AXIS preparing to increase third-party capital use, sees higher rates

AXIS Capital is working to ensure it’s able to leverage additional third-party capital to capitalise on any market dislocation at the January 1^st, 2018 renewals and beyond, and the firm’s Chief Executive Officer (CEO), Albert Benchimol, says alternative capital providers are pushing for rate increases.

AXIS Capital has now released its third-quarter 2017 results, which includes the impacts of higher catastrophe losses in the period, with companies’ earnings calls focusing on the financial impacts of the events and what this might mean for reinsurance market dynamics heading into 2018.

Speaking on the insurer and reinsurer’s Q3 earnings call, CEO Benchimol underlined the firm’s willingness and ability to increase its third-party capital operations to take advantage of any post-event pricing surge, but stressed this would be dependent on the market landscape at renewals.

Across the board, said Benchimol, AXIS has an appetite for growth, providing the pricing is right.

“But with regard to cat in particular, as you know, and many other lines of business, we have significantly expanded our third-party capital available to us to support customers and our brokers, and we fully expect that if it makes sense into the market conditions, we would write much more on a gross basis and share that risk with our capital providers without necessarily having, in the near-term, a meaningful increase in our net cat exposures,” said Benchimol.

The firm’s 10-Q also underlines its desire to expand its third-party capital operations, as it looks to broaden its risk-funding services and establish vehicles that make the most of the efficient and willing base of alternative reinsurance capital.

In light of the expected and desired growth within its third-party capital businesses, AXIS expects its net premiums written growth to retract somewhat compared to its gross premiums written, as it looks to share more risk with its strategic capital partners.

The company’s third-quarter results showed that during the quarter it ceded more risk to insurance-linked securities (ILS) investors, which in turn helped the firm pay its Q3 losses.

AXIS has expanded its participation in ILS business through initiatives as part of its Ventures unit, and also through its total-return reinsurance joint-venture, Harrington Re.

During its earnings call, Benchimol was questioned on whether it would be willing to increase the volume of capital at Harrington Re or perhaps another potential platform, should market conditions create an opportunity to do so.

“That’s right,” said Benchimol, adding that while “Harrington is mostly long-tail,” AXIS is “working right now on additional third-party capital that we can make available on January 1^st, 2018.

“And depending on how attractive cat gets, we may actually choose to increase our own appetite. But, for the moment, given our expectations of where the market will be in 2018, I expect that our net appetite will be broadly in line with what it was in 2017, but that we would write more on a gross basis.”

During the third-quarter, AXIS recorded a decrease in ceded premiums to gross premiums written in its reinsurance segment, which is in part down to less premiums being ceded to its strategic capital partners.

AXIS explains that the decrease was attributable to its professional and liability lines, so likely within Harrington Re, being a longer-tail vehicle, although this was partially offset by an increase in ceded premiums to strategic capital partners in catastrophe business, which is likely its other ILS vehicles.

The re/insurer’s general and administrative expense ratio also decreased in the third-quarter, to 12.3%, which is primarily a result of a decline in performance related compensation costs, and increased fees from its strategic capital partners.

Just how much rates increase at the January renewals season remains to be seen, and Benchimol was eager to point out that it’s not just the traditional players that will be looking for rate increases.

“All the feedback that we are getting back from third-party capital is that they expect more rates for the capital they are going to bring in,” said Benchimol.

Continuing to remind listeners that the majority of alternative capital comes from pension funds, who invest in catastrophe-linked insurance and reinsurance business for diversification benefits, and essentially view their catastrophe bond investments as less than investment grade bonds.

“So, all of the feedback we are getting is yes, there is money, but not at the same rate,” said Benchimol.

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