02 August 2018
Axa’s decision to hedge 20% of its equity portfolio has paid off, by helping in part to boost the group’s solvency ratio by 28 points to 233% over the past six months.
Senior managers announced the move to hedge equities last quarter, and trumpeted one of its outcomes this morning in half-year performance figures.
Management actions to reduce equity market risk was one of three actions that improved the French group’s regulatory coverage. The others were a strong operating return net of estimated dividend accrual, and flotation in the US of Axa Equitable Holdings.
Axa only had about 4% of its portfolio in equities at the start of this year, according to the group’s Solvency II filings. Its half-year results today revealed a holding of equities available for sale, net of hedging, of 3.6% of the balance sheet.
During the first half Axa harvested net capital gains of €318m ($369m) from equities, comprising the lion’s share of the €447m net amount harvested. It swallowed net losses of €34m on alternative investments, and €101m on property.
It’s far smaller French rival Coface was also busy crystallising investment gains of €3.8m last half, in an environment it said was “still marked by historically low rates”.
Gerald Harlin, Axa’s deputy chief investment officer and chief financier officer, said the equity hedging programme – instituted partly because he considered prices toppy - would affect about 20% of the shareholdings for two years, after which Axa would consider commencing another such protective programme. The group’s sensitivity to equity market fluctuations would be cut by a commensurate proportion.
Year on year the French insurer has trimmed investment property holdings from 3.2% of its balance sheet investments, to 2.8%, and debt instruments from 57.4% to 56.7%.
Most (61%) of Axa’s new general account fixed income investments in the first half went into high-grade corporate bonds, with an average rating of A. This was almost three times the proportion of fresh monies that Axa put into government bonds (23%). From these, plus 8% to each of sub-investment grade credit and asset-backed securities, earned Axa a reinvestment yield of 2.4%.
Axa’s first-half reinvestment yield of 2.4%, up from 2.1% a year earlier, created an overall return that Gerald Harlin, deputy chief executive and chief financial officer, said “seems fairly optimal”.
“We do not for the moment seek to increase the risk as regards our global asset portfolio,” he said.
He added that Axa, alongside other insurers subject to Solvency II, also had to take capital charges on investments into account.
One instrument that entails no such charge, but whose recent volatility might have kept insurers awake at night last half was Italian government bonds (Buoni del Tesoro Poliannuali, or BTPs).
Thomas Buberl, group chief executive, said recent federal elections in Italy had “brought about volatility, and volatility is not an insurer’s best friend”, even though he added Italy’s economy “remains stable [and] luckily this situation in Italy is perhaps more stable now than at the time of elections”
He added that a bigger challenge for the EU than Italy was “the response after the actions of the US and China [in regards tariff wars] - and we still have much progress to make”.
Harlin said at mid-year Axa had €20bn of BTPs, roughly equivalent to its holdings in mid-2017 and minor compared to the volume of its overall balance sheet.
“This allows us to keep these bonds,” he said.
The group’s affiliates helped boost profits in the first half, with Alliancebernstein in the US reordering its mix of products and lowering its cost to income ratio, to increase revenues by 11% to €1.3bn.
Higher management fees were at work to boost the revenues from Axa Investment Managers (IM) as well, by 5% to €631m. Some €4bn of third party net new money flowed into Axa IM last half, helping total assets under management inflate by 4%.