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Original Risk: A Society for Change Agents

AXIS commits to third-party capital, restructures for efficiency


Hybrid insurance and reinsurance company AXIS Capital has announced a wide-ranging series of initiatives to add efficiency and shareholder value, while also committing to a continued use of third-party capital to match the best risk with the right balance-sheet.

Axis Capital logoHaving failed in its attempt to effect a merger of equals with fellow reinsurance firm PartnerRe, it had been expected that AXIS Capital would seek to increase its efficiency in other ways. The announcement today shows that AXIS is not prepared to simply wait for another M&A opportunity and is ploughing ahead with initiatives that will add efficiency and also restructure the firms operations to a degree.

Key to this audience is a commitment to “match risk with the most appropriate form of capital” and to continue to make use of third-party capital, alongside its own balance-sheet, as it seeks to become a more efficient and profitable hybrid insurance and reinsurance firm.

CEO Albert Benchimol explained; “Integral to creating shareholder value is a 21st century capital management strategy. We intend to match risk with the most appropriate form of capital, and access a broad range of capital to complement our own balance sheet.

“This supports the delivery of significant capacity, innovation, and tailored solutions to our clients, provides a valuable product and service to the investment community, and generates stable fee income for the Company.”

The use of third-party capital at AXIS is already evident in its AXIS Re Ventures capital market, insurance-linked securities (ILS) and alternative reinsurance capital focused unit. AXIS has been planning an expansion of the activities at Ventures in 2015 and Benchimol’s comments suggest the re/insurer is now committed to becoming a multi-balance sheet reinsurance player.

“We look forward to continuing our success to date in delivering solutions to our clients in partnership with third party capital providers,” Benchimol continued.

The rest of today’s announcement involves a restructuring initiative, in order to focus AXIS’ business efforts on the areas of the insurance and reinsurance market where the most profit can be made.

The initiatives are “esigned to support profitable growth and enhance shareholder value by better aligning and deploying its resources to focus on attractive opportunities, while delivering both greater efficiencies and increased levels of client and broker support around the world,” the announcement explains.

Benchimol explained; “We are fully committed to the hybrid model under which insurance groups have both primary insurance and reinsurance activities because this approach provides flexibility, balance and diversification in opportunities and risks, leading to more stable growth and profitability. We are confident of our ability to deliver increasing shareholder returns through the pursuit of high-return growth opportunities, including attractive external growth prospects where appropriate.

“In 2014, we announced several important initiatives designed to enhance our profitability and drive the future growth of AXIS Capital, on which we have already reported in earlier communications. These include investments in greater resources to support improved data and analytics, and we have seen improvements already, notably in professional lines and property insurance. We have also established significant strategic IT sourcing relationships, which have and will continue to increase productivity and efficiency across our businesses over time.”

After a review, AXIS has decided to wind down its retail insurance operations in Australia, but will continue to serve the Australian market through its international wholesale insurance and global reinsurance platforms.

AXIS identified that its positioning in this market “would not allow it to generate appropriate and sustainable returns,” so this restructuring is all about enabling the firm to focus on lines and regions that are profitable.

AXIS expects this restructuring will result in a workforce reduction of approximately 100 positions, primarily in its corporate and select insurance operations. This will reduce its expense load, vital in a pressured reinsurance market where efficiency is becoming increasingly key.

This will result in a pre-tax reorganisation charge of around $51 million, or $0.51 per share during the third quarter of 2015, with an anticipated annual run-rate of pre-tax cost savings of approximately $30 million, which AXIS expects to be substantially realised in 2016.

Benchimol concluded; “The refinements announced today are about strengthening the Company’s focus, and moving resources to where they can provide the greatest value to brokers and clients – ultimately driving profitable book value per share growth over the longer term.”

It’s interesting to see the restructuring being announced, as few other re/insurance firms have taken such steps to date. In the pressured market, where cost-of-capital and underwriting efficiency are key, the reorganisation and the commitment to leverage third-party capital increasingly, are both focused clearly on establishing AXIS Capital as a re/insurer looking to respond to the changing re/insurance market environment.

It will be interesting to see whether these initiatives and the commitment to becoming a multi-balance sheet, capital agnostic re/insurer stimulate similar announcements and initiatives from other firms which have not yet joined the M&A wave.

As insurers and reinsurers face up to the pressure and the changing market environment, making greater use of third-party capital and building deeper relationships with the capital markets looks set to be a growing trend.

How that plays out in years to come, as fee income from leveraging another source of capital is unlikely to replace underwriting income, remains to be seen. It will be an interesting few years as larger re/insurance companies come to terms with a capital agnostic future and learn which risks fit best with which capital and how to manage the potential conflicts of interest that can be inherent in that strategy.

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