AXA’s Tilt to Commercial Insurance and Technical Income Shows Nascent Positive Signs

Equity Analyst

Henry Heathfield

AXA is a large European multiline insurer that has been on a path of renewed focus and transformation. While its renewed focus may still be a little elusive and it will always be hard for such a large insurer to achieve, given the nature of this business, the company has clearly made strong inroads in transforming its business model to one that is less focused on life and savings. Historically, these lines of business have contributed over half of AXA’s revenue and earnings. Yet, as the company took some deliberate actions to sell its North American savings business, shift its products to more technical-based income in Switzerland, and purchase a more North American-focused commercial property and casualty insurer with the proceeds, this is by and large a technical income-based, albeit large and diversified, insurance business. Alongside the developed markets of France, the U.S., and Northern Europe, we think the company holds solid property and casualty insurance businesses and relationships in developed as well as emerging markets in Asia.

Alongside this shift toward more technical sources of earnings where there is limited reliance on profit on investment income, we think AXA has invested in technology. While we cannot attribute the exact root cause of this, we know that AXA has invested in utilizing geographical data to better assess risks and reduce or reprice business. Further, data and technology have been used to access driver safety and improve claims automation. While frequently overlooked, the latter is increasingly important in insurance to get ahead of all forms of inflation. We think AXA’s historical commercial insurance sweet spot lies in insuring micro-, small, and midsize businesses across Europe. With the acquisition of XL, the company is going up against some stiff competition. History has shown AXA can utilize its investment to improve its commercial insurance loss ratio. Only time will tell whether the company can continue to do so to match market-leading peers in the midmarket and broader commercial segments.

Business Strategy & Outlook

We do not award AXA an economic moat.

AXA has returned an average 7.9% return on equity over the last 15 years. The business has earned an average return on equity of 9.1%, excluding unrealized gains and losses, over the same time. Both are below the 11% cost of equity we apply. We forecast AXA will earn a 13.4% and 14.4% return on equity midcycle forecasts.

With the sale of AXA Equitable Holdings along with AllianceBernstein, and the purchase of XL Group, AXA has shifted its business model from one that was more focused on life and savings, to one that is more focused on property and casualty. This was a good move, but the change hasn't been all sunshine. 

Around 20 years ago AXA was looking to grow its insurance portfolio further by leveraging its position in group life insurance in its home market of France to grow market share in SMB insurance. At this time AXA’s European property and casualty client mix was around 60% personal and 40% commercial lines. AXA’s largest commercial markets were France, the U.K. and Ireland, and Germany.

However, we think AXA’s economic profits began to go a bit wayward after it moved up the ladder with AXA Corporate Solutions and began to insure larger commercial clients. While AXA Corporate Solutions offered specialty marine, aviation and space, building, infrastructure and construction materials, environmental risks, and energy and transport insurance for larger companies in 90 countries across the globe, and these relationships likely meant returning clients, AXA’s commercial insurance loss ratios have been worse than the broader company’s property and casualty loss ratios, overall. By AXA’s own admission, large accounts were more competitive and less profitable at the higher end.

By around 2013 AXA had become the fourth-largest commercial insurer in the world, listed behind Allianz, Zurich, and American Insurance Group yet AXA’s commercial insurance book was still largely focused on smaller accounts. Micro businesses accounted for a quarter of property and casualty commercial sales. Another 40% was sold to SMBs and so the lower end of the commercial market still accounted for less than half. Large businesses accounted for 20% of property and casualty commercial insurance sales and corporates accounted for 15%. So, while AXA has ventured into larger and corporate accounts, we think the company was still focused on micro, SMBs and in Europe at least this is where the company’s historical expertise lies. AXA has historically liked this part of the market because of the lower penetration and lower levels of competition involved.

We think AXA has improved the profitability of its commercial insurance book by investing in technology and improving its process. For example, the company embarks on a yearly portfolio review where it defines growth and profit objectives by segment, and at renewals closely monitors conditions and lines it agrees to write. The company has used a geographical data tool called AEGIS to rule out unprofitable risks and price profitable risks better as well as assist with concentration and accumulation. At least some of these investments have helped contribute to a 3.4-percentage-point improvement in the commercial insurance loss ratio. Benefits might also have been a result of investments in technology that helped improve claims mitigation through claims leakage containment, body shop and supply network management, and fraud detection as part of a technical excellence drive. Nonetheless, AXA’s commercial insurance loss ratio has still, at least historically, been 2 percentage points worse than the rest of its property and casualty sales. And more recently AXA’s property and casualty combined ratios have worsened.

With the acquisition of XL Group in 2018 AXA has done two things: increased its exposure to commercial insurance in North America and increased its exposure to larger commercial insurance accounts. Up until the point of the acquisition AXA generated around EUR 15.8 billion in commercial insurance premiums. The acquisition of XL added EUR 15.9 billion purely commercial insurance premiums, including EUR 4.3 billion of reinsurance and EUR 9.5 billion of specialty premiums. These specialty lines have been predominantly dedicated to marine, aerospace, energy, fine art, London wholesale, and political risk. AXA’s European midmarket commercial insurance business has historically concentrated on the wholesale and manufacturing sectors. Commercial insurance gross written premiums now account for 30% of gross written premiums across AXA as a whole.

AXA’s SMB commercial insurance segment has focused on selling insurance to businesses with less than 50 employees. Here it provided basic insurance needs and so, standardization of policy design and wording helped significantly. With the acquisition of XL, it has proportionately increased the amount of commercial insurance it sells to the midmarket where businesses have between 50 and 5,000 employees. We generally like commercial insurance because we think it has a stickier nature than personal lines. Albeit, at least in the case of AXA, commercial insurance is not as profitable as personal lines. We think there are two conflicting elements here and they are that as AXA has moved up the corporate spectrum, it has moved toward writing less profitable accounts. They may become long-term partners, but we think there is also more competition for these accounts. Nonetheless, if written well North American midmarket commercial insurance can be written profitably, with sub-90% combined. But AXA faces a tough time trying to create a maintainable and defendable competitive position here when competing with peers.

None

Economic Moat

AXA SA

Earnings data Q1 2024

AXA SA engages in the provision of insurance and asset management services. It operates through the following segments: France; Europe; AXA XL; Asia, Africa, and EME-LATAM; AXA Investment Managers (AXA IM); and Transversal Entities and Central Holdings. The France segment includes the life, health and damages, AXA Banque France, and French holdings. The Europe segment refers to life, health activities, and damage in Switzerland, Germany, Belgium and Luxembourg, Spain, Italy, United Kingdom, and Ireland. The AXA XL segment focuses on the activity's damages of the XL Group in the United States, United Kingdom, France, Germany, Australia, Switzerland, the Netherlands, Italy, Spain, Bermuda, and Canada. The Asia, Africa, and EME-LATAM segment covers life, health, and property activities in Japan, Hong Kong, the Philippines, Thailand, and China. The AXA IM segment is involved in asset management activity. The Transversal Entities and Central Holdings segment relates to XA Assistance, AXA Liabilities Managers, AXA SA, and other central holdings. The company was founded in 1946 and is headquartered in Paris, France.

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