Bermuda headquartered insurance and reinsurance group AXIS Capital is taking a slow and steady approach to building out its AXIS Re Ventures third-party and ILS capital management unit and is looking for quality over quantity in terms of investor.
AXIS Capital sees its AXIS Re Ventures, or AXIS Ventures Reinsurance depending on how the firm reports it, as a key component of its diversified business. Alongside the firms Weather and Commodity Markets business, which specialises in parametric solutions to weather and commodity related price risks, the Ventures Re team is seen as a growth area of the AXIS business.
“One of the things that we absolutely believe is that, over time, companies like AXIS will have a steady supply and a diversified supply of third-party capital,” said CEO Albert Benchimol during the firms recent third-quarter earnings call.
As a result Benchimol believes that it is vital that AXIS maintains a very strong traditional reinsurance franchise, in order to attract the type of third-party investors the firm wants to work with and to be able to continue to source quality risks.
“It’s really critical for us to have a very, very strong, very powerful front-end with great people, great service, great brand recruiting a great number of opportunities,” he continued.
This is where the flexibility that having a third-party capital unit, alongside a traditional unit, provides AXIS with additional options for where to place the risks it underwrites and how it optimises its gross reinsurance book.
Benchimol explained; “It’s really up to us as a company to determine how much of that gross risk that we’ve taken on board do we want to reinsure with traditional underwriters, do we want to hedge in the capital markets, how much do we want to share with third-party capital or other forms of capital and how much do we want to keep for our own account.”
Benchimol said that these decisions are crucial to the way AXIS Capital optimises its shareholders risk adjusted returns, these are all levers that the firm can use to optimise and smooth its way through the challenging reinsurance market.
Benchimol is looking for investors who understand AXIS’ strategy and who understand what it means to be in the insurance and reinsurance business.
“One of the reasons that we’ve been reasonably slow in growing AXIS Ventures and third-party capital is specifically because we want to make sure that we choose partners who have a very good understanding of the risk that they are taking, a long-term commitment to taking those risks and to partner with us going forward,” Benchimol explained.
And any investors participating in AXIS Re Ventures unit need to be aware that losses will happen, as is the nature of the business. Benchimol continued; “Nobody should be in the insurance business if they don’t expect occasional losses and so certainly the conversations that we have, with our third-party capital providers, demonstrate a very good understanding of the risks and an appetite to accept occasional losses.”
The current investors in AXIS Re Ventures, who have provided the roughly $61m of third-party capital that the unit manages, have already faced an impact in the most recent quarter as AXIS ceded some agricultural reinsurance business to Ventures which suffered a loss.
Axis Re Ventures was always designed to expand beyond property catastrophe reinsurance risks, said Benchimol, and one of the transactions that AXIS ceded to AXIS Ventures Reinsurance was a crop or agricultural contract which faced a loss. With multiple cells in AXIS Ventures Reinsurance this loss may not have hit all of the investors in the vehicle, we cannot be sure. The size of the loss was approximately $6m.
Benchimol clarified that the crop business was not something that had been brought into Ventures Re at the request of an investor; “The crop business is business that we were writing in any case and then we shared it. This was not a transaction that we did to satisfy a specific demand from a capital provider.”
“So somebody did not come to us and say, ‘Here’s X dollars go find me that business.’ The crop business that we underwrote was part of a diversified crop portfolio that we intended to write at the beginning of the year,” he continued.
Third-party capital and the AXIS Re Ventures unit clearly has an increasing focus at the firm as it navigates the challenging reinsurance market. Benchimol again reiterated how third-party capital, and Ventures, makes optimising its business mix more important for AXIS.
“We will increase or decrease the amount of reinsurance and or retro that we buy and, in some cases, we will share some of that with third-party capital. All of these are tools that we need to use to make the best of the business in a transitioning market,” He said.
Long-term, reliable investors are what AXIS needs if it wants to cede much broader books of business to AXIS Re Ventures, as attritional loss rates may be higher but then the potential return to investors may be higher too.
Benchimol commented; “What we do with that premium then becomes very interesting, because we could choose to keep it net, or we could choose to share some of that with third-party capital partners and we believe that it makes sense to start to establish, as we have, in a reasonable and modest way, long-term partnerships with high quality capital providers.”
So AXIS Re Ventures could be just the start of AXIS Capital’s third-party capital journey. It’s interesting to hear Benchimol mention what to do with the premiums resulting from business underwritten as there are now reports in the market that the re/insurer is planning to partner with alternative asset manager The Blackstone Group to create a hedge fund style reinsurance vehicle.
In the future any such vehicle with a more active and higher return investment strategy would also complement the mix of capital base and strategy that AXIS is building. It will be interesting to see whether such a vehicle comes to fruition.