AXA SA (CS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the AXA Group's 9 Months 2020 Activity Indicators Analyst Conference Call. To begin the call, I will now hand over to Andrew Wallace-Barnett, AXA's Head of Investor Relations. Sir, please go ahead.

Thank you, and good morning to everyone, and welcome to AXA's conference call on our activity indicators for the first 9 months of 2020. I'm pleased to welcome Etienne Bouas-Laurent, AXA's Group CFO. Etienne will briefly take you through last night's release. And at the end of his introductory remarks, he will be happy to take your questions. Etienne, I hand over to you.

Thank you, Andrew. Hello, and good morning to all. Thank you for joining the call today. As you would have seen from our press release, AXA's activity rebounded strongly in the third quarter after a significant decline in the second quarter in the context of COVID-19. The rebound in revenues we saw is an important demonstration of the resilience and strength of our business model. It stems from the strategic choices we have made in recent years to focus on P&C commercial lines, health, protection and unit-linked. And is a reflection of the commitment of our employees and distributors. And most importantly, the loyalty of our customers. Let me rapidly go through some of the details, starting with P&C. P&C revenues were up 2% year-on-year versus the third quarter '19, driven by both Commercial lines and Personal lines. In Commercial lines, revenues were up 2% year-on-year in the third quarter, driven by continued strong price increases, partially offset by underwriting actions to improve profitability at AXA XL. In the third quarter, prices were up 4% in France and Europe. Personal lines revenues were up 1% year-on-year in Q3, with a strong increase in net new contracts, notably in motor, including in France and Europe with around plus 100,000 contracts. On AXA XL, specifically, we continue to see an acceleration in pricing increases. In Q3, insurance pricing was up 20% and reinsurance was up 10%. At the same time, Scott Gunter and his new leadership team are taking decisive underwriting measures to enhance the performance of AXA XL's business. As an example, in Q3, AXA XL decided to exceed from some financial lines in our U.K. and Lloyd's business as we believe the level of pricing increases are not sufficient to compensate the uncertain and volatile outlook for these lines. You all know that Q3 was another active CAT season with above-average insured losses across the industry. This stems from an elevated number of storm in the U.S., including Hurricane Lora, Isais, Sally, Derecho as well as wild fires in California. Our current bottom-up estimates indicate that we may incur claims charges of EUR 3 billion in excess of the normalized level for AXA XL for the second half of the year before tax and net of reinsurance. Very recently, AM Best in its September 2020 rating review, reiterated the AA- rating of AXA XL with a stable outlook, which is important commercially and a sign of confidence in the measures currently being implemented. If I now move rapidly through our other business lines. On Health, we continue to see growth with revenues up 7% over the 9 months, up strongly in France and across all our geographies. On the Life side, despite a continued slowdown linked to COVID-19, I'm pleased to see a sustained positive shift in the quality of our business. Specifically, we saw positive flows in the third quarter in protection and in unit-linked, and continued outflows in G/A savings in line with our strategy. Finally, on Asset Management, we recorded EUR 11 billion of net inflows in Q3 from both core and alternatives, with revenues up 4%. Now let's move on to Solvency II. As at end September, our Solvency II ratio remained stable versus end June at 180%. This includes a pro rata dividend accrual based on the full year dividend of EUR 1.43 per share, initially proposed by the Board for full year '19. Looking ahead, the Solvency II ratio for full year '20 is expected to benefit from the integration of AXA XL into the group's internal model, and from the completion of previously announced disposals, including plus 2 points from the CEE disposal, which was not captured in the 180% as of September 30. And that is a good segue to remind you that we continue to pursue our simplification journey. In mid-October, we closed the CEE sale of EUR 1 billion of cash proceeds. We announced, in August, the disposal of non-life operations in India. And a few days ago, we closed the sale of Architas UK investment business. We expect the level of cash at holdings to remain high at the end of 2020, above the top end of our desired range of EUR 1 billion to EUR 3 billion. Finally, a brief word on COVID claims. At this stage, we expect only a limited impact from the current second wave of lockdowns, and we have reaffirmed our best estimate of EUR 1.5 billion, net of tax and net of reinsurance, for COVID-19-related claims in 2020. So to conclude, AXA has performed well in the context of COVID-19 with a strong high-quality rebound in our activity in the third quarter, and which initial figures indicate has continued into October. Our business model favoring technical risks over financial risks is proving its relevance and strength as confirmed by the continued growth momentum in our preferred segments and the loyalty of our customers. Our balance sheet is strong and remains resilient in volatile market conditions and with upside ahead of us on our Solvency II ratio. We expect the level of cash at holding to be above the top end of our target level of EUR 1 billion to EUR 3 billion at the end of 2020. We expect only a limited net impact on claims from the current second wave of lockdowns, and have reaffirmed our estimated EUR 1.5 billion impact from COVID-19-related claims in 2020. We believe in our strategy and its execution. We have become a simpler and more focused organization, and we are confident to deliver sustained good performance. I'm now ready to take your questions.

