AXIS share price up as Benchimol plays down political threat to BI book

The legislative efforts by a number of US states and some senators in Congress to retroactively open up business interruption (BI) policies to Covid-19 virus losses would inevitably reach the Supreme Court because of constitutional questions, and would therefore be pointless as no funds would be received potentially for years by policyholders, according to Albert Benchimol, CEO of Bermuda-based AXIS Capital. Mr Benchimol discussed the matter with analysts after AXIS reported a net loss of $185m for the first quarter, impacted by provisions for virus claims of $235m including some for potential BI losses. The group’s share price rose, however, after the analyst call because Mr Benchimol and his team did a good job of explaining the reasons for the virus provisions and how confident they are that the eventual losses will be capped because of recent re-underwriting, virus exclusions and reinsurance cover. AM Best downgraded the insurer’s credit rating to A (excellent) from A+ (superior) after the results were posted but as Mr Benchimol stressed, this was not related to the group’s virus exposure but rather a “backward-looking” view based on the past five years' performance. The equity analysts appeared to agree that AXIS is actually in decent shape looking forward and armoured to deal with the current crisis. Much of this, however, and the outlook for all other insurers and reinsurers involved in the US market, will depend upon whether or not the efforts to retroactively open up BI policies proceed and are successful. Mr Benchimol for one is confident that they will not succeed because it would wipe out the industry – and there is increasing evidence that he may be right. “If you were to do this [retroactively open up BI policies], you would so hurt the insurance industry that it would end up being an industry that requires a bailout. If regulators and legislatures… realise the full negative impact of what this would mean, I think they would step back. At the end of the day, I think the very simple question that one has to ask every legislator and every regulator is: If you want to take all of our capital to pay for this where we don't have covers, when the hurricane hits Miami, how do you want the insurance industry to respond, now that it no longer has capital?” he said, in response to one analyst’s question, as reported on results service Seeking Alpha. “The issue is that the downside of making that decision is, it's so bad… I think that has been recognised by Republican senators in their letter to the President and so on… basically saying that this goes against the constitution in the United States. It's very likely to have to go to the Supreme Court, which means that the insureds are unlikely to see any benefits from action of the sort for many years. And so why would you want to do all that, when there are much better mechanisms to support the economy?” continued Mr Benchimol. One analyst asked whether AXIS had budgeted for the legal expenses of dealing with legislative and legal actions being taken on BI cover. He said the company has set aside budget and pointed out that this would be an industry-wide effort anyway, with shared cost. “This would be a massively funded movement by the entire insurance and reinsurance industry. So, thank God, we wouldn't have to pay for it all ourselves. But to be specific, we do have a budget in this $235m charge for defence costs, because we do believe there will be additional litigation to defend our position,” he said. The analysts would have been pleased to hear that AXIS has carried out an exhaustive analysis of its contracts in force and decided that it has limited exposure to BI and other virus claims, and is also adequately protected by limits and reinsurance. “While we do have some contracts that provide the cover, the majority of our business includes physical damage requirements from business interruptions, clear virus or pandemic exclusions, and sub-limits in terms of coverage. Where we do have exposures, we believe that we have a good understanding of our potential losses for our first-party business,” said Mr Benchimol. “While our loss provision of $235m is, of course, subject to change given the uncertainty of the situation, we believe it appropriately reflects potential losses that have been incurred, assuming the shelter-in-place restrictions remain through 31 July. I would like to credit our team for the tremendous effort required that has gone into preparing this estimate,” he continued. Mr Benchimol explained that virus-related claims will also take some time to be realised and the continued hardening of markets worldwide will help to pay for any future losses. “We did not take a provision for third-party business. Frankly, we haven't seen anything yet there. And we expect that it'll take several quarters, if not years, for the full impact of Covid-19 to be realised. That's another reason we expect that market pricing will continue to remain strong, to allow the industry to absorb the higher losses that are expected to emerge from this pandemic over time,” he said. Referring to analysis of the group’s property book containing BI exposures, Mr Benchimol stressed again his confidence in the robust nature of its analysis. “We've gone through every policy that's for casinos, hospitality, hotels, restaurants and so on and so forth. We reviewed the business. We've looked at where the BIs are, where the exclusions may or may not be, and we took a charge against that. So by and large, we believe that we've done a comprehensive review of all of our property exposures – where there was BI, where there isn't – and we're comfortable that we've identified all of the policies where there is coverage,” he said.

AXIS share price up as Benchimol plays down political threat to BI book

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