AXA to increase use of ILS capacity, as it further reduces cat risk in 2019

Global insurance and reinurance group AXA said that it plans to further enhance and increase its insurance-linked securities (ILS) capacity as part of its mission to de-risk and control its catastrophe exposure across the group, with further reductions in exposure expected in 2019.

Since its acquisition of XL Catlin earlier this year the enlarged AXA, which now includes the AXA XL unit for reinsurance, specialty lines and corporate insurance, has been de-risking itself of catastrophe exposures to align its acquired units with the parents risk appetite.

This hasn’t simply been a case of buying more reinsurance and retrocession. Rather it has been about making use of capital in all its forms to align risks with the capital most appropriate for it, hence the use of alternative capital and ILS as part of this de-risking exercise.

With its investor day being held today, AXA said that it intends to utilise alternative capital more efficiently as one of the levers it sees as key to enhancing its earnings.

The firm said it has already achieved a “significant reduction” in catastrophe exposure within the acquired XL Catlin portfolios, through a combination of underwriting actions and use of a little more reinsurance.

These actions are set to continue, AXA said, with catastrophe exposure set to reduce further in 2019 as a result.

Already the firm has reduced the 1-in-200 year U.S. hurricane exposure within the XL Catlin business by 29%, U.S. earthquake by 46% and European windstorm by 22%.

Part of this process has involved an increased use of alternative capital, aligned with the idea that AXA’s ILS operations will now write little to no third-party business anymore, as it prefers to utilise third-party capital to manage the risks and exposure it has underwritten for its own book.

Recently, AXA XL took 100% ownership of the New Ocean Capital Management ILS fund management business, to put it to work within its broader remit for alternative capital activities.

Again, that aligns well with the idea that AXA intends for third-party capital to be a tool it can use as an additional balance-sheet, with a different risk appetite for catastrophe exposures. Hence it’s seen as a key lever for the firm going forwards.

AXA said that it plans an “increased use of alternative capital to match the appropriate capital to our risks.”

This will involve greater cessions to strategic third-party capital partners, such as sovereign wealth funds and pension funds, as part of the plan to further enhance AXA’s ILS capacity.

The goal is to gain control of the catastrophe exposure the insurer holds on its book and reduce the volatility this can have on its earnings.

Of course, all the while this will be delivering fee income and profit shares or commissions, as AXA XL will receive payment for its origination expertise through its alternative capital activities.

The alternative capital activities are likely to provide significant leverage in two of AXA’s targeted growth areas, P&C commercial insurance and re/insurance in emerging markets and Asia.

Both of these tend to come with significant catastrophe exposure, but through careful application of ILS strategies and use of third-party investor partnerships AXA can manage its group-wide cat exposure while still delivering the growth in terms of premiums written, footprint in emerging areas and market-share growth especially in areas such as the United States corporate risk business.

This brings opportunities for the third-party investors that may look to align themselves with AXA and AXA XL, as greater capacity requirements seem to be on the cards for 2019 to support group expansion.

But of course, this is another major re/insurer using third-party capital to manage its own book and earn fee income, which does not align with every ILS investor’s needs, some still preferring a degree of independence and to know that re/insurance risks are being selected and underwritten specifically for their capital.

A final question that still remains, regarding AXA’s use of alternative capital, is when or if we will see another catastrophe bond issued by the firm. A question that has been making some nervous, given the significant issuance that came from XL.

On that we will have to wait and see, but it seems likely that AXA will utilise whatever forms of capital, structures and mechanisms are most efficient and conducive at the time, making further cat bonds likely at some point in the firms future.