[Operator Instructions] First question from Andrew Sinclair from Bank of America.

Three from me as usual, if that's okay. First one is probably a slightly longer one. Look, your comments about ensuring that XL has necessary resources to take full advantage of market conditions. There's been some discussion as well about potential cash down streaming before year-end. I just wondered if you could give us some color here. Should we think about just reserve strengthening cash for future growth? I know the subject of reserves for anything you'll be in a position to give us more disclosure to properly analyze adequacy of XL's reserves. That's the long question one. Second question was just on the COVID loss guidance. Good to hear further lockdowns will not have a material effect. I assume that's on a net basis after allowing for lower attritional frequency. I just really wondered if you can give some breakdown on kind of gross versus net claims there. And thirdly, just what proportion of your Commercial lines contracts have now explicitly excluded COVID claims as we go through renewals during the year?

Andrew, thank you for your questions. So your first question relates to the -- our willingness, and our wish to reinforce the resources of XL, to be able to benefit from the current favorable pricing context and the anticipated resumption of demand across most lines segments in 2021, which is a very clear statement from our side. Obviously, we need as well to offset some expected loss from COVID-19. And all in all, what we want to ensure is that we have sufficient resources capital within our risk appetite framework to continue to grow this business. We are not shrinking this business. Of course, we are re-underwriting, we are line-sizing. We are increasing the client retention, but we want as well to grow in the business lines where we think that it's correctly priced, and we think that the market will grow -- will continue to grow next year. So we want to be in a good position to benefit from this trend. We have -- of course, your question related to the reserves. We don't make -- at the 9 months, we don't publish a balance sheet. So what I can tell you is that we continue to consider our reserves are adequate. And lastly, the amount of capital we intend to inject is around EUR 1 billion. We think it will put us in a comfortable situation at year-end. This will be -- there will be no impact in terms of liquidity at the group level because we have also other upstreams from entities in the second part of the year. And last point, there will be, as well, no impact on the solvency for the group. So your second question is related to the COVID losses. So as you know, there are 2 aspects. The first one is the first wave. And on the first wave, we consider that the uncertainty is really reducing month after month. I would say that we have clarity in the U.K. in the meanwhile since the first half. There are still some uncertainties in France, but which remain, in our view, manageable. And there is some debate around some contracts, which we think are extremely clear because they exclude pandemics. There is some confusion in the French courts around that. We think that it will be settled over time. But after reinsurance, we don't see that as a very material impact. Regarding the second wave, we are confident that the impact will be very limited for 2 main reasons. The first one is event cancellation, you remember, represented a pretty big part of the cost in the first half. Event cancellation, we already booked a provision for the 12 months starting from March. So -- because there was very limited new business. And when there is no business, including pandemic and because we had already booked a provision, we don't consider that there will be any impact related to a second lockdown. The second part was the business interruption. Business interruption is, I would say, a more complicated topic. However, based on what we see and understand, first of all, the second lockdown have softer restrictions than the first one with more government support. Second, I remind you that in some cases in France, in Germany, in Switzerland, there were settlements, settlements in case of lack of clarity of the contracts. These settlements included a clear waiver on any claims linked to a further lockdown. So we think we are safe on this part. And maybe a link -- a third point, which is linked to your third question. We have adapted -- we have started to adapt, already a few months ago, and we continue it to be rolled out, the wording of our contract in a way which is not only excluding pandemic, but as well, clarifying what is really covered and what is not. We had in the past, especially for business interruption contracts, an approach with a sort of blanket coverage with exclusions. So -- which was saying, you are covered for everything, but. And this led to some confusion. And therefore, we have decided to switch to an affirmative description of the coverage provided. So name payrolls, so as to not to be exposed to systemic risks.

