AXIS sees higher fee income from third-party capital partners in Q1

Bermuda based insurance and reinsurance group AXIS Capital Holdings Limited has recognised a significant increase in the fee income it earned from its work with what it terms “strategic capital partners” in the first-quarter of 2017 and ceded significantly more premiums to third-party capital as well.

AXIS has been steadily building out a variety of third-party reinsurance capital activities in recent years, not least with the launch of its total-return reinsurance joint-venture with asset manager Blackstone Harrington Re, following a $600 million capital raise.

AXIS has its other third-party reinsurance capital initiatives within its Ventures unit, where its ILS fund management type activities occur.

Between Harrington Re and the AXIS Ventures activities, the re/insurer has started to generate an increasing amount of incremental income from fees it earns for managing the capital, as well as for underwriting and servicing the subject business.

In its first-quarter 2017 earnings release, Albert Benchimol, President and CEO of AXIS Capital, explained that the company is demonstrating increasing; “Benefits from our strategic capital partnering activities which allow us to do more for clients, lower our cost of capital, and attractively rebalance the risk-reward equation for our shareholders.”

The lowering of the cost of capital is key, as by bringing third-party capital with a lower hurdle rate than the balance-sheet into its reinsurance underwriting AXIS can recognise an efficiency across its own capacity as well.

Add to this the benefits of the Harrington Re alternative investment and total-return strategy, plus the fee income earned from servicing Harrington Re and managing the AXIS Ventures third-party capital funds, and the increasing benefits become quite meaningful very quickly as the activities scale up.

In Q4 2016, AXIS reported that it earned $7 million of fee income from its strategic capital partners in the quarter, compared to $3 million in the prior year.

That figure has risen again in the first-quarter of 2017, as underwriting fee income from Harrington Re and for other third-party capital activities in the Ventures unit drove an increase in fee income to $11.14 million in Q1 2017, up considerably compared to just $4m in Q1 of 2016.

Helping to drive these third-party capital revenues higher was a significant increase in premiums ceded to strategic capital partners in the quarter, with just over $60.4 million of premiums ceded to Harrington Re and almost $154 million to other strategic capital partners in Q1 2017.

In the prior year quarter Harrington Re was not launched, but on the other strategic capital partner side of the business AXIS Capital ceded only just over $93 million in premiums to this third-party capital in Q1 2016.

AXIS sais the increase in premiums ceded came from its catastrophe, credit and surety lines, and also factors in the impact of the retrocessional quota-share reinsurance arrangement it has with Harrington Re, which increased premiums ceded in its liability and professional lines of business.

The fee income earned represents the work that AXIS Reinsurance undertakes on behalf of these strategic capital partners. You can also see in the results that the third-party capital partners are assisting AXIS to navigate the challenging market environment, as its overall premiums managed had dropped, while the proportion of those ceded to its third-party capital backed vehicles has risen considerably.

Benchimol explained that the work with third-party capital is supporting AXIS’ underwriting results, saying it is reflected in; “continued positive momentum in our strategic capital partnering activities.”

Benchimol has long discussed the needed 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.

The growing income earned suggests that this is beginning to pay off for AXIS and the increase in premiums ceded to capital partners shows that as the re/insurers feeds more risk to the third-party investor vehicles it is likely to see the fee income increase further in quarters to come.

It will be interesting to see how big a part of the business these activities could become in a year or two’s time and importantly whether they are continuing to deliver incremental income to AXIS and attractive returns to investors.

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