback.

Asset Management Positive Trends

In Asset Management, the company saw a 2% increase in average assets under management and EUR 6 billion in net flows, mainly from third-party clients. Revenues rose by 3%, driven by higher management fees. This performance underscores the company's success in attracting business through its strong track record, particularly in real estate.

Capital Strategy and Future Outlook

Maintaining a strong Solvency II ratio of 229%, the company plans to keep its debt stable over the strategic plan's duration. This approach includes managing grandfathered debt proactively, which might have a slight negative impact on solvency—potentially a couple of points. The company's strong start to the year fosters confidence in executing its new strategic plan, aiming to deliver predictable earnings growth.

Earnings Call Transcript 2024-Q1

[Alban Nesle, executive]

Good morning to all of you, and thank you for joining the call today. So let me go through the key highlights of 1Q '24. And I think the sentence that said -- the result is that we have achieved a very good performance in this first quarter. We delivered strong organic growth across all our lines of business. P&C, Life & Savings, Health and Asset Management. And this is obviously very consistent with our new strategic plan, which we presented to you in February. So we are growing all our businesses, leveraging our attractive positioning, in particular in P&C, Commercial lines and employee benefits. And our growth initiatives are starting to contribute.

Overall, our total revenues increased by 6% to EUR 34 billion. Our balance sheet remain very robust with a Solvency II ratio at 229%, reflecting our strong capital generation capacity. And we also continue our actions on climate. We have recently strengthened the AXA for Progress Index targets across underwriting, investment and our own operations.

So let me now go through the key numbers of the press release, starting with P&C. P&C revenues are up 7% with growth both in Commercial and Personal lines. In Commercial lines, excluding AXA XL Re, we grew by 7%. And this was driven by favorable price effects across all markets as well as higher volumes, notably in Europe and at AXA XL.

At AXA XL insurance, in particular, prices were up 3% on renewables, which is a similar growth as last year's. So pricing is holding well. Excluding North America professional lines, pricing including exposure is slightly above loss trend. And as explained in February, there are different dynamics, and we are managing the cycle proactively. We see a continued hard market in short-tail lines, notably North America property, up 15%, while pricing is moderating in long-tail lines with plus 5% in casualty, but this remains above loss trends. And North America Professional lines, pricing remains soft and we remain focused on profitability.

In France and Europe, still in Commercial lines, we continue to see favorable pricing at plus 4% and plus 3%, respectively. And we also continue to see good demand from corporates across SMEs, mid-market and large risks. And this is driving growth in volumes. So we are well positioned to capture the structural growth in this market, including through our growth initiatives in white spaces, mid-market and new risk.

In Personal lines, revenues were up 6% with growth both in Motor and non-Motor, up 3% and 9%, respectively. Pricing was very strong overall at plus 10% across both Motor and non-Motor. In Motor, pricing continues to accelerate across geographies, notably in France and Europe, except for Switzerland. And this was partly offset by lower volumes and the change in business mix in the U.K. What we did, for the reasons you know, a full portfolio review, and we further strengthened our risk selection in addition to significant pricing actions.

Overall, in Personal lines, both frequency and severity are in line with our expectations in the first quarter. And therefore, we are confident in our margin improvement plan, which is, as you know, an important part of our 200 bps target for the improvement of our combined ratio in the plan.

Finally, in reinsurance, as you know, the rightsizing of property CAT lines were completed in '23. And in 1Q '24, the revenues were up 9% driven by both favorable price effects in Property & Casualty and higher volumes in Specialty.

One last point on nat cat and large losses. Group nat cat experience in the first quarter was below w the prorated annual budget, but we maintain our annual nat cat budget of 4.5 points of combined ratio for the year. And as for the large losses, we expect the potential impact from the Baltimore bridge to be nonmaterial at group level, i.e. less than EUR 100 million before tax.

Now moving to Life & Health. In Life, premiums were up 6% with very strong growth in capital-light G/A savings with 19% -- plus 19%, notably in Japan from strong sales of single premium Whole Life products and in Italy from the successful launch of a new product. We had also strong performance in Unit-Linked, plus 8%, driven by successful commercial campaigns across our distribution network and mainly in Italy and in France.

We also saw a positive trend in Protection, up 3%, notably from higher sales in Protection with Unit-Linked in Japan and in Europe, mostly from Switzerland. And lastly, in line with our strategy, premiums in traditional G/A savings were down 14%.

