AXIS didn’t renew 2017 cat bond, bought reinsurance lower-down instead

AXIS Capital, the Bermuda headquartered specialty insurance and reinsurance player, elected to let one of its catastrophe bonds expire without renewal this year, as it shifted its focus to buying more reinsurance lower-down in the tower to reduce its PML’s.

AXIS Capital had three catastrophe bonds from its Northshore Re series of transactions still in-force and providing it with a source of industry loss based retrocessional reinsurance amounting to $715 million until June this year.

Now, the company has let the oldest and largest of those three catastrophe bonds, the $350 million Northshore Re II Ltd. 2017-1 deal, mature and has chosen not to renew it, deeming the protection higher up in its reinsurance tower to be less important than adding more protection lower down.

AXIS Capital has suffered heavily from recent years of major catastrophe losses, while all three of these cat bond transactions remained intact and unaffected.

This has led to a rethink at the re/insurer about how it purchases its reinsurance and retro, with a renewed focus on reducing modelled probably maximum losses (PML’s) at the more remote, but more impactful, end of the scale.

During its quarterly earnings call last week, CEO Albert Benchimol and CFO Peter Vogt explained to analysts that the company has restructured its reinsurance and retro at the recent renewals.

As well as improving protection, AXIS has also been working on improving the quality of the risks it underwrites.

CEO Benchimol explained that in reinsurance, “In Axis Re’s case, we’ve used these recent renewals to continue upgrading the quality of our portfolio and we think that we’re well positioned to capitalise on the improving market. Importantly, we’re seeing improvements in wordings, on terms and conditions, in both insurance and reinsurance and that will help loss ratios, beyond the impact of rate.”

He went on to explain that if you look at AXIS’ PML for southeast U.S. hurricane risks, “It’s down meaningfully year-over-year across every period.”

This is thanks to a change in reinsurance buying, which Benchimol put down to, “We emphasised protecting ourselves in the more frequent periods and we decided not to renew our cat bond. Since the cat bond was attaching at a high level you can see the these impacts in the 150 and 250 going up. That’s the impact and we think right now we think we’ve built a better book across the curve.”

Managing exposures in a time of opportunity for growth is important and it seems AXIS may have been left with too much protection at the top of its tower, but not enough lower down.

With reinsurance hardening and the company likely to have expanded its portfolio in areas like southeast U.S. wind at the renewals, it will have been important to reassess this and ensure PML’s are managed.

CFO Vogt went into more detail, explaining, “As we looked at our reinsurance purchasing for property in the second-quarter, we did not review renew our cat bond which really helped the 1-in-250.

“We actually replaced it with more protection at the lower-end of the curve. When I look at the lower end of the curve, our AALs (average annual losses) are actually down from 2019 levels by 20% at the 1-in-5, 1-in-10 and 1-in-20 and actually in southeast wind, we’re down by over 30%. So we feel good that we’re more protected going into wind season this year.”

AXIS is left with two catastrophe bonds outstanding, the Northshore Re II 2018 and 2019 transactions that between them provide the company with $365 million of industry loss based property catastrophe protection.

Those two cat bonds mature in 2022 and 2023 respectively, so there is plenty of time for AXIS to continue adjusting its program safe in the knowledge that this capital markets backed protection persists higher up in the tower.

With AXIS Capital seeking growth in reinsurance right now, CEO Benchimol said, “We’re certainly looking to continue improving the book, but we’re also incredibly well-positioned in the markets that are seeing some of the best improvements. We’ve got great relationships with our clients and our brokers, and we are looking to take advantage of the growth opportunity.”

Vogt added, “The team is geared up and is looking at growth as we go into 2021, to take advantage of the hardening markets.”

So by the time the 2018 Northshore Re II cat bond matures, AXIS’ portfolio could look quite different and the higher-up protection from the catastrophe bonds may be something the re/insurer looks to continue with. We’ll have to wait and see.