Reporting its third-quarter 2008 results, French insurer Axa
reassured investors that despite market turmoil its financial
position was sound and that there were no plans to raise additional
capital.
However, one thing was made clear: growth expectations embodied
in Axa’s company-wide Ambition 2012 project are all but
unattainable.
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Launched in 2004, Ambition 2012 called for the doubling of
revenue and tripling of earnings between 2004 and 2012. Having
ended 2007 well ahead of schedule on the project, Axa has now
declared its targets “increasingly obsolete”.
A key assumption in the Ambition 2012 objective was for equity
markets to generate an 8 percent total annual return. Following the
recent collapse in equity market values, to achieve its original
target Axa estimates that equity markets would have to rise by 35
percent in both 2009 and 2010 and by 8 percent in both 2011 and
2012. This would represent a total rise of about 112 percent from
current levels.
While not impossible, judging from Axa group chief economist
Eric Chaney’s analysis of the global economic crisis a market
recovery of this magnitude appears unlikely.
Chaney puts forward two possible outcomes of the present
situation, one an extended recession which he describes as having
an extended L-shape and the other a short V-shaped recession.
Hopefully it will not be the L-shape outcome that materialises.
Under this scenario, Chaney explained that the recession would not
be followed by a clear recovery but, rather move into a period of
weak economic growth. He warned that if the wholesale credit
markets, the interbank market and the corporate bond market do not
“unfreeze” in the months ahead, this L-shaped recession could
become a reality. It would, he added, be accompanied by
deflation.
A V-shaped recession would be global and deep but at least
transitory, explained Chaney. It is also the scenario Axa believes
is most likely, he added.
Supporting this view Chaney noted that the global recession is
in the process of what he termed “emitting its own antidotes” in
the form of a sharp fall in oil and metal commodity prices. This,
he said, represents “a dual positive shock” for the global economy
to which is added the boost provided by massive injections of money
by governments.
When the bottom of the V will be reached is unclear, but Chaney
believes the first positive developments in leading indicators
could appear by the second quarter of 2009. However, he believes
the effects of a recovery will only become really evident in 2010,
particularly in labour markets.
Commenting on the situation faced by insurers, Chaney said it
was clear that falls in equity and corporate bond prices were
hurting with added with stringent solvency regulations not making
things any easier.
However, on a positive note he stressed the extreme aversion to
risk evident in markets presents the most financially solid
insurers great opportunities that will lead to major benefits when
the economic cycle starts to recover.
In the current financial year Axa anticipates reporting an
underlying net profit of between €3.6 billion ($4.6 billion) and €4
billion. This would represent a fall of between 20 percent and 28
percent compared with net profit of €5 billion reported in
2007.