In Health, premiums increased by 7% to EUR 4.8 billion primarily driven by favorable price effects both in group and individual businesses across our main geographies. In the U.K., we continue to take pricing actions, which will be earned over time. But we are also, very importantly, rigorously implementing the claims pathways to triage claims in order to manage our claims cost. That, as you know, a very important aspect of our plan to improve profitability in our U.K. Health business.

On net flows. So we saw strong flows both in Protection and Health. That was particularly -- partly, sorry, offset by continued outflows in traditional G/A savings across most geographies, in line with our strategy. In aggregate, our surrender ratio remains broadly stable versus full year '23 and improved versus 1Q '23.

Moving on to new business. Life & Health, PVEP and NBV were up 14% and 6%, respectively. And this was attributable to the favorable impact of lower interest rates and good volume growth, as I just mentioned. New business CSM was up by 1%, impacted by the model changes that we implemented in full year '23. So as you know, we update assumptions only at 1H and full year. At full year '23, we updated assumptions in France, which had an unfavorable effect on the new business CSM. And this effect impacts 1Q numbers -- 1Q '24 numbers, but not the 1Q '23 that we reported. Therefore, the 2 periods are not directly comparable.

NBV margin was down 0.4 points, and that reflects the unfavorable impact of lower interest rates and the effect of the model changes I've just mentioned. And overall, our business mix in Life & Health remains at high quality.

One word on Inforce Management. As you've seen, the German transaction would not go through. There's been a significant change in market condition since the deal was announced, and that has caused both parties [indiscernible] to reconsider their position. So we have taken advantage of higher interest rates to close the duration gap, and there is now more value to the book today for us. The fact that we have terminated the transaction will have no impact on the targets disclosed by the group as part of its new strategic plan to unlock the future.

But you also saw that we announced today -- or yesterday, rather, that AXA Life Europe entered into a reinsurance agreement with New Re, a subsidiary of Munich Re Group, which will cover around EUR 3 billion of variable annuity reserves. This transaction is expected to result in a reduction of underlying earnings of around EUR 20 million per annum from '24 onwards. But as you saw in the press release, this will be compensated earnings per share-wise by a EUR 200 million share buyback.

Finally, in Asset Management, average assets under management increased by 2%, reflecting both favorable market effects and positive net flows. Net flows amounted to EUR 6 billion. We had strong inflows from third-party clients in both our core and our Alts platforms, and more particularly in real estate, which reflects AXA IM's superior performance track record in this asset class. Revenues were up 3% mainly driven by higher management fees due to an increase in average assets under management.

Last, word on Solvency II. So we continue to operate with a strong Solvency II ratio at 229% at the end of March, up 2 points versus full year '23. So that comes from plus 7 points from normalized capital generation, minus 5 points of accrued foreseeable dividends and annual share buybacks, plus 1 point from sub debt reflecting the issuance of EUR 1.5 billion restricted Tier 1 in January, but partly offset by the repurchase of around EUR 1.2 billion of sub debt through a tender offer. And as you know, we intend to maintain our stock of debt stable over the plan, minus 3 points from expected regulatory changes and plus 2 points from financial markets, mainly higher equity markets. So we're happy with our strong Solvency II ratio that reflects our capital-efficient business model.

So to conclude, we are off to a very strong start this year, and that's very consistent with our plan. And therefore, we remain confident in our strategy. We are very focused on the execution and the delivery of the new strategic plan targets. And that's all supported by the attractive and highly diversified business model, which allows to deliver predictable earnings growth.

I'm now happy to take your questions.

[Operator]

[Operator Instructions] The first question comes from Will Hardcastle of UBS.

[William Hardcastle, analyst]

It's tiny one actually, to do with -- if I look at the pricing premium, it looks like there's been volume reductions throughout the Personal lines book, Motor particularly. U.K. is enormous at a 50% price and 2% premium. You mentioned the mix shift there, Alban. I guess, is it -- is there any way that we can get an indication of how much the U.K. Motor volume has reduced? Because obviously, we'd -- you'd be looking in excess of 40%. But I assume that's not right. That would be really helpful.

[Alban Nesle, executive]

Thank you, Will, for your question. In fact, there are 2 things or 3, rather. Obviously, there is the very significant price increase that you saw. But it's also the fact that as we focus on the better risks, the average premium is also coming down even though we increased the prices because we let go of the worst risks. And so you have the very significant price increase, reduction in the average premium and a bit of loss of volume. But clearly, not the 40% you mentioned. We're losing significantly less customers than that. Is that clear?

[William Hardcastle, analyst]

It is. I guess we're not going to get a -- sort of a 5% to 10%, 15% volume reduction, are we? Is that asking too much?

[Alban Nesle, executive]

That's a bit asking too much, yes.

