AXA SA (CS) Earnings Call Transcript

Good morning, everyone, and welcome to AXA's 2020 full year analyst presentation. It's good to have you with us. The presentation this morning will be made by our Group CEO, Thomas Buberl; and our Group CFO, Etienne Bouas-Laurent. Also joining us for Q&A this morning, at the end of our presentation will be the CEOs of AXA in Europe, in France and AXA XL and our Group Chief Risk and Investment Officer. Now sadly, we can't be with you physically in London this morning. But we're very happy to welcome you virtually here to sunny Paris. And to enable a fluid and direct interaction between our analysts and the management this morning, we've invited our analysts to join us here by Teams. And so welcome to you all as well. And if you've connected by the webcast, you can also ask questions, if you wish, in written form, just follow the instructions you've been given. And now I'm very happy to hand over to Thomas for his introduction.

Thank you, Andrew, and good morning to all of you. As Andrew said, we are very sad not to be with you in person and hope that, hopefully, for the next full year, we will be in the old physical format again. Let me start with the key highlights of the full year of 2020. And those are 4 key highlights. The first 1 is very much around our revenues. EUR 97 billion of revenues is almost stable relative to last year in a very difficult context. We've seen that the business momentum is good. And that particular in the preferred segments, it has really been very good, plus 5% in the last quarter of 2020, and we obviously are very confident that this is continuing throughout 2021. Second very key message is the stability and solidity of our balance sheet. 200% of Solvency II coverage represents this very strong balance sheet, and it shows that our shift towards technical risk, and in particular, the benefit from the integration of AXA XL into the internal model with 13% of benefit shows that we are very strong as a group in one of the most difficult crisis in the last 50 years. Third message is about dividend. The Board of Directors has decided yesterday a proposed dividend per share of EUR 1.43. It was important for us to get back to an attractive dividend and certainly, to get back to a proposal of the initial dividend of 2019 full year. Fourth important message is EUR 4.3 billion reported underlying earnings. This has to be seen in the context of a very severe crisis, but it also has to be seen going forward. Many of the negative effects that we have seen in 2020 will not repeat. Therefore, we are very confident in our outlook. Also, given the very good business momentum that we can achieve, the 3% to 7% underlying earnings per share growth based on the normalized rebased underlying earnings of EUR 6.3 billion. If we now go a little bit in more detail. And before I do that on the numbers, I would certainly like to talk again about AXA's contribution to society during this very difficult period of COVID-19. As you know, we had many challenges. Starting with our employees around a simple question, how can they continue to work in a safe environment? How can they continue to serve their customers. Up to the point how can we help our customers that have found themselves in very, very difficult situations and are still in some of the sectors in difficult situations. Up to the point where we really wanted to make sure that as an actor in society, we do contribute to relaunching the economy and stabilizing the economy. And this was very much the driven spirit of our 2020 engagement. On the one hand, protecting our clients and employees, we've spent and paid over EUR 1.5 billion in claims and solidarity measures to our customers and to society. And we focused very much on how can we guarantee a high employee well-being in a situation that is very different and that requires to work at distance. Supporting the economic recovery was very much around supporting the SME, making sure that we provide capital to the SME in order to relaunch growth, in order to relaunch investment. EUR 700 million have been invested in France into SMEs to help them to prosper. And certainly, when we think about the investment in people and research, we continued our engagement into research. And certainly, we recruited despite the difficult crisis, 5,000 people in France and 30% of those 5,000 people have been young people in order to make sure that we are a very strong actor, a very active actor in a difficult situation of our society in this difficult moment of COVID. Where has that led to? And when you look at how the franchise of AXA has developed. I'm very proud to say that despite those difficulties, our distributors, our employees and our customers have really seen an enhancement in their satisfaction. On the distributor side, we were able to increase the use of digital means from 67% to 91%. This was really the key to make sure that we could continue a good customer service in a time where we couldn't rely anymore on the traditional mechanisms. The digital investments that we have made have significantly helped us to continue the very good service. I mentioned earlier that employee protection was one of the absolutely key elements and first priorities that we have. We managed very quickly to transfer all of our colleagues into a safe environment of distance working and this was really the fruits of a very long term, very intense strategy and engagement of investing into digital. This has led to the fact that our employee satisfaction has increased by 14 points during the crisis to 35, which is way above the benchmark of global high-performing companies. All of this has resulted in an increase of our customer satisfaction, which made me personally very proud. In a period of a crisis, you have very difficult situations. You are faced with very tragic moments but we did our best to help everybody, to help our customers, and I'm very proud to see that today, in 94% of our markets we're at or above the market average in terms of customer satisfaction. This is a fantastic result, and I would really like to thank all of my colleagues and certainly all of the AXA agents and the distributors for this excellent result. If we go a step further and have a look what has really happened in the underlying dynamics. It is very clear that we see some very promising trends that are significant opportunities for the future. One is clearly the growth in our preferred segments. I mentioned earlier that we've seen a dynamic of plus 3% over the first 3 quarters of 2020, but in particular, in the last quarter, we've seen an acceleration to plus 5%. This makes me very confident that we have a good momentum also for 2021. On the P&C profitability, we could also advance. If you exclude the effect of COVID-19, if you exclude the abnormally high natural catastrophes, we managed to bring down the combined ratio to 94.2%. And lastly, we also continued during that very difficult period of the crisis to continue to shift our business mix away from General Account, which has experienced a negative net flow towards more Unit-Linked, fee-based business, which has see a very attractive, good positive inflow. XL was clearly the business that was mostly hit by COVID. Most of the other geographies had another business, which was mainly the Personal lines business that could compensate the negative effects. And as you see in a moment, we have a very high stability of Europe or France, where this compensation mechanism has worked very well. Since COVID is very much a crisis of the Commercial lines business and since XL did not have the opportunity to compensate with another business, we obviously see the biggest effect there. However, we've taken very concrete measures at XL under the leadership of Scott, who is with us today, to make sure that we are very focused on our target of EUR 1.2 billion in 2021. What have we done? We have firstly been very, very disciplined in the reunderwriting of our contracts, making sure that we get the right profitability, making sure that we exclude the risk of COVID as much as we can and benefiting from a very strong momentum in pricing. You've seen that up to the Q3 of last year, prices have increased by 20% and in Q4, it even went beyond to 22%. We've seen with the renewals in Europe that this trend of price increases is continuing, and we are very, very dedicated to continue this very strong discipline on the underwriting side to make sure that we are using this great momentum of increasing prices. At the same time, we have continued to take measures to manage our volatility down, volatility on the natural catastrophes, which means that we have increased our prudence by the higher CAT load of 6% and but also managing down our volatility on the reserves of the long tail business through the adverse development cover with Enstar that we published this morning. All of this makes me very confident that we have taken the right measures. We have a strong base. We are confident on the reserves at XL, and we will be achieving the EUR 1.2 billion of desired target for 2021. When we look at the other businesses, as I said earlier, we see very high resilience. France and Europe, the strongholds of AXA have managed to keep their results even between 2019 and 2020, despite the fact that we have experienced significant losses from the COVID. The balancing effect and the diversification effect has worked very well. We've also seen in other geographies, for example, Asia and the international markets that our pivot towards Health has really advanced well. Health is now considered as the #1 risk for everybody. It's on everybody's mind and benefiting from this trend. Being in a position of having such a strong global franchise on Health will really help us to capitalize on this trend in 2021 and going forward. And certainly, on the investment management side, we have seen a very high desire for longer-term alternative and illiquid assets, having one of the most important franchises on Alternatives in Europe helped us really to accelerate our growth on the Alternatives and to make sure that we have really boosted our performance there, which is also a good indicator of how this will continue going forward. When we look at how does 2021 look like, I'm personally extremely confident. Why? Because we have taken the right measures and the right decision at XL to really accelerate the turnaround. Very strong measures on the discipline on underwriting, very strong measures on the reduction of the volatility on nat cat and the long tail reserves. All of this in an environment that remains extremely favorable when it comes to price increases. Secondly, we have a very strong foothold with France and Europe, very strong results despite that difficult crisis, sustained delivery over the crisis, and we have a clear program of pace under the leadership of Jacques and Antimo to continue this. And certainly, benefiting from the growth options in Asia, in the international markets and in AXA IM, we are well-positioned. We are on the right trends be it the alternatives, be it the Health business in order to make sure that we can achieve the 3% to 7% underlying earnings per share-based on a normalized earning capacity of EUR 3.6 billion. This ends my section, and I would like to now hand over to Etienne. Thank you.

