The parent company of global insurer and reinsurer XL Catlin, XL Group, has significantly reduced its catastrophe exposure with the help of alternative reinsurance capital, as the company looks to further its strategy with the use of efficient capital.
In light of lessons learned and changing reinsurance market conditions, XL Group has made changes to its ceded reinsurance, increasing its use of efficient alternative, or third-party reinsurance capital to reduce its catastrophe volatility and optimise its book of business.
During its recent earnings call, XL Group executives explained that in total, it increased its major catastrophe limit by $500 million, which includes per-occurrence, stop-loss and pro-rata coverages. A substantial portion of its increased catastrophe limit is from alternative capital providers, and the firm revealed that as at 1/1 2018, it had more than $3 billion of alternative capital protection.
Changes to its reinsurance include its catastrophe bonds, which, while marginally reducing total in-force limit, the firm expanded coverage for U.S. or Caribbean wind and convective storm. The firm also acquired more international enterprise catastrophe aggregate, and decreased insurance and reinsurance segment specific coverages.
Furthermore, XL Group increased its cession to a third-party capital provider via its New Ocean Capital insurance-linked securities (ILS) fund manager. And, XL Group also announced a new net property quota share, which covers property cat treaty, property treaty, large risk property insurance, and London wholesale property insurance classes.
Gregory Hendrick, Executive Vice President (EVP) and President of Property & Casualty, said; “The impact of these changes and others is that we have more cover on a broader basis, enhanced protection across more frequent parts of our catastrophe exposures and we’ve achieved a lower attachment point for non-peak perils.
“We’ve reduced our exposures across the curve but most meaningfully at lower probabilities where we are down 20% to 30%. While these are on an occurrence basis, our worldwide aggregate exposure has decreased by similar amounts.”
Interestingly, the firm states that in light of the changes made to its reinsurance, which have meaningfully reduced net cat exposure, were 2017 events to happen again this year, its net catastrophe losses would be down by roughly 20%.
XL Chief Executive Officer (CEO), Mike McGavick, discussed the rationale behind the recent changes, including the heightened utilisation of alternative reinsurance capital; “It is clear that meaningfully reducing our volatility in the cat space, while maintaining and monetising in new ways the market position and high-quality customer base we’ve built over many years, is the right thing to do.
“We have been doing this through our ceded programs, in both traditional reinsurance and even more so with our long-standing alternative capital partners. You’ll see from our actions in the fourth quarter and at 1/1 that we’ve made good strides and we’re not done.”
So it could be that XL utilises increasing volumes of capital markets-backed capacity as it looks to pursue its strategy while using the most efficient forms of capacity, a trend that could also take hold at other large, global insurers and reinsurers as they adapt to the changing market conditions in 2018.
“We have seen the reaction in reinsurance to be less favorable to the total equation for us than the reaction on the primary side. So we’re excited to drive more of our opportunity for earnings into what’s going on in the primary side and to share more of the risk on our reinsurance side, particularly in the cat affected lines that could be both insurance and reinsurance, with alternative capital.
“We see that as a furthering of the strategy we’ve been adopting for a long time and a particular set of pricing and opportunity conditions that allowed us to accelerate that strategy,” said McGavick.