And can I just come back to the first question again? And you mentioned that you'll be fitting the XL business in a comfortable position on reserves around year-end, but I think the market has been struggling for a few years now to really get comfortable on that level. Are you able to commit to giving more disclosures, say, more detailed reserve triangles on XL over the coming months?

So as you know, it's difficult for me to comment balance sheet items at 9 months. I -- so we will give, of course, the numbers in the full year numbers, which means at the end of February. But I think -- I guess your point is more related to the -- it's less a question of numbers, but more a question of disclosures, if I understand well. What your message is to say please provide us with more detail so that we get more comfort. And I know this point, we have that in mind and it's a fair point. We just need to ensure that the format of the information provided gives indeed more clarity. Sometimes when you look at net of reinsurance amounts and the historical data, the scopes, you don't always get the needed clarity. And this is why -- this is my only waiver. If it was very clear, very helpful for the analysts and investors, we would not hesitate.

Next question from Farooq Hanif from Crédit Suisse.

Returning firstly to AXA XL. How can you convince us that the EUR 1 billion capital injection is enough? Clearly, there have been questions about this. And when you talk about the upstream from other entities, is that Switzerland? Can you explain where that capital is coming from so that we can be assured that you're not taking surplus from one area to bulk up surplus in another area? Secondly, on AXA XL, can you talk a little bit about the future of further mix shift that you're going to do? So we've heard about financial lines and some liability lines in the U.S. Just wondering what further work do you have to do? So at what point should we start to see better top line growth? And then last point is, I understand a difficult topic, but even if we are convinced that you can pay a dividend, the elephant in the room is whether you will be allowed to pay a dividend. What can you tell us about that?

Farooq, thank you for your questions. Not easy ones, especially the third one. So on the dividend, the thing which I can tell you is that technically, if I can use this word, there is no hurdle, no constraint. If you look at profitability, liquidity, solvency, there is no technical hurdle. And it's very difficult for me to, at this stage, to comment on any intention or positions from the regulators and especially on the French regulator. It's too early for me. You just need to understand that we have, I think, a good motivation. We fought to pay part of our dividend this year. And for next year, I think we'll be in the same spirit. This was for your question #3. Question #1, why? So on the capital increase -- so first of all, we manage internally our capital. It's business as usual for us. And reallocating capital from capital-intensive businesses like G/A business to more technical risk like XL's business is something we want to do in the future. This being said, we have -- the amount I gave, which is around EUR 1 billion should be sufficient for us to support the growth, not only this year but next year as well. So this is what I can tell you at this stage, and it corresponds to the guidelines of our risk appetite. The financing is very clear. It's coming partly from the cash upstream from the other entities, it's coming partly from Switzerland. And you know that because we have restructured our General Account business in Group Life. So it's freezed capital. It started last year. It continued this year, and it will -- there will be a third part normally next year. So this is the second part for this year, which would be paid. And the other one is Japan, which usually pays its dividend in second part of the year. So there is absolutely nothing unexpected there.

Okay. So quickly, while you're on that point, you're still not intending to pay a dividend from XL next year in light of this year. Is that correct?