Thank you, Thomas, and good morning, everybody. Happy to be with you to present our full year '20 results and share some insights on the outlook for 2021 and beyond. Let me start with Group revenues. Overall revenues were EUR 97 billion, down only 1%, demonstrating the resilience of our business model in a challenging year. We recorded strong growth in the first quarter, followed by a tough second quarter impacted by strict lockdowns. We then saw a rebound in the third quarter and an acceleration in the fourth quarter, which bodes well for 2021. Each of our preferred segments, P&C Commercial lines, Health & Protection performed well, proving the pertinence of our strategy. Revenues in preferred segments, which represent around 2/3 of our total revenues were up 3% overall in 2020 and return to pre-COVID growth rates in the fourth quarter at plus 5%. Going forward, we are well-placed to continue to grow in our preferred segments, notably with continued strong pricing momentum in P&C Commercial lines and increased awareness for Health & Protection post COVID. Let's now move to underlying earnings, which, of course, were impacted by COVID and nat cats in 2020. AXA's underlying earnings were EUR 4.3 billion in 2020, down from EUR 6.5 billion in 2019 from 3 key items. First, the nonrecurring contribution from equitable holdings; second, COVID impact; and third, nat cats, which were EUR 0.2 billion higher than in 2019. If we look at it by line of business, here are the key elements which are important to retain. P&C earnings, excluding COVID and excess cats, were 2% higher, driven by current year technical margin improvements. In Life & Savings, the technical margin was partly impacted by nonrecurring items, as already seen in the first half, while investment margin remained resilient. In Health, we have a good top line momentum across geographies and in Asia, in particular. However, earnings growth was offset by adverse regulatory changes in France. Asset Management performed well, boosted by the Alternatives division. Holdings and others improved mainly from higher nonrecurring investment income. As Thomas just explained, we have set the starting base for underlying earnings of our 2023 plan at EUR 6.3 billion, adding back COVID impact and the excess cats from 2020. This is in line with 2019 earnings on a like-for-like basis, which is a strong level, considering the changes in economic environment. Let's look at more details for each of our lines of business, starting with P&C. P&C revenues are up 1% overall. First, in Commercial lines, we recorded 2% growth for the year with a strong rebound in the second half, plus 2% in the third quarter, plus 7% in the fourth quarter. Pricing momentum remains strong, as Thomas explained, notably AXA XL with insurance prices up 22% year-on-year, in line in the fourth quarter. We also had strong January renewals in Reinsurance, with prices up 9% year-on-year. We expect to see continued pricing increases in 2021 and this will lead to further margin expansion. Personal lines revenues declined by 1%, mainly from lower new business during lockdowns in France and Europe, mostly in Motor. The number of contracts remain overall stable and pricing was flat. Moving to P&C earnings. The key point to highlight is that where earnings were actually higher, adjusting for COVID and CATs. Earnings were impacted by EUR 1.5 billion of COVID losses and by higher net cat charges, notably from a very active hurricane season in the North Atlantic. Looking through that, we recorded a higher current year technical profit, which more than offset lower investment revenues. We also had slightly less favorable prior year reserve developments. As a result, excluding COVID and assuming normalized nat cat, P&C earnings were up 2%. The combined ratio shows a similar picture. The current share combined ratio, ex COVID and CAT improved by 0.5 points from both lower loss and expense ratios. Going forward, for P&C, we remain confident that higher technical profits will more than compensate lower investment revenues. As a reminder, our target combined ratio is 93% by 2023. Let's now take a detailed look at COVID impacts, which are confirmed at EUR 1.5 billion and in line with our initial June 2020 estimate. This continues to represent our best view of ultimate losses linked to COVID. In the second half of 2020, we saw additional impact in Commercial lines, notably AXA XL offset by reduced frequency in retail lines. In business interruption, we have assumed some incremental claims from the introduction of new partial lockdowns and also from court decisions in the U.K. and Australia. And as you know, some uncertainties remain in France. In Other lines, credit, financial lines, liability and travel, we have anticipated some more impact even if we have seen very limited claims so far. IBNR is at 90% for these lines. Even cancellations remain pretty stable. On the other hand, and offsetting these additional impacts, we saw further benefits from reduced frequency in retail lines, notably in Motor. In order to reduce our exposure going forward, we have revised the policy wordings for all our nondamage business interaction contracts across the group and strengthened the exclusion of pandemic triggers. The rollout of these revised wordings is ongoing as contracts are renewed. Moving on now to AXA XL. We confirm the EUR 1.2 billion target for 2021. First, some color on 2020 earnings. Underlying earnings were minus EUR 1.4 billion, impacted by COVID, CATs and US riots. COVID impacts have been booked at EUR 1.7 billion mainly from business interruption, even cancellation and other lines as I've just explained. Natural catastrophes were EUR 500 million, above the assumed 4% CAT load for 2020 linked to the high-frequency of midsized storms in the Atlantic. We also had EUR 0.1 billion claims from riots in the U.S., as mentioned in the first half. Adjusting for these 3 items, normalized earnings were EUR 1 billion, in line with guidance provided by Scott in December. In comparison with 2019, we did benefit from higher pricing, more than offsetting higher claims cost in long tail lines. For 2021, we are confident on our EUR 1.2 billion underlying earnings target. We expect EUR 0.5 billion earnings uplift from higher pricing and underwriting measures, net of claims trends. The year is starting well on that front. Also, remember, we are now assuming a more cautious CAT load of around 6% of combined ratio compared to 4% previously, and we expect EUR 0.1 billion headwind from lower investment income. Overall, in 2021, we expect around 70% of products will deliver a combined ratio of 96% or below and the overall combined ratio for AXA XL to be 96%. Let's now move to Life & Savings, starting with revenues. You will see that our business mix continues to improve. Revenues were down 6% in 2020, driven by lower general account savings in the context of COVID, especially in France and in Italy. Protection revenues were resilient at plus 2%, Unit-Linked revenues were down 1%, but up 3%, including Unit-Linked products booked as mutual funds in Italy and Belgium. In France, we continue to see strong appetite for Unit-Linked products, which represents 48% of revenues in individual savings. And this is 10 points higher than the