AXIS sets $235m loss reserve for Covid-19, largely from property lines

AXIS Capital, the Bermuda headquartered specialty insurance and reinsurance company, has revealed an expectation that the Covid-19 pandemic will drive some $235 million of losses, the majority of which will be in its property book.

AXIS Capital gave a preview of the expected first-quarter hit to earnings from catastrophe events and severe weather losses, revealing a total impact of $300 million is expected to be reported.

But the majority of that is due to the Covid-19 coronavirus pandemic, with a net pre-tax hit of $235 million expected.

The $65 million of catastrophe and weather losses, also net (so after reinsurance) and pre-tax, includes regional weather events in the United States, the UK flooding and losses from the Australia wildfires.

But AXIS Capital’s claims provision for the Covid-19 pandemic is perhaps more interesting, as the company has projected out its potential losses through July 31st and found that the majority are anticipated to come from its property portfolio.

Which is perhaps a little surprising, given AXIS has been highlighted as one of the companies that could take significant trade credit losses given its active book covering European risks in that line of business. Although it’s possible these come further down the line, so are something to look out for in future.

AXIS Capital said that its estimated net claims reserve for Covid-19 is, “largely attributable to property related coverages, but also includes event cancellation and accident & health coverages, and considers a global shelter in place order that remains in effect until July 31, 2020.”

It may be particularly relevant for some in the insurance-linked securities (ILS) market that AXIS Capital said it expects the majority of its Covid-19 claims to come from property lines of business.

AXIS Capital cedes a significant amount of risk from property lines to ILS investors, with private quota shares and its sidecar vehicles one of the main conduits.

These ILS structures may find themselves sharing in some of the claims burden, benefiting AXIS with reinsurance and retrocessional support.

The company has a specific sidecar vehicle, Alturas, that has both a reinsurance and a property insurance tranche, so investors exposed to that vehicle, particularly the insurance side, may find themselves exposed to a degree.

But perhaps more relevant are the significant amount of private ILS quota shares that AXIS enters into with investors, as these arrangements could find themselves taking a share of AXIS’ Covid-19 property insurance or reinsurance claims.

AXIS Capital had some $2 billion plus of third-party reinsurance capital that it was using in its business at the start of 2020, with a significant proportion still coming from ILS investors.

It’s hard to imagine that all of the private ILS and collateralised reinsurance arrangements the firm has in place escape losses from the pandemic, given the admission the majority of its claims provisions are for property business.

In addition, AXIS’ third-party capital backed and total return reinsurance vehicle Harrington Re is likely to take its share, further exposing some of the investors backing the firms underwriting and Harrington Re no doubt also felt the hit from the financial market volatility in recent weeks as well.

The re/insurer also said it faces another full-limit $10 million loss for the support it provided to the World Bank and WHO’s pandemic swaps, which are now paying out as we explained recently here.

Albert Benchimol, President and CEO of AXIS Capital, explained, “COVID-19 has disrupted both society and the (re)insurance marketplace on a global scale. We have experienced its impact in our homes and in the communities where we live and work. Our foremost concerns are with the health and safety of our staff, and the well-being of all those directly affected by the virus. We also extend our deepest gratitude to the heroes who are on the front lines fighting the pandemic, including our healthcare workers and first responders.

“While COVID-19 continues to create unprecedented challenges and uncertainty for all carriers, we believe AXIS is well-positioned to manage through the pandemic. We entered 2020 with strong capital adequacy, a high-quality investment portfolio, and a well-balanced book of business. Our portfolio optimization actions are delivering tangible results. Our focus continues to be on providing our clients and partners in distribution with the same high level of service that they have come to expect from us. AXIS transitioned seamlessly to a remote work model and we are deeply appreciative to our staff for their tremendous resilience and commitment to advancing our business, as we navigate a rapidly evolving environment.

“We have confirmed that most of our contracts do not provide coverage that applies to the current situation. Nevertheless, we have written policies that will respond to this pandemic. We are already processing claims and making payments where coverage exists. We proudly stand by our promise to be there for our customers in their time of need.

“We believe that the estimate that we have provided appropriately reflects losses that have been incurred assuming the shelter in place lasts through July 31st.”

On the investment side of its business, AXIS Capital said that it anticipates reporting net investment income of $93 million for Q1, down from $107 million in Q1 2019, mainly due to lower hedge fund returns.

AXIS also expects net unrealised losses of $61 million ($55 million excluding foreign exchange movements) from its equity securities portfolio and net unrealised losses of $275 million ($224 million excluding foreign exchange movements) from its fixed maturities portfolio, all due to the volatility and decline in equity and credit markets at March 31st 2020.