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A new kind of catastrophe is emerging: the “unnatural disaster.” The effects of man-made climate change are manifesting in extreme weather events that surpass historical norms, leading to risks that are becoming uninsurable from a commercial standpoint.
To address this potential danger, Axa is reportedly considering the sale of the reinsurance arm of its subsidiary, XL, as reported in Reuters. Axa, a reputable French commercial and retail insurer, is no longer interested in assuming risks that other insurers are seeking to offload.
The entire insurance sector is grappling with the challenges posed by climate change. Property-related losses from natural catastrophes have exceeded $123 billion in the past two years, a significant increase compared to the five-year average of $100 billion and the decade-long average of $75 billion.
Recent events like the Canadian forest fires that shrouded Manhattan and Chicago in darkness have garnered attention. However, it is severe storms and floods that cause the most significant damage. Hurricane Ian, which struck Florida in September of the preceding year, resulted in insurers facing around $60 billion in losses.
General insurers are now seeking to decrease their exposure to these risks. In May, US insurer AIG sold its reinsurer Validus for a transaction value of $4.5 billion, representing a nearly 25% premium over its 2018 valuation.
The debate about whether hurricanes are worsening continues. Some investors remain optimistic, such as hedge fund DE Shaw, which underwrote reinsurance risk in Florida last summer.
Catastrophe bonds, which reinsurers sell to transfer their own risk, have performed well. According to insurance database Artemis, an index of specialist catastrophe bond funds has seen a 19% increase in value over the past five years.
What could XL potentially be sold for? Analysts at Berenberg estimate that based on its projected book value and the 1.4 times book valuation that AIG received for Validus, XL should be worth around €2.5 billion in a trade sale. The dilution to earnings per share would likely be minimal, around 1%.
Selling XL could boost AXA’s valuation by approximately 7% by reducing its cost of equity. A trade sale is more probable than an initial public offering, otherwise, Charles Cooper, CEO of XL, would likely remain in his position. However, Cooper resigned on Wednesday.
Optimists argue that the insurance market is equipped to mitigate the impact of worsening weather. Axa, as a successful general insurer, is strategically reallocating its capital. While this shift may benefit other insurers through increased premiums, there remains concern about the affordability of comprehensive insurance for businesses operating in high-risk areas. If this issue persists, both sides of the insurance trade will face challenges.
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