market average. Net flows also demonstrate clearly this change in business mix, less spread business, more technical risk and more fee business, in line with our strategy. Going forward, we expect a rebound in Life & Savings revenues as COVID impacts continue to recede with further growth from Protection and Unit-Linked. Let's now move to earnings for Life & Savings. As you can see, a very similar picture compared to the first half. Earnings were down 7%, mainly driven by lower technical margin linked to a combination of factors already reported in the first half. Investment margin was stable at 67 bps as lower investment revenues were broadly offset by lower crediting rates. Expenses were lower, reflecting good cost containment measures across geographies. The technical margin should improve next year from current levels, while investment margin could see some dilution given the low level of interest rates. Remember, our guidance is 55 to 65 bps for investment margin during the plan period. Moving now to our growing Health business. Revenues were up 6% across geographies in Group and individual businesses. In Asia, revenues were up 9%, mainly in China with higher volumes from new partnerships at AXA Tianping. We also saw higher volumes in Japan and tariff increases in Hong Kong. Underlying earnings were down 1%, with the new growth being offset by a higher combined ratio. In France, the benefits from reduced frequency during lockdown were broadly offset by the exceptional tax introduced by the government. We also saw increased claims frequency from a recent health care reform. Going forward, we expect Health earnings to go back to a normal growth trajectory, brought in line with revenue growth. Moving now to Asset Management, which continues to be boosted by Alternatives. Assets under management were up 7%, reaching a record high EUR 858 billion. Alternative assets under management were up strongly by 14%. Net inflows were strong at EUR 14 billion across core Alternatives and our Asian joint ventures. Revenues were higher, driven by Alternatives, which represent around 40% of total revenues. Underlying earnings were up 6%, largely reflecting higher assets under management, a strong performance in a challenging year. You can expect us to keep growing our high-margin Alternatives franchise, which contributes around half of our profits. Alternative products continue to be very attractive in a lower rate environment. Let's move to net income, which amounted to EUR 3.2 billion. Let's go through the key drivers. Net realized capital gains were EUR 337 million, significantly higher than in first half, reflecting more favorable market conditions in the second half. For gains and losses on derivatives, we had positive from our equity hedges and losses from interest rates and ForEx hedges. For change in fair value of P&L assets, we saw a decrease in funds value from private equity, hedge funds as well as fixed income funds. Exceptional operations reflect the impact from announced disposals, the impairment of some nonconsolidated assets, contributions to solidarity funds and a change linked to the discontinuation of our management liability and financial institutions business written by AXA XL in the U.K. and [ Deloittes ]. Integration and restructuring costs are mainly linked to the integration of XL and restructuring initiatives in France and Europe. Moving now to shareholders' equity, which increased by EUR 1.7 billion to EUR 71.6 billion. Net income was partially offset by the dividend paid in July. Higher unrealized gains from lower interest rates were broadly offset by ForEx impacts linked to the strengthening of euro against major currencies and higher pension benefits. Solvency II now as you can see, a strong solvency ratio at 200%. The ratio was at 20 points in the fourth quarter, benefiting from 13 points uplift from the integration of AXA XL into the group's internal model. This captures the diversification benefits from combining XL with AXA, which resulted into lower capital requirements, the solvency capital requirement reducing by about EUR 2.5 billion to EUR 27.5 billion. Note that this ratio does not reflect yet the expected 4 points benefits from the disposal of AXA Bank Belgium. We remain confident the transaction should close in the upcoming months. Lastly, you will have noted that market conditions have improved since the end of 2020, and this bodes well for 2021. Turning to assets now. We remain very disciplined and have maintained a stable mix of high-quality assets. Our asset mix has remained stable with 80% in high-quality fixed income. The average rating AA for [ govies ] and A for corporate bond. Other fixed income assets are also of high quality. ABS are primarily AAA CLOs and mortgage loans are highly secured. The remaining 20% of assets are well diversified in real estate and listed equities. Our exposure to vulnerable sectors is very limited, representing less than 2% of total assets following derisking actions implemented in the first half of the year. As expected, we saw a slight reduction in our book yield. The reinvestment rate was 1.3% in full year '20, leveraging our expertise in low-risk alternative assets. Looking now at cash at holding. We continue to benefit from ample cash flexibility with more than EUR 4 billion at full year '20. This is above our desired range of between EUR 1 billion and EUR 3 billion. The main drivers of cash movements during the year were as follows: firstly, a strong cash remittance from our entities at EUR 4.8 billion. In the second half, the capital injection in AXA XL was offset by remittances from Switzerland and Japan. Second, we had EUR 1 billion proceeds from the disposal of CEE and EUR 1.2 billion from crystallized gains on equity derivatives and commercial paper. These elements were partially offset by EUR 1.7 billion of dividend payment, holding cost of EUR 1 billion as well as the rebuild of cash flexibility at entity level amounting to EUR 1.4 billion. Finally, financial debt and gearing. As promised, we reduced gearing significantly over the past 2 years, at a level now well within the 25% to 28% target range. The gearing ratio was 26.8% at full year '20, reduced by 2 points from full year '19, primarily from debt repayments of EUR 1.3 billion in April and EUR 0.4 billion in December. In conclusion and before handing over to Thomas, top line momentum is good, notably with strong pricing and successful general renewals in P&C commercial lines. P&C earnings ex COVID, ex CATs were higher with current year technical margin improvements. We have taken measures on AXA XL reserves, and we are on track towards the EUR 1.2 billion underlying earnings targets for 2021, growing profitable business in an attractive market cycle. In Life & Savings, the business mix improved further and earnings are resilient. In Health, we have a good top line momentum across geographies, earnings should grow in line with top line going forward. Asset Management performs well, boosted by Alternatives. The Solvency II ratio is strong at 200%, and the holding cash position is above our guidance. The outlook across our key financial metrics is positive, and we are confident on our planned targets as communicated last December. Thomas, I hand over to you.

