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Insider in Full: Opinion: Axis Re drops property – A move that might confuse, and yet not surprise

Axis Capital’s announcement yesterday that it is to call time on its $700mn property reinsurance book may strike some in the market as odd...

The revelation comes just a week after the key 1 June property reinsurance renewal, which this year was one of the most fraught in memory, marked by accelerating treaty pricing and negotiations spreading beyond the 1 June deadline.

It may seem strange that a carrier writing such a significant book of business would choose to announce after, rather than before, such a tough renewal.

  

 

Although sources have intimated that the Bermudian barely featured in the Florida renewal, and Axis Re said it would honour any existing quotes, brokers would presumably have appreciated clearer messaging on Axis Re’s appetite ahead of the season.

The timing relative to the broader market cycle may also raise a few eyebrows.

In cutting off property business Axis is redressing the challenges that led it to pay out claims year after year for major weather losses in the tough years from 2017 to 2021. But it is also pulling out of the class at just the moment payback is coming through and when it could obtain the most leverage with brokers in continuing to offer property risk.

Axis is not the only reinsurer to walk away from property completely, but when Markel did so at the end of 2020, it was in the different position of being able to transfer some of its book to ILS partner Nephila, retaining an affiliation with a property writer even if it was not bearing the risk.

But it is important to note that Axis’s withdrawal from property reinsurance has not come out of the blue. The cessation comes against a context of recent cat aversion among many reinsurers to the extent that it was a key theme at the 1 January renewals.

It also comes as the culmination of a years-long campaign to reduce volatility within Axis Capital through increased emphasis on specialty primary and reinsurance business, as well as casualty.

  

 

The withdrawal from property reinsurance, then, at least partially answers the question as to what Axis’s strategy is on reinsurance. This is particularly important in light of its recent, tentative attempt to sell its reinsurance unit – a plan that was quickly shelved in the face of investor disinterest in reinsurance in general.

All of this is to say that if Axis Re could not stand the catastrophe heat, it stands to reason that it is vacating the property kitchen.

Things, however, are never that simple. While the dropping of property reinsurance solves some of Axis’s problems, it also raises a number of questions.

One of brokers’ and clients’ most valued qualities in a reinsurance partner is consistency of capital. Reinsurance – particularly treaty – is often considered a long-term relationships business rather than an annual transaction.

Shutting down a line of business at short notice creates headaches for cedants and their brokers who want to know their reinsurance partners will be there for them next year and the year after.

There is also the question of how much leverage writing cat and other property lines provides to reinsurers. It is well known that clients want to trade with reinsurers who write a broad range of classes of business and often build up a cross-portfolio working relationship.

To gain access to the most attractive business, a reinsurer may find it must offer support on more challenged lines. A reinsurer that is unable to do so must surely come up against some competitive disadvantages.

Market sources estimate property reinsurance to be worth around $80bn, or very roughly 35% of the non-life market – a core part of the reinsurance business and for the programmes bought by all major cedants.

In fact, some reinsurers, having already carried out the cat pruning they deemed necessary in the past two years, are busy reiterating their dedication to cat as rates are rising.

Swiss Re CEO Christian Mumenthaler, for instance, stressed after the publication of the carrier’s 2021 results that cat business remains a “core competency”.

Against this backdrop, while Axis Re may have managed to rid itself of the immediate difficulties associated with writing property business and cat specifically, its course of action may bring with it a host of other challenges. 

 

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