In a recent analyst call, AXA Chief Executive Officer (CEO) Thomas Buberl suggested that the company will reduce the risks attached to the newly acquired XL by buying more reinsurance.
This week AXA announced plans to acquire XL Group Ltd. for $15.3 billion, and this latest statement offers some indication about how it plans to manage its new operations following the deal.
Buberl stated: “We will not run the XL business in the same risk appetite that XL has run it. We will reduce it, and obviously this will cost us reinsurance, and at the same time we do have reinsurance synergies together with XL.”
AXA has regularly taken a conservative approach to catastrophe risks, and although Buberl stresses XL’s risk appetite will be reduced, he also notes its existing specialism in selecting low volatility risks and mitigating them with reinsurance or retrocession where appropriate.
“XL is very leading in the space of originating, packaging, but only keeping a small share of the risk and placing the risk elsewhere through reinsurance, or, through capital market instruments,” said Buberl.
“This is something for us that is extremely important and is extremely attractive, something we don’t have today.”
The CEO has already cited the $5 billion of gross written premiums that XL Group have in the reinsurance business as being among the key considerations for the acquisition.
There has been speculation that the reinsurance synergies the acquisition provides would lead AXA to use less reinsurance, but the opposite now appears to be true.
Buberl remarked: “I have been asked a lot ‘are you going to get rid of the reinsurance?’ The answer is no. Why is the answer no? Because we believe that the market has completely changed in terms of blending the reinsurance and primary insurance together.
“Today, it’s not any more a question of ‘are you in primary insurance or are you in reinsurance?’ The question is ‘what access do you have to capital pools in the market?’ Are you using your own shareholder money? Are you using reinsurance? Or are you using even capital market instruments like insurance-linked securities?
“And with that we get the full spectrum, and we want to optimise the entirety of AXA with this operation.”
Buberl’s statement suggests that AXA’s strategy will not simply be one of offloading risk, but of leveraging reinsurance capital to add efficiency and reduce the business’s volatility by controlling its exposures.
This protective strategy of reducing volatility and lowering peak exposures while supporting front-end growth through reinsurance capital and capital markets is similar to the approach XL has already utilised in recent years.