Thank you, Etienne, and coming to the conclusion again. You've seen that the year 2020 was a strong year in a very difficult context. And that is what is most important, we have very, very good -- and good business momentum and good perspectives for 2021, which makes us all very confident for 2021. Why? Because we've been very stable during the crisis, being able to have a revenue that is almost stable relative to 2019, with a good dynamic in the preferred segments. All of this based on a very strong balance sheet, 200% solvency is very solid, enabling the Board of Directors to propose a dividend of EUR 1.43 per share and being able to come back to a normality of dividends. And certainly, being very clear and very confident on a good outlook that we can achieve our 3% to 7% underlying earnings per share in 2021, based on a normalized earning capacity of EUR 3.6 billion, which also means that the COVID losses that we have seen will not repeat in 2021. Thank you very much for your attention, and we are now moving to your questions.

[Operator Instructions] The first one is from Andrew Crean from Autonomous.

I've got 3 questions, if I might. Firstly, could you -- you've said that XL's profit improvement, EUR 500 million is coming from pricing, rising above the level of claims growth. Could you give us some detail around that, as to what level of pricing versus what level of claims inflation you have there? Secondly, could you give us a little bit more detail around the EUR 1.43 dividend and particularly, give us some insights into your discussions with the ACPR and just how intervention is there or not intervention exactly. And then thirdly, your solvency margin will -- once you sell Bank Belgium, it will be EUR 204 million. If you retain more earnings than dividends, you could be well above EUR 210 million by the end of the year. You have got some disposals in, and I think there's rumors of other disposals coming. How should we look at that relative to your EUR 190 target? And is there any possibility of you being able to execute buybacks this year or even make up the shortfall in the 2019 dividend?

Thank you, Andrew, for your 3 questions. I suggest that we ask Scott to answer the first question, which was around how do we get to these EUR 500 million of pricing improvement above claim inflation. And I will then take the second question, which was around the dividend behind the scenes, what have been the discussion with the ACPR. And I would also take the third question on our solvency margin and the potential for share buyback. Scott, let's start with you. I think you are still on mute, Scott.

Andrew, how are you doing? Good to see you. Yes. In terms of the EUR 0.5 billion. When we -- the rate is going to earn in, obviously from 2020 that earns into 2021, plus the rate we're getting in the first quarter. We'll also predominantly earn in for 2021. So if you take this 2020 number, say around -- for reinsurance, around 17% rate and then use a loss development factor or a claims cost inflation number around 4% to 5%, you see the difference there. So you get about a 12-point margin on the portfolio that generates about EUR 0.5 billion. That's kind of the rough sort of back of envelope math that we use to calculate that. Hope that answers your question.