Yes. Yes, absolutely. Because XL, you saw at half year, had a negative earnings. So when you have an entity with negative earnings, usually they don't pay dividend the year after. It's very clear, yes. So on the business mix shift. So you saw our communication on the Lloyd's and -- from the Lloyd's and U.K. office. We have decided to put enough around half of the financial lines of the U.K. and Lloyd's business because we think that in the medium term, they will not come back to a level of profitability with enough security, given all the risks we see associated to this business despite the price increases. It's -- this being said, it's within each subsegment of the company, we are fine-tuning the approach. So it's not such a radical move, it's more line-sizing. So we already explained that their contract, we don't want to have more than EUR 25 million of risk. There were a substantial amount of contracts, which had a EUR 50 million of risk. We are increasing the attachment points in excess -- in case of excess of loss. So accounting with a higher retention from the clients. We are then fine-tuning per geographies, per really contract subsegments underwriting. So it's not that we are changing radically the company. It's really a mix of stopping, fixing, increasing the different activities in a very, very granular way. And this -- we'll come back to this with much more explanations soon, I would say. So don't worry about that.

Next question from Peter Eliot from Kepler Cheuvreux.

Three for me, please. The first one on your EUR 1.5 billion guidance. I mean, I guess, at H1, that consisted of EUR 1.9 billion of adverse claims offset by EUR 0.4 billion of lower frequency in France and Europe. I'm guessing that both of those numbers have increased a bit, but perhaps you could confirm that. And I mean, I guess what we've also seen so far is more restrictions in Europe where you saw the sort of the frequency benefit. So I'm just wondering if we get more restrictions in the U.S. or if that changes? Is there any risk of -- creep there? Just wondering if you could comment around that. Right. The second question was on nat cats. And I guess your EUR 0.3 billion estimate is a bit lower than last year, while many in the industry have sort of reported slightly higher amounts. And I'm just wondering if there's anything sort of in particular you'd like to highlight there as a reason that, that's come down a bit? And then finally, just a follow-up on XL. I mean, I guess, post EUR 1 billion capital injection, we're looking at a solvency ratio of about 140%. That's obviously higher than it is at the moment, but it's still lower than it has been in the past. I mean do you have a sort of feeling for what level is the right sort of level? Or is that the wrong way of thinking about it? Any light you can shed there would be great.

Peter, thank you for your questions. Your first question relates to the EUR 1.5 billion. And so I think you referred to the mix, and how this mix of claims has evolved between half year and full year across entities. So we always say that there might be some variations across geographies because indeed, you -- we, I think, had some more good news on the retail front, especially in motor in the retail side. And some movements between the geographies, maybe a bit more in France, a bit less elsewhere in terms of claims cost. I think this is the comments we made already and which revealed true at the moment. The second, but -- maybe if you have a more granular question on this, I'm happy to answer. I just was not sure if I got fully, your question. The second part, which is related to the nat cat. Obviously, we reduced our market share in nat cat. You remember the -- we have reduced our underwriting a little bit. We have also a quota share of 15% on nat cat. And therefore, our exposure can be considered as reduced by more than 10%. We are -- market share worldwide has certainly gone down from 1.6% to 1.4%, which explains part of the fact that we are a little bit below last year, while one might have expected a higher cost. Regarding XL, we don't make comments at a granular level on how we capitalize versus the Bermudan regulators' rules. What I can tell you is that we have the same approach across all the countries. We are within our risk appetite framework. And we consider that after this capital increase, we will be at the right level to pursue the activity of XL without any kind of constraints to subscribe more business. Peter, did I answer your questions?

Yes. No, that's right.

Next question from William Hawkins from KBW.

Actually, I'm sorry. I'm going to come back and ask you to talk a bit more about regulatory conversations that you're having. I understand the answer you gave to Farooq. I wonder if you could talk a bit about what you may be hearing from AOPA rather than the French regulator? And also whether you think there's just going to be more nuance in what regulators say going into 2021? This year, it's been reasonably black and white, hasn't it? Regulators went from saying yes to then saying no to then saying yes again. But when you look at the banking sector, there does seem to be more of a focus of intervening and payout ratios and all that kind of thing. So I'm just wondering if you're having any more nuanced conversations locally, and what you're hearing from AOPA? And then secondly, please, could you also just update us on any thoughts with regards to the sensitivity to the low interest rate environment? This always feels like old news and then something else comes along. So particularly for this quarter, any important changes to update us in terms of product evolution? I know the general trends towards protection, I'm just asking specifics. And then even you guys did still have IFRS issues from low yields, thinking of French annuities in the first half of this year. Can you just update us again on whether there's any particular earnings issues we need to be aware of as the low interest rate environment [ continues ]?

