Enstar Group Providing $2B+ Adverse Development Cover To AXA XL

Enstar Group Ltd. announced that one of its wholly owned subsidiaries has signed an agreement to provide adverse development cover to AXA XL, a division of AXA.

In the transaction, Enstar’s subsidiary will cover losses incurred on or prior to Dec. 31, 2019 on a diversified mix of global casualty and professional lines for a premium equal to the transfer of loss reserves of 90 percent of $1.550 billion, or $1.395 billion.

Enstar’s subsidiary will provide 90 percent protection (with AXA XL retaining 10 percent) on two layers, the first providing $1.550 billion of cover in excess of a $9.438 billion retention and the second providing an additional $1.0 billion of cover in excess above $11.363 billion. (Editor’s Note: The total coverage from Enstar is $2.295 billion—90 percent of the $1.55 billion layer and 90 percent of the $1 billion layer).

Completion of the transaction is subject to regulatory approvals and satisfaction of various closing conditions. The transaction is expected to close around the end of the first quarter 2021.

Enstar is a Bermuda-based legacy-acquisition specialist that offers capital release products and services through its network of group companies in Bermuda, the United States, the United Kingdom, Continental Europe, Australia, and other international locations. Enstar has acquired over 100 companies and portfolios since its formation in 2001.

AXA Explains

During an earnings call yesterday, executives of AXA Group explained the factors that caused an 18 percent drop in net income for the group overall, much of it driven by COVID losses recorded at AXA XL. They also addressed a number of questions about the possibility of blowing through any layers of the ADC coverage from analysts who sought insight into the economics of the Enstar deal given that AXA Group Chief Executive Officer Thomas Buberl and AXA XL CEO Scott Gunter both said they were “very confident” in the level of XL’s reserves.

In fact, a year-end 2020 reserve review showed that the company has €200 million ($244 million) in excess reserves, Buberl said, stressing that AXA XL is on target to achieve an operating profit of €1.2 billion ($1.5 billion) in 2021 as a result of favorable price momentum outpacing loss costs and underwriting discipline. Insurance price increases averaged 22 percent for AXA XL during fourth-quarter 2020, he said.

Both men said that a key priority is to manage earnings volatility, noting actions the company is taking to reduce line sizes and to adjust the catastrophe load for natural catastrophes to be higher for 2021. “Another way to manage volatility is the ADC,” Gunter said.

“I have said we are very comfortable and very confident about the XL reserves,” said Buberl. “Enstar has certainly looked at the reserves in detail” as well. “We feel this is the right time to move forward to reduce the volatility on the reserve movements of this long-term block,” he said.

Chief Risk Officer Alban de Mailly Nesle Albon added: “We see it as a cost that is completely absorbable by XL in its earnings. It doesn’t change the [earnings] target that we have for this year.

“What we have booked in 2020 is our view of the ultimate cost of these lines. At this point, we don’t think it will be used up in any given number of years in the future. But there is volatility in these lines of business. We know that. And we thought it was a good idea at this point to put that behind us.”

Social Inflation Not Over

AXA XL is not the only company to take advantage of an ADC from Enstar in recent months. In late December, CNA agreed to have an Enstar subsidiary reinsure a legacy portfolio of excess workers comp policies, representing $690 million in prior-year loss reserves.

Without purchasing an ADC, Everest Re announced it was increasing prior-year reserves by $400 million, pointing to social inflation as the reason for the action.

Later in the AXA call yesterday, Gunter also identified social inflation as the reason for the volatility in reserves for the 2017-2019 year that the company sought to manage with the ADC. Social inflation “was definitely, not just to us, but to the entire marketplace, a shock to the system. You see a lot of that in the marketplace—actions [being] taken.”

“With the ADC, I think we have got that adequately covered off. [Now], we just have to make sure that we keep that in mind as we go forward to set our IBNR numbers for 2020, 2021 and 2022,” he said.

“It’s not over yet,” he said, referring to social inflation and the need to continue to be cautious in setting reserves. “It’s a fool’s errand to say it’s over. It’s done, and we go back to traditional loss costs.”

“I’d rather lean in more on the side of caution,” he said.

Buberl said that AXA may build up AXA XL’s reserve buffer over time. “But the very [immediate] focus [for] this year is to get to the €1.2 billion” targeted operating earnings level, he said. “If we are in excess of the €1.2 billion, we will certainly think about increasing the reserve buffer.”

Etienne Bouas-Laurent, AXA Group’s chief financial officer, noted that while underlying (operating) earnings were recorded in red ink for AXA XL in 2020—at negative €1.4 billion ($1.7 billion) for 2020—€1.7 billion ($2.1 billion) of that related to COVID. In addition, natural catastrophes were €.0.5 billion ($0.6 billion) above the catastrophe load assumed for the year.

Bouas-Laurent and Gunter explained that a key figure that will turn last year’s negative into a positive €1.2 billion operating profit for 2021, is an expected €0.5 billion coming from the difference between pricing trends and loss cost trends. Gunter said that rate hikes from 2020 of roughly 17 percent with earn into 2021 premiums, while loss cost inflation is assumed to be around 4 to 5 percent.

*A portion of this story ran previously in our sister publication Insurance Journal.