Bermuda headquartered insurance and reinsurance group AXIS Capital Holdings intends to work with its third-party reinsurance capital investors to bring them reinsurance opportunities which match their risk appetites, even moving outside its typical lines of business.
AXIS launched its third-party reinsurance capital management unit AXIS Ventures in the fourth-quarter of 2013. The unit sits within AXIS Re and is led by experienced reinsurance convergence capital exec Ben Rubin who heads up the initiative as the Executive Vice President, Director Capital Markets at AXIS Re.
AXIS said previously that it intended to take a long-term approach to third-party capital, slowly developing the unit as it gained a better understanding of its investors requirements and the best way to service them. The unit received its first third-party capital in late 2013 but began operating at the January 2014 reinsurance renewals this year.
During the AXIS Capital first quarter earnings conference call held last week, the AXIS Ventures unit received some focus as it is beginning to be ramped up and to make a contribution to the firms results.
CEO of AXIS Albert Benchimol said that it is still early days for the initiative but that AXIS’ third-party reinsurance capital work at AXIS Ventures is now showing a positive contribution to the firms profitable growth trajectory.
CFO of AXIS Joseph Henry said that the first business had been underwritten by the new unit in January, commenting; “Our new third-party capital initiative AXIS Ventures commence business on January 1, 2014 with the writing of a fully collateralized catastrophe cover.”
At the end of 2013 total non-controlling interest at AXIS was listed as $50m, presumably largely the third-party capital invested in the AXIS Ventures unit. By the end of Q1 that had risen slightly to $51.222m. The $1.222m is net income that was attributable to the third-party investors during the first quarter of 2014.
AXIS Capital intends to ramp up its third-party reinsurance capital activities during the year. Henry said that the AXIS Ventures unit would continue to enter into additional reinsurance transactions throughout the remainder of 2014.
In terms of the role that alternative reinsurance capital plays for AXIS, Albert Benchimol said that they are still taking it slowly as AXIS does not want to create capacity that it cannot put to work.
It sees three ways to work with third-party capital; firstly through individual transactions that only use that capital, secondly through quota shares where AXIS shares a portion of its catastrophe reinsurance or agricultural reinsurance book with the AXIS Ventures capital or thirdly by working with other lines of business which may interest the investors.
Benchimol explained; “Expect that as the year continues, there will be greater capacity provided by third parties and we will be ceding to them various portions of different books of business, in ways that make sense to them and make sense to us.”
CFO Henry said that AXIS sees itself as being at the juncture where risk meets capital, with multiple sources of capital at its disposal including its own capital, its reinsurance capital and now its third-party capital from AXIS Ventures.
AXIS has an outstanding distribution platform for insurance and reinsurance, said Henry, but there are always risks that the firm has access to which may not be suitable for its own equity depending on AXIS’ risk appetite.
So the AXIS Ventures third-party capital gives the firm an opportunity to consider working with some of those risks which do not meet its own risk appetite to hold against its equity, enabling it to pass them on to the third-party capital if it chooses. This could help AXIS itself broaden its focus, using third-party capital to fund growth into less familiar business lines and allowing it to underwrite reinsurance which does not fit with its own capitals appetite for risk.
Henry said; “It would be very easy to take the benefit of our ability to access that business and share that business with reinsurers or with third-party capital.”
Henry continued; “There may be third-party capital providers who have a very specific risk appetite with whom we would be sitting down, and we would say this is not business that we have historically pursued but if this is business that you are interested in let us see if we can get some of that for you.”
This partnership approach, of working with third-party capital to establish its appetite for risk and what the investors ultimately want to access could work beneficially both ways. It will be good for investors, enabling them to access a more diverse book of reinsurance business, while also enabling AXIS to try new things and put out lines where its own equity capital does not have the risk appetite.
Henry finished; “It’s a partnership between our selves and our third-party capital providers and we will share with them both business that we write on our own and that we’ve written historically. But there is a very good possibility that we could sit down with them, identify lines of business that are attractive to them and help them access that business.”
This strategy should be very interesting to investors. AXIS Ventures aims to include agricultural risks in its third-party capital backed portfolios, which are risks that are not as typical in ILS or alternative reinsurance capital investment opportunities. If it can add other lines of business or specialties into the mix as well it will help AXIS to make its third-party reinsurance capital offering stand out.
CEO Benchimol said that the reinsurance market remains competitive and dominated by high levels of capital, both traditional and non-traditional. However he suggested that the market will cope with this, by moderating the capital while also finding avenues to put it to work.
He commented; “While I’m optimistic that overtime, the industry will both develop new products in markets as well as right size its capital, it appears that in the near term at least there is pressure as many reinsurers try to protect their top line and providers of alternative capital attempts to fully deploy their new capacity.”
Looking ahead Benchimol said to expect continued pressure at the mid-year reinsurance renewals; “Looking forward to the upcoming June 1 and July 1 renewals, which are dominated by U.S. catastrophe excess of loss renewals. We expect continued softening of rates, we expect to see reductions in the range of 10% or greater and continued strong showing by alternative capital providers.”
So AXIS sees no let up in recent market trends, but its focus on providing what investors want should help it to continue to build a portfolio which its third-party capital appreciates the exposure to. AXIS does not have a huge Florida focus which should also help it to avoid some of the steepest pricing declines.
AXIS wants to position itself as a balanced, hybrid insurer and reinsurer, with multiple sources of capital available to it. It looks set to try to leverage its third-party capital not just for the fee income but also to help the firm grow and perhaps to branch out into new areas of reinsurance. This is likely to be a strategy increasingly followed by reinsurers, especially as the areas of the market which were typically allocated to third-party capital become less attractive as prices continue to soften.