Thank you, Scott. Andrew, let's go to the second question, which was around the dividend and the ACPR. As you can imagine, we've got a very fluid relationship with the ACPR. We've also had a very active dialogue around the dividend, but not only because we also had a very active dialogue around the question of our financial situations and stress tests. And as you could see today, the financial situation, the solidity of our balance sheet is very good at 200% solvency. The ACPR has clearly communicated last week that dividends should be looked at with the angle of prudence. And our board has certainly taken all of these considerations into account when they decided yesterday, but not only the ACPR considerations are much wider. And that's why it was very important for me earlier to also show you what we have done on a wider society basis and certainly for our customers at large. Because a dividend decision should be and is taken at AXA in a balanced approach across all stakeholders. And given our financial situation, given the fact that the Board has considered that the decision of EUR 1.43 is in alignment with the principles of prudence, we are very happy to announce that attractive dividend today to the market. Your third question on the solvency margin. It is absolutely true that we -- if we conclude the transaction with AXA Bank Belgium successfully. We would be at EUR 204 million and we certainly hope that the generation of solvency from operating returns beyond a dividend payment will also add to the stability of our balance sheet and the solvency. As you will remember on the Investor Day, we have been very clear that we want to target our solvency around 190%, but that we are not relating it to any share buyback or other criteria anymore. Share buyback was very much seen under 2 angles. One, if we do make further disposals, so disposals that were announced after the Investor Day on the first -- of December 1 of last year, that those proceeds would be used at the -- after closing of the transaction to neutralize the earnings dilution. And we said further that when it comes to investments and looking where can we really deploy the capital, that we would really do that with high financial discipline and always looking at where is the multiple of AXA at that point in time. And so this should give you a very clear idea how we are looking forward at this. It is important to know that COVID is not over yet. So we are very proud of having a strong balance sheet, but we want to make sure that we continue to build the strength and keep the strengths up. Let's move to the next question.

Our next question is from Peter Eliot from Kepler Cheuvreux.

Yes, 3 questions from me, please. The first one, was just looking at the reserves in excess of best estimates. I mean, if I look at France, they fell by EUR 0.6 billion across the year after being up, I think, at the half year stage. I'm just wondering if you could explain what's happening there, especially for France? The second question was just on the protection of the long tail lines that you've done AXA XL. I just wondering if you could give us a little bit more insight into that decision and maybe the timing. I mean, I guess, obviously, you've had that book for some time, but decision is being made now, but some more insight there would be great. The third one, event cancellation. Now I think I'm right that you now assume that events canceled up until the end of 2021 as probably adopted with 2020 before, but the cost has only increased by EUR 0.1 billion. I have to admit, I'm totally surprised that it was so small. And I'm just wondering if you could explain again what you're assuming there? Does it include the Olympics, for example and any other events like that? Would be very helpful.

Thank you, Peter, for your 3 questions. I suggest that the first question will be answered by Alban de Mailly. The second question on the -- and sorry, the first question was very much on the reserve movement in France. The second question was on the protection of the long tail lines. I would like Scott to talk about it. And certainly, when it comes to the event cancellation, I would also like Scott to talk about it, maybe a general comment on our reserving situation as you've seen. And the slide is now being shown. The reserving ratio has increased in the full year 2020. And despite the fact that we have the phenomenon you mentioned in France, the excess reserve above the undiscounted Solvency II bell remain at a very comfortable level. The same is true, as I said in my statement around XL, we have high confidence on the reserves, the reserve review at full year 2020 has really shown that we are very comfortable. We have excess reserve of EUR 200 million and certainly, when it comes to the COVID reserves, as Etienne has pointed out, we've also been very cautious since 65% of these are IBNR, incurred but not yet reported. And so all of this is really with 2 angles. One is to keep a very strong reserving position for the group. And secondly, to make sure that at the XL level, we really have managed well our volatility when it comes to the reserve. And then the last piece, which is around the prior year development, you have certainly seen that the guidance that we have given is 1.5% to 2.5%. Last year, we were at 2.1%, which is below what we could have gone. So I think we should keep this in mind when we talk about the reserves. Alban, if you could please talk about France in particular.

So thank you for the question, and hello. Yes, I think, Thomas, you've said most of it. What I would just add is that the reduction in this amount comes from the prior year development, the positive prior development, which at group level is still well within the range that we have indicated. And overall, the ratio of reserves to premium in France is very stable at 250%. So we have not deteriorated at all the prudence in AXA France reserves.

Thank you, Alban. Let's move to Scott on the ADC and the second quarter. The third question was on the event cancellation. Scott?

Peter, to answer your first question on the ADC, first of all, our -- as we mentioned earlier, we're comfortable in our current reserving position. However, as we mentioned during the Investor Day, one of our key priorities is really managing our earnings volatility. Thomas mentioned it during his opening comments around -- we've taken action on line sizing, net line sizing. We've taken action on CAT. We've been more prudent at our CAT load. And so what we've decided to do is -- another way to help manage earnings volatility is on the reserve risk side. So obviously, working with the whole team, we decided that one way we can help that earnings volatility is to purchase the ADC. So in my mind, it helps achieve one of those key priorities for us, which is improving our -- or reducing our earnings volatility. With respect to the event cancellation, when COVID first happened back last year, we took a hard look at our entire debt cancellation portfolio. And then you sort of make estimates about what -- when things are canceled, when they're going to be canceled. And the majority of the -- of the vast majority of the exposure was obviously from sort of a March to March basis. However, there were events that purchased coverage going into '21 and even a little bit into '22, but it's relatively small compared to the rest of the book. So at the beginning -- at the end of last year, we took a look at, okay, what's left? What's happening in those kind of events? We do expect a lot of events to occur, perhaps with fewer attendees or no attendees, et cetera. And then we put a little bit more provisioning into event cancellation for the remaining part of the events that we insure. You mentioned the Olympics specifically. We've done our analysis, and we're comfortable. We don't expect it, but if the Olympics are canceled, but we expect to be able to handle that within the event cancellation reserve that we have set up.