William, thank you for your questions. So on the AOPA, I think you know, and you hear a lot of things as well. I'm not sure that I have to comment anything. There are ongoing discussions. Nothing concluding at this stage. I think that you have some -- certainly, the AOPA is on the conservative side. I'm not sure they have changed their position versus the recent months or -- or last year, even. But I'm not -- it's too early for me and too sensitive to comment on any kind of nuances going forward into 2021. I think it's too early, and it would be really a speculation from my side. So I don't think I am in a measure to comment in a very concrete way on the regulatory updates. I think it's too early and not -- we don't have any hard facts at this stage. Regarding the sensitivity to interest rates, of course, when interest rates go down, you can expect lower investment income. This is very true for P&C, a bit less for Life, given the longer duration of the assets, and given our capacity to adapt the crediting rates in most other countries. However, where you have a good point is that it's true that we are repricing our products in a lot of countries at the moment in order to reduce the level of guarantees, if there are any. And this is an ongoing trend and will continue, including next year. I think there is a real shift in the way the Life business is being done. And coming back to P&C, I think that this is part of the reason why we see as well this price hardening, especially in the Commercial lines. There is lower investment income. It has to be offset by a higher technical margin, and this is a sound evolution. Regarding your hint that we might have a big hit on -- there might be a big hit due to interest rates. At this stage, I don't see any reason to have perhaps a specific query on our earnings or more than business as usual.

And next question from Michael Huttner from Berenberg.

Yes, fantastic. I want to let you -- sorry, I thought the results are fantastic and well done for achieving that amazing solvency, 180%. On the regulatory, I must say I don't understand fully. For me, the toughest regulator in Europe, because they were so shocked by the previous financial crisis, is a Dutch. They're allowing dividends, they're allowing buybacks. So I don't understand this and anyone not commenting about dividends, and they must be speaking to the local regulator every day. So I just wondered can you give us a little bit of a feeling where the sensitivity lies. Is it just French specific? That's what it sounds like to me, in which case, it really is difficult for French insurers. I'm not sure the regulator understands that. But anyway, that's the main question. And then on the cash flow, you've given us a few indications on cash. So there's something left in Switzerland. I just wondered if that's the third of the original amount of EUR 700 million for next year. And would it mean if I add the numbers in terms of cash flow, we had EUR 4.9 billion, I think, at 6 months. If I add the EUR 1 billion we're talking about now, that means EUR 5.9 billion. And I just wondered if we could see a similar number for 2021. Or do you think that would be down? And then the last question, and you alluded to it, is on the reinsurance recoveries. How confident are you or how big is it in your EUR 1.5 billion number, EUR 1.5 billion number with regards to reinsurance recoveries and other discussions around that?

Michael, thank you for your comment on the good numbers. Good to hear from you.

Yes. Very fantastic. Really well done. I wish I had the -- your management's -- yes, it's really good.

So your first question related to the regulators again. So first of all, I don't think that it's purely specific to France of -- some other regulators are in the same I would say, spirit, mood or approach. I guess that there is -- it's not specific and it's not specific to insurance. I think that certainly, the French government and authorities are very worried about the economic situation as a whole. And this has an influence on everything. They are worried about the economic situation. They are worried about the sanitary situation. You have seen that the confinement measures are certainly stricter in France, can add Belgium to France as well, than in other countries. So there is a real concern, a macroeconomic and sanitary concern about the situation. And this has an impact on all the rest, not only on the regulation and insurance. But on the way they see or they want to protect, according to them, the economic sectors. So -- and it's difficult to say much more than this, right? It's really certainly this worry, and we felt that from the beginning, they were really, really afraid. Maybe because French doesn't have a very strong economic culture. I don't know. I let it to you. Regarding the cash. Obviously, the cash upstream next year will be lower than the cash upstream this year because it's a direct consequence of the level of earnings of the previous year. So if you make the math, obviously, will come to a lower number. On the reinsurance, every time we tell you, we don't disclose the gross and net amount because we are in discussions and I should say, negotiations with the reinsurance companies. So it's a very sensitive information. What I can tell you, again, is that we are confident with the numbers we have taken into account in our calculations because they are the result of a very fine-tuned and granular approach, taking account different scenarios to ensure that at the end of the day, our amount be fair in any circumstance, and that we don't get a bad surprise at the end.