[Operator]

The next question is from Farooq Hanif of JPMorgan.

[Farooq Hanif, analyst]

I just wanted to ask a few questions. I'm sorry if it's more than 2. But can you talk about the cash impact of the new deal you've done with Munich Re on the VA book? So I mean, obviously, you're losing cash-positive that you would have got from the German back book deal, although that would have been obviously offset by buyback. But what's the cash impact of the Re deal?

Secondly, can you explain what the market conditions were that made you happy to keep it. I'm presuming it's interest rates. What would it take for you to look again at this back book? So either to sell it or to reinsure it, what would it take for you to sort of strategically change your mind on that?

And I just wanted to also ask about the commercial pricing momentum. So it feels like it's still kind of declining even if you take out U.S. professional lines in terms of the kind of the difference between pricing and loss cost trends. Would you kind of agree with that? And then what would you say is your kind of expectation for the rest of the year and also for 2025 in terms of the commercial pricing momentum to deliver your plan?

[Alban Nesle, executive]

Thank you, Farooq. So the cash impact of the transaction on AXA Life Europe is that we'll be able to release EUR 250 million of capital that will be freed up by this transaction.

On the German transaction, so as you remember, the transaction was signed in '22. Over '22 and still in '23, interest rates increased, and we had discussions with Athora. We both honestly wanted to do this transaction, but given higher interest rates, there is more value to the book to us. As I also said, we managed to close the duration gap. And so expectations on both sides didn't meet. And at the end of the day, it was better for everyone to call it a day and to say, we're not anymore on the same lines. So let's decide to terminate.

So we find with holding the book but all our options are open. If somebody comes with a good price, the -- we wanted to sell 2 years ago, we might sell if we have a good offer. But as I said, given higher interest rates, given the right ALM and closed duration gap, it's not an issue if we keep the book.

And third, on the Commercial line pricing at XL, so the -- it's quite similar to the end of last year in the sense that, yes, U.S. professional lines are soft. That's very clear, which means that we are focusing on profitability, we are focusing on our current book of business, and we have increased the retention of our books of business. Because obviously, you have better profitability with your current customers rather than looking for new customers in such a market.

But for the rest, for all the lines, we see very good momentum. Bear in mind that at XL, there is obviously a biased to Europe in the first quarter. And the pricing momentum in Europe is good. And you saw it, around 5%, to make it simple. But it's even better in the U.S., where you see property still up 15%, like it was last year. But you also see some places in casualty also up significantly in the U.S. So that's why I said that overall, with that pricing dynamic, excluding North America Professional lines, we are slightly above loss trend still.

So what should we expect for '25? I don't see why the market should change abruptly in '25. We are coming to a place where prices increase with loss trend slightly above, could be in line. I don't see competitive pressure that would take the prices down or below loss trend at this stage, then '26 we'll see. And you know that, for the plan, our assumptions is that -- are that we maintain our margins at XL, playing with the various cycles of the various lines of business.

[Operator]

The next question is from Dominic O'Mahony of BNP Paribas Exane.

[Dominic O''mahony, analyst]

So just 2, one is just to clarify something, Alban. I think you said -- it sounds like the margin recovery in Personal lines is very much on track and that ex financial lines pricing remains above loss cost trend. But should I infer from that including financial lines, pricing probably isn't ahead of loss cost trends? Is that a fair inference from what you're saying?

And then I just wanted to invite your thoughts on trends in North America casualty. I mean some of your North American peers seem to be adding to reserves for the more recent vintages, so 2020 onwards. Interested in your thoughts on how experience is running through the XL book on those more recent vintages.

[Alban Nesle, executive]

So on your first point on North America financial lines, it's true that profitability, which -- I sound like a broken record on that one, which was extremely high, is now good on financial lines. And that's what matters to us. And as I said, we will manage this focusing on our customers rather than looking for new business at any price. That's not our sense.

So you -- I separate it from the rest because for us, this is a specific line with a specific dynamic. And exactly for your question on casualty, what matters to us is whether we are above loss trend in those other long-tail lines, and we are.

And on the casualty reserves, so as you know, we review our reserves twice a year, before half year and before full year. We had seen the change in the trend, I think, earlier than our competitors. And really, what matters for reserve is change in trends. And we have not seen over the last months a change in trends on casualty, and what I mean by that is we haven't seen an acceleration. Now we will do the reserve review in Q2, and we'll be able to tell you more at half year.

[Operator]

The next question is from Andrew Crean of Autonomous.

