Plans by Axis Capital is to wind down its Australian retail operations are part of a long-term restructuring strategy which will rebalance the re/insurer towards the most profitable parts of its business, the company's president and CEO Albert Benchimol has told Reactions.
The effort aims to slash expenses, but will first result in a pre-tax reorganisation charge of approximately $51m, taken during the third quarter.
The Bermudian firm added that pre-tax cost savings of approximately $30m are then expected on its annual run-rate, the majority of which would be realised in 2016.
Following the initial announcement of the restructuring, Benchimol told Reactions the company's long-term plan would focus on making Axis more capital efficient and more profitable. He said Axis had been undertaking discussions with several stakeholders for some time and that the Australia decision represented the fruition of those discussions.
Despite the retail retreat, Benchimol said that the company would continue to serve the Australian market.
“Our discussions with our clients and brokers has highlighted our strong positioning in our chosen markets, which reinforces our confidence in our ability to achieve our market leadership objectives and we certainly feel very good about the team we have in place,” Benchimol told Reactions.
“That said, we also identified a number of areas where some change was appropriate and we identified a few markets where ongoing conditions and our positioning would make acceptable profitability very difficult to achieve in the near future," he said.
While there is an industry-wide keenness to find growth, Benchimol stressed that the firm's strategy underlines its underwriting discipline, focusing growth in its most profitable lines, over those less profit-making segments.
“Our retail operations in Australia was one of those areas. We like Australia and we support Australia through our global reinsurance operations and we also write business out of Australia through our wholesale platform through the Singapore and London offices, including Lloyd's," said Benchimol.
“It's just the retail operation in Australia that was not performing and is the only part of our Australian activity that will be affected. We also recognise that we need to better align our resources to our most promising profitable growth opportunities and so we are reducing some staffing in some less attractive lines, but also increasing our staffing and resources in the pursuit of the more promising opportunities," he continued.
"We recognise the need to make more progress on our expense efficiencies and that includes some of the cost cuts and job cuts that we discussed today.The aggregate is approximately 100 individuals, including the retail Australian operation, which is the largest single contributor to that,” he added.
Turning some business away as less profitable highlights the continued industry-wide problem of pricing inadequacy faced by reinsurers amid soft market conditions, he noted.
“We were losing money in the Australia retail market so this decision will improve our underwriting performance,” said Benchimol.
“Our business is a business of identifying and pursuing attractive opportunities and having the discipline to stabilise or sometimes reduce businesses when they no longer show reasonable profitability,” he said.
“We need to do that with a focus on maintaining stable markets for our clients and our brokers, while never losing sight that discipline is key to being a profitable and growing company,” added Benchimol.
Quitting the retail Australian market goes along with some internal investment in the company's internal capabilities.“We've made great investments in actuaries and in systems over recent years to increase the use of data and analytics and we have already seen some significant improvement in some of our lines and we are continuing to expand on that initiative," said Benchimol.
“We are also growing attractive lines and our accident and health (A&H) operation continues to do very well. We continue to be very pleased with the growth we are seeing in primary and excess E&S casualty in the US and areas such as our professional lines business are growing very well,” he said.
Another important part of Benchimol’s plan is his strategy of managing capital efficiently and returning capital to its shareholders. Axis initiated a $300m accelerated share buyback programme that is expected to be completed by the end of this year, when its board will review the share repurchasing and dividend policy.
“We have always been a very responsible and efficient capital manager and we have essentially returned all of our operating earnings to our shareholders over the last few years in the form of share repurchases and dividends,” said Benchimol.
“We initiated a $300m accelerated share repurchase in August that should be completed by the end of the year. Our board will also be revisiting our capital management plans at our next directors’ meeting so we are continuing to make progress along each one of those fronts," he said.
“The Australia announcement is just one more step in our strengthening our focus on aligning our resources to our most promising opportunities," he added. “It is also about delivering the right products and services to our clients and brokers, all of which will benefit our markets, our clients and our shareholders,” he added.
Freeing up capital does not mean then throwing it at unprofitable business to boost the top line, he stressed.
“Capital management has always been a very strong focus of ours and we believe the best focus for capital is to use it to grow profitable business, but if that is not available then we should return that capital to our shareholders,” said Benchimol. “If we can find lower cost capital through debt or preferred stock then we would issue that and liberate capital, which we would then return to our shareholders."
Another Axis development has been increased involvement within the third-party capital space. In September, Reactions learnt Axis was to go into partnership with the Blackstone Group to launch a so-called hedge fund reinsurer. Fund raising for the new venture will begin during the fourth quarter of this year and it is hoped to start underwriting ahead of the January 1 2016 renewal.
There had been rumours that Axis was looking to enter the third-party capital space as far back as March 2014, when Reactions’ sister title The Insurance Insider reported the Bermudian re/insurer was considering a possible joint venture. Benchimol noted in the company’s Australia announcement that he saw third-party capital as important to the company’s future, and reiterated that commitment in his conversation with Reactions.
“We are absolutely convinced that our 21st century approach to capital management, whereby we will complement our own balance sheet with a broad range of third party capital, is the right approach to evolving markets because it supports the delivery of capacity, innovation and tailored solutions to our clients,” added Benchimol.