And next question is from Andrew Crean from Autonomous Research.

Two questions, if I can. Firstly, you're, I think, now celebrating your second burst of ownership of XL. And throughout that period, nat cats have been above your expected rate. Could you say whether your expected rate is too low? And whether in the next renewal season, you're looking to buy additional covers to reduce the volatility of XL's results? First question. Second question, I'm going to come back to this question of regulators. You seem not to wish to answer any questions about AOPA or the ACPR, which leaves the investors with a view of deep uncertainty of your 2020 dividend. Are your answers actually merely political because you may have the regulators in the room? Or is there something substantive there? And is there any efforts being made by the industry privately to equalize the playing field between the different national regulators?

Regarding the nat cats, I fully understand the -- your questions because we have been above our budget for the second time. And I think it's a very sensible question you are asking. I don't think that taking more and more reinsurance is the solution because it's very costly. And at the end of the day, this is our -- part of our business model. What I propose is to get back to you to the market pretty soon with some clarification on what it means for us. In the meanwhile, what I can tell you is that when I see the prices -- the price increases we are seeing at the moment, part of the answer is in the price increases we see at the moment. So on the reinsurance, if you see on average, plus 10%. This covers, of course, nat cat. You will see that there is some correlation between the expenses -- sorry, the claims incurred and the price increases performed. I don't say this is the only solution, but this is part of the solution, and we'll come back to you very soon with more concrete answers on this very important question. The second question on the level playing field. You know that it has been our wish that there be a level playing field in Europe, which is, I think, common sense. Where there is -- and I think this is not only AXA, this is most of the insurance companies as you hinted. The second wish is that decisions on dividend be made on economic factors. So within -- not capitalizing on the Solvency II framework. And not a sort of approach, sort of, yes, black-or-white approach based on macroeconomic factors because we think that it would undermine the credibility of Solvency II, which is a framework which has its disadvantages, but also has the merits of being pretty conservative. And having an influence on the way we manage our businesses. So I think this is it, and I see a convergence among the various bodies representing the insurance industry, like the PIF, CRO, COO Forum, Insurance Europe. All these bodies going to the express themselves, I think, in the same direction.

Next question from Nick Holmes from Societe Generale.

Just a couple of quick follow-ups. Firstly, with XL, do you think it's on track for EUR 1.2 billion underlying earnings, if you take out all the bad stuff, the COVID, U.S. civil unrest and the nat cat hit? And second question is just coming back on the reinsurance protection. Can you remind us what levels you actually have at the moment, if you were to take some -- or if there were to be in the industry, some bad nat cat this year?

Nick, thank you for your question. So I will not comment just right now on the normalized earnings for full year 2020, I think it's too early. But this is something on which we will, as well, come back to you soon, I would say. But please understand that it's difficult to comment on H2 normalized earnings during -- so right now. Even if your question is absolutely justified, and I would say, if you exclude all the one-offs, we should not be that far away. Second, on the reinsurance protection, how can I tell you? We have, I think, a very solid protection in terms of high-severity amounts. The difficulty is the high frequency. And this is what's happening at the moment, again. So low to medium events -- medium-sized events. And on this, the only protections we have and which we disclosed in the beginning of the year was to say we have a quota share of 15%, and we have reduced our underwriting. But this does not prevent us from incurring more losses, if there were some more small events, I would say. And therefore, it's very difficult for me to tell you. Don't worry, the cap is -- there is no cap as such. So we are well protected against very severe events. But you cannot protect yourself against events, which for instance, are below EUR 50 million. On this, you just have to live with that, and it's part of the business.

So it's really frequency rather than severity that you would be worried about. Would that be fair to say?