[Andrew Crean, analyst]

Can I ask, I suppose 3 areas? One, could you go into a little bit more on -- detail on German motor as to what the severity and frequency trends are there and how that's stacking up? Secondly, could you say -- I know you said nat cats were below your pro rata rate. But if you baked in man-made or large losses in Baltimore bridge, are you basically on trend in the first quarter?

And then thirdly, could you talk a little bit about reinvestment rates? You've got quite a headwind, I think, on the sort of discounting amortization. But against that, there should be a decent pickup in the reinvestment rate on the portfolio. If you could talk a bit about that, that would be great.

[Alban Nesle, executive]

Andrew, so on German motor, I think this is -- we are in line with our expectations. So we increased prices by around 17%. And at the same time, we saw no additional drift in frequency. So we -- the price increases that we have implemented allow to correct for the drift that we had last year without additional drift this year. So we are in line with our expectations. And I mentioned frequency because that was the issue last year, but we have no issue on severity here this year.

On nat cat and large losses. Large losses, before we had the Baltimore bridge claim, that was also a good quarter. And so nat cat plus large losses is also a good quarter. And on the reinvestment rate, so obviously, it's a mix of many currencies and notably, if we not forget that we can also invest in Japan and Switzerland. We invested at 3.8% overall over the first quarter. And obviously, it's a small positive compared to our expectations.

But if I broaden that, I think the way I would characterize the first quarter is that we have a good number of small positives, small positives on the reinvestment rate, notably on the dollar side, and therefore, on the discount rate; small positives in the pricing on retail, which is slightly better than expectations. So it's only Q1, obviously. But nevertheless, I think we -- as I said, we're off to a good start, thanks to all this.

[Andrew Crean, analyst]

What was the reinvestment rate in full year '23 against 3.8%?

[Alban Nesle, executive]

It was around 4%, if I remember it well. It's slightly lower the -- for the first quarter. But the currency mix plays a role. And the other reason is that, for specific reasons, we focused for the first quarter on liquid assets. And so we didn't get the additional premium from illiquid assets, but we'll get that later in the year.

[Operator]

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

[Andrew Sinclair, analyst]

First from me just a point of clarity on Baltimore bridge, less than EUR 100 million. Just can you give us a little bit of color in terms of the industry loss expectations for that? And if that industry loss goes higher, on cat rates or are there any other nonlinear elements we should be aware of for Baltimore bridge losses?

Second was just -- thanks for the commentary on the drop in contribution from new business, CSM, and the color on that year-on-year. But just looking at in particular in France, on the non-CSM/other new business value in France, that was a really big jump up 41% despite Protection GWP actually been slightly down year-on-year in France. Really surprised me a bit. Just can you take a little bit of color on that big jump in other new business value?

And then third for me was just on XL Re. I think the first time exposure seems to have grown in a long time. Is this just Specialty that you're interested in? Or do you have some appetite for growth in any other reinsurance lines as well?

[Alban Nesle, executive]

Well, thank you, Andrew. So on your first question on the Baltimore bridge, so what we said about having a loss of less than EUR 100 million, it's based on the assumption that the industry loss is around $1.4 billion -- $1.5 billion in total. That being said, if the loss was to creep up to, say, $2.5 billion or $3 billion, I estimated that it would still be less than EUR 100 million for us because of the policy limits that we have. The only increase that we would get in our loss is the increase in the Reinsurance reinstatement premium that we would have to pay. So it is, in any case, capped to a low level.

On the new business value, this is new business, CSM at AXA France, if I understood correctly your question. A good part of it comes from the health part, which is in the NBV, but not in the NBV, [ ENV ] CSM. And on the NBV part, we have significantly increased prices and therefore margins. And that's probably the main reason why we increased the NBV in France. There's also a bit in Protection in volumes. But that's Health, which is really the issue -- no, not issue, the cause of the improvement.

And on the XL Re, I think what we want -- what we don't want to increase significantly is property cat. We want to be cautious on casualty reinsurance in the U.S. because we want to make sure that pricing -- local pricing reflects the profitability and the risks. But on other lines, we're happy to grow.

[Operator]

The next question is from Michael Huttner of Berenberg.

[Michael Huttner, analyst]

I'd be really quick because, I compliment all my peers. The questions and the answers are fantastic. It's -- on Health in France, in the U.K., can you give an idea of the speed of the improvement? Will we see it in -- already in H1 in terms of profits or H2? It sounds as if you've done a massive turnaround, but there's always this lag.

[Alban Nesle, executive]

Well, thank you, Michael. Look, it's a transformation. It's not as easy or as quick as the recovery in German motor. Because as you know, it's about pricing, but it's mostly about the change in the way we manage claims, the pathways, the use, so to speak, of GPs. And so you will see some improvement already in wage, but we will be back to normal profitability, as we said, early '25 or by the end of this year. So that would be progressive.