Thank you, Scott. Let's move to the next question.

Yes, we have another question from James Shuck from Citi.

And congratulations on the new innovation for this Q&A. So I had 3 questions, if I may. I just wanted to return to the best estimate margins. So that's reduced from 8.7% to 7.5%. So you're eating into that assessment margin a little bit, and part of that has come from France. But the overall PYD for the year is 2.1 points. So if you adjust for that reduction, in conservatism, it seems like there's some adverse movement happening elsewhere. If you could just elaborate on that and whether you think 7.5% is an appropriate level going forward? Secondly, on the ADC and the reinsurance in general. So the ADC looks like it's costing EUR 20 million in lost investment income. Then we have the reduction in the retention rates on -- across the reinsurance that you're buying. Just interested to know how that gets charged to XL? Does it all come through XL? Or is it -- is there a central item that, that flows through? And kind of equally with that, could you just elaborate on the long-term reserves or not forming parts of the ADC. It looks like you have about EUR 17 billion of total long-term reserves, about EUR 11 billion are transferring. I know it's 2019 and prior. So maybe that is the answer. And I'm kind of interested about the large loss potential and how that feeds into the aggregate. So are the reserves that are transferred to Enstar, do they still feed into the aggregate cover? And then final, just a quick question on the own funds generation. I saw this positive development, EUR 1.2 billion operating experience variance for Life & Savings. And that is partly driven by -- sorry, and then there's negative on the P&C, I think, minus EUR 0.7 million. Can you just elaborate a little bit around that? I saw that you had contract boundaries being a positive factor from Japan. Is there any progress with conversations with the regulator around contract boundaries in France?

Thank you very much, James, for your 4 questions. I suggest that they will be -- the first one on the best estimate being taken by Alban, is 7.5 enough? Second question was on the ADC? And how does it work with the rest of the reinsurance and the charging mechanism to XL and the central unit. Alban should also answer that question. The third one is around the long-term reserves, what is the large loss potential? And how does that fit in with the reinsurance structure, I guess, Alban, that is also your question. And on the owned funds, I give that to Etienne. And the question, do we have any boundaries of contract discussion with the ACPR. Alban?

So thank you very much for those questions. So on the first one, the best estimate margin. So you have seen that there is a reduction in AXA France. The other part of the reduction is with AXA XL with the use of the P-GAAP reserve, and that's why we have a reduction there on the excess overall at group level, is the resulting amount at EUR 7.5 million in line with what we want. I think there is no target on that one. What I can tell you is it's above the minimum of our risk appetite. And therefore, we have margin there. The second part on the ADC. So it's going to be all charged to AXA XL. Any cost and in particular, the loss of investment income. On the third one, the long-term reserve, that would not be part of the ADC. So we -- what we said is that it's the legacy XL. What we mean by this is that the AXA Corporate Solutions long tail reserves on casualty, liability or professional are not part of it. Simply because from an actuarial standpoint, it's still 2 different triangles, to put it that way. And it was easier to tackle the XL part. And we see also less volatility in the AXA Corporate Solutions reserves that focus on Europe. But then I'm not sure I have understood your question on the on the large losses and how that feeds. So if you can say that again, so I can take that question.

The question was really around, to the extent that you might see adverse development on the reserves that are transferring to Enstar. Do those reserves still feed into your Group aggregate cover? So any large losses, so they come back into the Group aggregate?

Okay, sorry. So the Group aggregate covers property. And property losses, notably CAT. So it's not the same insurance coverage. So the ADC covers long tail lines, casualty and professional, that are not covered by the aggregate. So that's 2 different protection mechanisms. I hope, I've clarified.

Is it clear, James?

Yes, yes.

Very good. So let's go to the fourth question, the own fund generation, Etienne?

James, I guess that your question relates to UFR report, where you see that we have EUR 3.5 billion of operating free cash flows. We had indeed some exceptional movements due to Japan impacting or the nonrecurrence of an exceptional in Japan last year, which impact negatively the evolution this year because it was a reinsurance contract. So I think the reference to the boundary of contracts, there was no evolution this year. And I guess that the EOF reflects this one-off in Japan for the Life business; second, unfavorable market conditions, which will reduce the free operating cash flow in Life. And then, of course, the lower contribution from the P&C earnings.

Thank you, Etienne. Let's move to the next question.

The next question is from William Hawkins from KBW.

I hope that you can hear me. Also just a little bit more detail to help understand the ADC. Thomas, how are you thinking about the all-in economic cost of what you've just done? Obviously, ultimately, this is an additional cost to the original acquisition of AXA XL. And you've given us the EUR 20 million run rate, but I'm wondering how you're thinking about the economic cost of that transaction? And then secondly, to understand your view about the level of protection that you've got. How long, if at all, will it take to ease and eat through that EUR 1 billion of cover? It's not at all unusual that ADCs are completely exhausted over some period of time. So will this one be exhausted? Or from your point of view, is this really kind of tail protection? So the risk that it gets entered into, let alone exhausted, is limited. So that's kind of point #1. You've already -- question #2, please. You've already touched on this to Andrew, but I wanted to come back. The baseline that you set for earnings and the dividend that you've paid, you've described both of them. I think Etienne was talking about effectively being the same as 2019. So relative to your long-term business plan, you've effectively lost a year of growth. Put another way, this year's dividend should really have been EUR 1.5 if we haven't had the catastrophe of the past year. So should we be looking really at your reset as 1 year's worth of lost earnings growth and lost dividend growth? Or do you think that over the long term, we'll be able -- well, not the long term, over the life of the business plan, we'll be able to make it back to what should have been the original trajectory? And then lastly, please, I just wondered if you could be a bit more explicit on the outlook for running yield. I haven't finished updating my model yet, but it does look like the XL investment income was about flat 2020 on 2019. And it's the rest of the world that took the brunt to the decline in investment income, which was about EUR 250 million. How should we be thinking about the euro changes in non-life investment income for XL and the rest of the world?

