Strategic capital activities at AXIS, including Harrington Re, pay off

AXIS Capital has reported an increase in fee income earned through its strategic capital partners activity, which includes its alternative reinsurance capital strategy and the total-return reinsurer Harrington Re.

AXIS Capital partnered with investment group Blackstone to launch Harrington Re this year with $600 million of capital raised, as it sought entry into the alternative investment oriented reinsurance space, with a strategy aiming to optimise returns across both the underwriting and asset management side of the business.

AXIS also has a number of other initiatives leveraging third-party capital within its Ventures unit, where its ILS management activities occur, but Harrington Re is a much bigger play on leveraging external money to gain fees for underwriting services and management, as well as profits due to the alternative investment strategy as well.

Albert Benchimol, President and CEO of AXIS Capital, commented in the firms quarterly earnings this week that the firm has been; “Growing our strategic capital partnerships highlighted by the launch of Harrington Re.”

“Through these initiatives and others, we are laying the foundation of a differentiated leader in global specialty risks,” Benchimol continued, adding that the strategy helps the re/insurer to grow more intelligently, optimise its portfolios of risk and match risks with the right capital.

For the fourth quarter of 2016 the contribution from Harrington Re underwriting fees is clear, with the company reporting that it earned $7 million of fee income from strategic capital partners in the quarter, compared to $3 million in the prior year.

This fee income represents service fees and expense reimbursement earned by AXIS Reinsurance for underwriting and portfolio construction undertaken for the strategic capital partners, including Harrington Re’s investors.

For the full-year 2016 the fee income from strategic capital activities is even more impressive, coming in at $22 million for the year compared to $9 million in 2015.

That’s a significant boost to income for servicing risks that don’t sit on the AXIS balance-sheet, demonstrating that working in partnership with third-party reinsurance capital can offer a traditional company a welcome return on its efforts.

This won’t represent the full profits that AXIS derives from Harrington Re either, as the company will take a profit share as well and so benefit from the investment return that Blackstone generates on the portfolio too.

For the fourth quarter AXIS’s reinsurance segment ceded just over $17.4 million of premiums to Harrington Re and almost $120 million for the year.

AXIS’s other strategic capital partners activities, which we assume includes the Ventures business, saw almost $15.5 million of premiums ceded to it in Q4 and just over $185 million for the full-year, up from just $105 million in 2015 suggesting growth in this part of the strategic capital business as well.

Benchimol has long been talking about the shift towards a more capital agnostic strategy at AXIS, calling Harrington Re part of a “21st century” capital management strategy for the firm, and integral to the company’s alternative capital plans.

All the signs are that this is beginning to pay dividends for the company and the growth in premiums ceded to capital partners shows that the company is making good on its promise of sourcing sufficient risk to keep the third-party investor vehicles fed as well as its own balance-sheet.

The proof will be whether over the longer-term these vehicles can consistently deliver enough fee income to help the re/insurer enhance its capital efficiency, while also enabling it to grow by putting the pools of third-party capital to work alongside its own. Importantly they also have to deliver returns to investors as well, so sound risk selection remains absolutely vital.