[Michael Huttner, analyst]

And can you say how much it is, the swing factor, if you like, from, say, '23 to '25.

[Alban Nesle, executive]

No. I mean what we expect in -- for the whole of '25 is to get back to the profitability we used to have until '22.

[Michael Huttner, analyst]

So about EUR 100 million, maybe EUR 200 million? Sorry, I'm pushing, but you're so generous today. I thought I'd try my luck.

[Alban Nesle, executive]

Look, it's, let's say, between -- around EUR 150 million.

[Operator]

The next question comes from Peter Eliot of Kepler Chevreux.

[Peter Eliot, analyst]

A couple of follow-ups, please, for me first. Firstly, just going back on the German deal. Just one -- sorry, try it a little bit more. Just are there any financial implications of the cancellation of that deal? And secondly, I appreciate the economics are now much better than they were a couple of years ago. Should we assume that the main change really is in the risk profile of the business? Or are the earnings looking a little bit better as well?

Then also a follow-up on U.K. Health, if I may. Appreciate how volume, as you said just now, it's not all about pricing. But if I do look at pricing and -- premiums were up 5% for Health Europe. And it doesn't sound like you've had outflows from the U.K. So I just -- it doesn't look like the pricing has been that strong, but I'm just wondering if I'm missing something there.

And finally, sorry, it's a little bit off topic, but just given your update on the ADC at the full year results, would you kind of remind us how much income you're currently giving away to Enstar and what your options are on that?

[Alban Nesle, executive]

Sorry, I was writing down your questions. And thank you, Peter. So on the German deal, the financial implications are simply, I mean, compared to today, nothing. I mean we keep the earnings, which are a bit more than EUR 30 million. And we don't do the share buyback that we would have done, and we don't get the cash, which was roughly EUR 400 million. So net-net, we would have gotten EUR 200 million net cash that we're not getting. That's the difference. But we are -- we keep the EUR 30 million, EUR 35 million earnings from the book.

Again, if duration matched, it's okay. But if we were -- if we had decided to sell it, that's because it's not fully in line with the nature of the live books that we want to have. So we were happy to sell it for that reason. It's obviously in better shape now than 2 years ago, thanks to higher interest rates. But as I said, if we find a good offer, we could sell it.

On the U.K. Health pricing, you will see in H1 that we will have increased prices further because we've done another set of price increases in April. And on the ADC, I don't have the numbers with me. The team is telling me, what, EUR 20 million, it was? EUR 20 million per annum on the ADC.

[Operator]

[Operator Instructions] The next question is from William Hawkins of KBW.

[William Hawkins, analyst]

What is the movement in the SCR that contributes to the 7 points of operating Solvency change in the first quarter, please? And then can you just remind me, to the extent that you emphasized that it was a normalized capital generation figure, is it boosted by the light nat cats that you referred to or not?

And then secondly, please, when you were making reference to maintaining the stock of debt through the plan in the context of what you've just done in the first quarter, can you just remind me what your specific intentions are with regards to the grandfathered RT1s? Are you intending over the next couple of years to replace it? Because obviously, you can't replace it with allowable Tier 2? Or are you assuming that your Solvency ratio is so high that it doesn't matter if you allow for some deleveraging with the grandfathered debt drifting down?

[Alban Nesle, executive]

Thank you. So on the SCR, within the plus 7 points, there is a minus 1 point from the impact of the business growth on our SCR. And there was no particular boost from nat cat. Nat cat was, as we said, a bit below the operated number but didn't have a meaningful impact overall.

On our stock of debt, so we plan to maintain our stock of debt, absent M&A. That was clear in February. We plan to manage proactively our stock of grandfathered debt, but it doesn't mean that we will replace one for one, Tier 1 and Tier 2, by Tier 1 and Tier 2. We might use also some senior debt to keep the level of cash that we have and overall our gearing ratio. And that might have a slightly negative impact on our solvency, but we are talking potentially a couple of points.

[Operator]

We have no further questions. I will hand it back to Mr. de Mailly Nesle for any closing statements.

[Alban Nesle, executive]

So thank you very much for joining this morning. As I said at the beginning, we are very happy with our numbers. Obviously, a bit disappointed with the German transaction. But on one hand, it's in good place now. We are open to options, and we are very happy with the transaction that we've done with Munich Re on AXA Life Europe. So we're overall happy with our Q1.

Thank you very much, and I'll see you at the latest in August for half year.