Excellent. Thank you, William, for your 3 questions. So I suggest Alban, that you speak again about the adverse development cover. Again, what is important is to position the adverse development cover, as Scott mentioned it, as a tool to reduce volatility of the earnings. And since I've also said earlier that we feel very confident and very comfortable and confident about the XL reserves. You've seen that we have EUR 200 million of excess reserves. Enstar has certainly looked at the reserves in detail. We feel that this is the right time to really move forward and reduce the volatility on the earnings and the reserve movements of this long tail block. But I would like Alban to go perhaps a little more into detail again on the economic cost and the logic at this point. And then we come back to your other 2 questions, I would do the dividend one, and Etienne would do the one on the outlook of the running yield. Alban?

So on the ADC, I think the way we see it from a price standpoint is obviously, there's a willing buyer and a willing seller. So it's -- as such, it's a fair price. But I think we see it as a right balance between a cost which is completely absorbable by XL in its earnings, doesn't change the target that we have for this year, for instance, and protection against volatility. If I take the second part of your question on the ADC. What we have booked in our reserves at full year 2020 is our view of the ultimate cost of those lines. So at this point, we don't think that it will be used up in a given number of years in the future. But there is volatility in those lines of business. We know that, and we thought it was a good idea to put that behind us.

Thank you, Alban. On the second question, William, on the dividend. Obviously, last year and last year's dividend debate in the crisis, was a very unfortunate one since France was very different in its treatment to dividend payment relative to other countries. For us, it was very important to get back to normality in the dividend payment. And therefore, the EUR 1.43 that you have seen, if you relate it back to the adjusted earnings. Normally, we've always given a guidance of 50% to 60% of adjusted earnings being the dividend. We've obviously gone very much beyond it as a very clear decision and sign to get back to a normality in dividend payment. And from here, going forward, we have said clearly that we wanted to increase the underlying earnings per share between 3% and 7% over the next 3 years. And for me, an attractive dividend trajectory should follow the development of the underlying earnings. Let's move to the next question, which is the outlook on the running yield, Etienne?

So 2 things. First, when you look at the normalized earnings of XL in 2020, EUR 1 billion. Part of the difference to the EUR 1.2 billion, which was our initial target is related to lower investment income. And you will see that for '21 in the roll forward, we will have another minus EUR 0.1 billion, which is reflecting the lower investment income yield.

Thank you, Etienne. Let's move to the next question.

The next question is from Michael Huttner from Berenberg.

This is remarkably efficient. I'm not efficient, but you are. The -- I have 3 questions. I'll do them really quickly in case I get cut off or something by my picture. France, what's the profit starting point of -- what I really want to know what's the profit for 2021. And it sounds funny, but France's results are fantastic, right? Almost flat in a difficult environment. But in there, I counted -- and I may be wrong, EUR 0.3 billion of COVID kind of benefit, a frequency less business interruption, other stuff, maybe I'm wrong. So that would be my first question. The second is on AXA XL. Scott, you gave us a figure for 2021, the rate rises of 12%. But of course, you don't have a EUR 4 billion or EUR 4 billion and change of commercial lines, you got over twice that. So there's over twice that benefit to come. And I just wonder, does it mean that we should put in for 2022, EUR 1.7 billion. So EUR 500 million on top. And then the last one is on cash. So we have EUR 4.8 billion remitted for 2020. And I really like this, I'm really lazy here. Then you can say what's what we should expect for 2021? Is it up or down and kind of order of magnitude? So it's really lazy, I'm sorry.

Thank you, Michael. Let's help you in your laziness, if I use your words. #1 on France. Maybe Jacques de Peretti, you could elaborate a little bit what were the tendencies in 2020? And how do you characterize the results? Scott, if you could take the second question on AXA XL and how do the rate rises really transfer and transform themselves into the required budget of EUR 1.2 billion. And then Etienne, if you could take the last question of what is the expectation for cash remittance for 2020? Is it 4.8% up or down? Jacques, let's start with you.

Thank you, Thomas. Thank you very much for this question that underlines the resilience of AXA France in this very difficult time and the capacity both to be close to our customer and also to be resilient in terms of results. We have been touched by the COVID-19 of course. And let's say that we have been touched by roughly EUR 300 million net of reinsurers on COVID-19. But this has been partly offset by cost reduction, first, EUR 100 million, roughly. Prior year development, which has been already underlined, which was very strong in France and also lower income taxes. So all of that permits to AXA France underlying earnings to drop only by EUR 47 million, minus 3% compared with 2019.

Thank you, Jacques. Let's move to Scott on the second one.

Michael, I think I understand your question. You probably in a little more detail on how we ended up at this - with EUR 0.5 billion benefit in 2021. And roughly, how we look at it is we have the rate that's earning in from '20 a little bit of '21 that we're getting in the first quarter. And then we look at that in conjunction with, for example, the loss cost trends, somewhere between 4% to 5%. It varies a lot by product, obviously loss cost trends. We look at -- and we have to build in things like the cost of reinsurance, some of the costs of our reinsurance on the insurance side as well as the retrocessional we buy on our reinsurance portfolio, we build those costs in, and those costs have gone up. So when you put everything into the mix, what falls out is about that EUR 0.5 billion of additional income, underlying earnings income for 2021, right? So there's a bunch of number of factors in that, but that's kind of how we look at it. I hope that helps.

