Climate change: Axa casts reinsurer adrift on rising flood of claims

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A new category of catastrophe is emerging: the unnatural disaster. Man-made climate change is bringing weather whose extremes fall outside historic norms. Some resulting risks may become commercially uninsurable.

Foreshadowing that danger, Axa reportedly wants to sell the reinsurance arm of its subsidiary XL. Axa is a large, stolid French commercial and retail insurer. It is no longer interested in covering risks other insurers want to lay off.

The whole sector is struggling to adapt to climate change. Property-related losses from natural catastrophes in the last two years have averaged over $123bn. That figure is high compared with the five-year average of $100bn, and a mean for the decade of $75bn.

Canadian forest fires darkened the skies of Manhattan and Chicago and grabbed headlines last month. Severe storms and floods do the most damage. Hurricane Ian, which hit Florida in September last year, cost insurers some $60bn.

General insurers now want less of these risks. In May, AIG of the US sold its Validus reinsurer for a total transaction value of $4.5bn, after paying almost a quarter more in 2018.

Whether hurricanes are getting worse is a matter for debate. Some investors remain sanguine. Hedge fund DE Shaw chose to underwrite reinsurance risk in Florida last summer.

Catastrophe bonds, sold by reinsurers to help lay off their own risk, have performed well. An index of specialist catastrophe bond funds has climbed 19 per cent in five years, according to insurance database Artemis.

What might XL fetch? Based on its forecast book value and the 1.4 times book which AIG received for Validus, XL should be worth around €2.5bn in a trade sale, think Berenberg analysts. The dilution to earnings per share might be just 1 per cent.

But selling XL could lift AXA’s valuation by some 7 per cent by reducing its cost of equity. A trade sale is more likely than an initial public offering. Otherwise Charles Cooper, chief executive of XL, might be sticking around. He resigned on Wednesday.

Bulls say the insurance market is more of a match for worsening weather. Axa, a big, successful general insurer is pulling its capital. So what? Premiums will rise, benefiting everyone else.

The question is whether extreme weather makes full insurance unaffordable for most businesses in risky places. If so, both sides of the trade will be in trouble.