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AXIS decided against renewing cat bonds, happier with less basis risk: CFO Vogt


According to the CFO of specialty re/insurer AXIS Capital, the company decided not to renew a catastrophe bond this year and he said he feels better as a result, as doing so removed some of the basis risk from AXIS’ reinsurance arrangements.

AXIS Capital logoAXIS Capital’s $165 million Northshore Re II Ltd. (Series 2019-1) catastrophe bond issuance matured in June this year and the company opted to replace it with indemnity coverage.

That cat bond and the others AXIS still has in-force, are structured to use industry loss triggers.

With AXIS’ shift away from writing property catastrophe reinsurance and its growing focus on insurance lines, rather than reinsurance, having cat bonds that effectively are structured as retrocessional covers, is perhaps viewed as less helpful to its overall protection needs.

As a reminder, AXIS still has a $150 million Northshore Re II Ltd. (Series 2021-1) catastrophe bond that runs until the end of 2023 and a $140 million Northshore Re II Ltd. (Series 2022-1) cat bond that provides coverage until the end of 2024, which at this time appear to still be in-force

But, given the commentary from the CFO and the fact AXIS is refocusing around specialty, casualty and more primary insurance, there now seems a strong chance the company may not need as much cat bond coverage in future, so the renewal of these issuances may also be in question.

Speaking during the AXIS Capital earnings call yesterday, CFO Pete Vogt discussed the reinsurance renewals that had been completed recently for the company.

“In the quarter, we renewed our outwards reinsurance coverage for our insurance property portfolio,” Vogt explained. Saying that, “We kept the attachment point on our excess-of-loss occurrence cover at $100 million and renewed the quota share treaties on our E&S and global property books at consistent levels.”

Asked by an analyst about the fact certain published probable maximum loss (PML) metrics for south east wind have not moved significantly in the last quarter, despite AXIS’ continued pull-back from catastrophe risks, Vogt explained that non-renewing the catastrophe bond has an effect here.

“When you look year-over-year at like Southeast Wind, Southeast hurricane, and the one in 100 is actually up a little bit,” Vogt said.

Adding that, “One of the things we did in our renewal at July 1 is we did not renew three cat bonds we had. And so the cat bonds were really helping, I’ll call it, the real tail risk that’s there.

“Now, we did get good indemnity coverage instead when we renewed our XOLs, but it’s the working of the cat bond through the model that’s actually showing some of the noise there, mostly in Southeast Wind.

“If you look at all the other perils, they’re down pretty substantially. I feel really good that now as we’re going into wind season, what’s more important is really what’s our outwards reinsurance property treaty look like and we’re able to renew that with XOL occurrence, event occurrence treaty that still attaches at $100 million.”

“So that was really good for us going forward, as well as the quota shares that we see on the other two, on the E&S line of business and the global property.

“But I think what you’re seeing in Southeast Wind has to do with those cat bonds and how they model and we switched from cat bonds to indemnity coverage, which quite frankly I feel better about because I have no basis risk.”

It makes sense that as AXIS downsized its property cat reinsurance book and pivoted to more specialty and casualty lines, as well as primary business, the need for cat bond coverage would shrink and indemnity protection would better match what cat exposure AXIS has from its property insurance books.

You’ll note that above AXIS’ CFO Vogt said “we did not renew three cat bonds,” we checked the recording of the call and it is how he stated it.

At this time, it’s not clear if this means the 2021 and 2022 issues under Northshore Re II Ltd. could be redeemed early.

For now, they remain listed on broker pricing sheets, which suggests the two additional catastrophe bonds are still in-force, but we’ll update you should we hear any differently.

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