Thank you, Scott. Let's move to Etienne on the cash remittance.

Michael, as you know, 2020 has been an exceptional year. And with the lower operating free cash flow, as you can see in the EOF report. And therefore, one might expect a lower level of remittance for 2021. So -- and this is, I guess, in line with the discussion we had already during the IR day.

Thank you, Etienne. Let's move to the next question.

Next question is from Pierre Chedeville from CM-CIC.

First question is relating to the asset management, as we see a strong recovery since few quarters of this division. And I have a question regarding performance fees this year against management fees. Did we see a good resilience of performance fees in this context? And also, I wanted to be clear when Etienne said that Alternatives represented 50% of revenues, I wanted to be sure that I have clearly understood. And overall, this detailed question, I wanted to know if one day, you could consider a spin-off of AXA IM, considering the valuation PEs that are much above in asset management industry than insurance. Is it something that you could consider, of course, while taking the majority stake, of course. My second question is about the target of EUR 6.3 billion in 2021. I wanted to know if it's at a starting point or if it's a target? I mean, would it be possible for you to get to EUR 6.5 billion, for instance? Considering the fact that we observed an increased interest in interest rates in U.S. but also in Europe, that could improve, as Etienne already said, somewhere in your investment margin. And my last question is regarding remote work. It seems to me that AXA wants to be a pioneer in this area in terms of organization. Can we imagine that we could see real estate capital gains coming forward due to reorganization of work inside worldwide AXA?

Thank you very much, Pierre, for your questions. I suggest that Alban is taking the first one on the asset management, when it comes to the resilience of performance fees, and Etienne is taking the question around is the targeted starting point or an endpoint. I would like to quickly comment on your 2 other points. First was the question of does a spinoff of AXA IM make sense in terms of valuation. As you know, AXA Investment management, for us, today is a very core entity to the AXA Group because it is important in a time of low interest rates. In particular, to be able to source the right amount of alternatives and be able to generate a good return for our customers. Therefore, AXA IM is core and we are also very proud about the fact that we have such a leadership position on the Alternatives. And I think it is clear that if there is an opportunity arising that could make it interesting to grow our franchise, in particular, on the Alternatives, we will certainly always have a look at it in the interest of our shareholders. However, as you mentioned yourself, what is very important for us is to keep control in a setting like this, and you have to think very carefully whether this makes sense because, again, today, we have the necessary size, we have the necessary capacities, we can live very well by ourselves. And maybe on your last question around the remote work. It is true that AXA has been very good in transferring all of the employees in a remote service setting, also being able to continue the customer service we've seen now in, let's say, 2 extremes: being 100% present and being 100% remote. I think all of us have experienced that. And we understand that the 2 extremes is not the scenario that we probably desire going forward. And therefore, we were one, as you said, of the pioneers of pushing very much what we call the smart working principle, which is to find a good blend between physical presence because we do need to interact. We also do need to make sure that the culture of AXA continues and continues to develop and is also transferred to the new recruits. But on the other hand, we also want to respect the way people are more flexible in the way they work. And so this is now -- and has already been, I have to say, integrated in many of the real estate strategies of our local entities. For example, you see that in Belgium or in Germany or in other -- in many other entities, we already had a philosophy where people were present for 3 days and had a remote situation for 2 days. And this enables us, obviously, to create a very different workspace, a more collaborative workspace, and we can really benefit from the technical and technological investments that we have done. It does obviously lead to a concentration and reduction of our real estate. And so we are continuously working through this now and making sure that we get to a ratio of around 0.6 workspaces purposed. Alban let's talk about the resilience of performance fees and thereafter, Etienne, at around the 6.3% target or destination. Alban?

So thank you for the question. There was also a question on the breakdown of revenues between Alternatives and core. So yes, it's roughly 50-50 between the 2. There is obviously less AUM in Alternatives, but the average management fees is significantly higher than for core. Hence, all the benefit of the growth that we forecast for that part of the business of AXA IM, the Alternatives part. On management fees versus performance fees. Performance fees were slightly down last year at AXA IM.

Excellent. Thank you, Alban. We move to Etienne.

Yes, absolutely. So the EUR 6.3 billion is, of course, the starting point and not the endpoint. And why so? Because we -- if you take the EUR 4.3 billion earnings achieved this year, we have to add up the nonrecurring COVID losses of EUR 1.5 billion and EUR 0.5 billion excess nat cat of this year. All this adds up to EUR 6.3 billion. And of course, we want to achieve a growth from this point, and we want, of course, to grow our earnings.

Excellent. Thank you, Etienne. Thank you, Pierre, for your question. Let's move to the next question.

Next question is from Jon Hocking from Morgan Stanley.

Yes. I've got 3 questions, please. Firstly, on XL. Scott was talking about sort of wanting to reduce the earnings volatility going forward at XL. You've got a very skinny reserve buffer there of EUR 0.2 billion. And I realize you've got the ADC to back that up. But is there a desire here to rebuild that reserve buffer over time? So you have got a little bit more earnings protection. And is that baked into the EUR 1.2 billion this year and then the business plan thereafter? That's the first question. Second question, just on the P-GAAP usage at year-end, the sort of EUR 0.5 billion that was used. Can you give a little bit of color, please, in terms of what reserve adjustments that were made...

I'm sorry. [indiscernible] I was completely distracted. [ Proceed with your thoughts ]

And then a final question. There's a -- the slide where you've got the cash injections into business entities, the EUR 1.4 billion, I think EUR 1 billion of that was the XL adjustment in the fourth quarter. Is that correct? And if so, what's the balance of the EUR 0.4 billion? Which other entities do you inject cash on capital into in the fourth quarter?