Third-party capital importance growing at AXIS, set to increase use

Capital from third-party reinsurance investors is becoming increasingly important to re/insurer AXIS Capital with the company set to increasingly utilise alternative and capital markets sources, as the multiple balance-sheet approach enables it to optimise its risk appetite and underwriting portfolio.

AXIS has been managing some third-party capital for a while, in ILS fund or sidecar type vehicles under the AXIS Re Ventures brand, as well as with the more recent launch of its total-return reinsurance joint venture with Blackstone, Harrington Re.

But CEO Albert Benchimol foresees the re/insurers use of alternative capital increasing, with the company likely to introduce other vehicles and strategies to put third-party capital to work in other lines of insurance and reinsurance business.

Highlighting the importance of third-party capital, Benchimol said recently that the Harrington Re venture, “Significantly advances our 21st century approach to capital management, whereby we complement our own balance sheet with a broad range of third-party capital to deliver enhanced capacity, innovation and tailored solutions to our clients and brokers.”

AXIS Capital is another of the larger re/insurers that has been increasing its use of third-party capital for retrocessional reinsurance needs of late, with CFO Joe Henry explaining during the firms second-quarter earnings call that a significant proportion of this is with investor backed capital.

“We have increased retrocessions,” Henry explained, adding that “Half of these cessions were to third-party capital providers and that will increase in the second-half of the year and beyond with our new Harrington relationship.”

Henry said that as third-party capital activities at AXIS Capital increase there will be a growing impact on the re/insurers financials, including a growing revenue stream of fee income earned from underwriting and capital management services rendered.

The impact of third-party reinsurance capital activities is expected to ramp-up towards the end of 2016 and Henry said that the firm will provide a greater level of disclosure on its activities in this space in quarters to come.

That’s pleasing, as disclosure varies so much between re/insurers when it comes to third-party capital activities. AXIS is set to disclose premiums ceded to Harrington and other capital providers, as well as the fee income generated from the third-quarter of 2016, Henry explained.

That will help us at Artemis and potential investors in AXIS Capital and the third-party capital vehicles to understand the impact and success of these activities, in terms of whether AXIS Capital is growing as a result or simply shedding risk it can no longer retain on its own balance-sheet, through the use of investor capital.

AXIS’ ambition, according to Benchimol, is to increase its use of third-party capital, both in existing vehicles and new ones.

“Part of our strategy is to expand our sources of third-party capital,” Benchimol explained. “So we may certainly, at some point in the future, do a second round for Harrington. We may look for other sources of capital for different risks than those that are currently targeted by Harrington.”

That suggests that third-party reinsurance capital backed vehicles could be part of the core strategy for the future at AXIS Capital, which would make a lot of sense as to increase scale, while still benefiting from income, running ILS funds, or other reinsurance vehicles backed by third-party investors is a great way to navigate a competitive marketplace.

Benchimol also explained that the AXIS’ strategy in property catastrophe reinsurance is three-pronged, gross underwritten premiums, plus retrocession, plus use of third-party capital.

“Part of our premiums are not simply shared in the retro market, but through third-party capital,” he said. “As you know, there is appetite in the investment community for catastrophe risk and we share with them all.”

In fact, Benchimol went on to explain that the front-end of AXIS Capital needs to be about serving its customers, identifying and being ready to take advantage of attractive opportunities, while the back-end needs to be about “having diversified sources of risk funding.”

As a result, when AXIS does find new opportunities it is not always going to result in net increases, Benchimol said, as sometimes the firm will be “sharing those risks with capital partners.”

So along with Harrington Re, which will from now on be taking a large quota share from AXIS Capital thus augmenting the companies underwriting capacity, AXIS is also increasingly using third-party capital and ceding more risk to third parties, as it uses more reinsurance to balance increasing underwriting on the front-end.

AXIS is certainly not the only insurance and reinsurance firm to highlight this in recent months, a number are shifting from having centralised and rationalised their buying to a strategy of ceding more risk and using reinsurance capital in all its forms to effectively increase their own size and relevance on the front-end.

As a result, if this is indeed the right strategy for a prolonged soft market, we’d expect to see others following suit and also launching vehicles that operate like sidecars, ILS funds, internal reinsurers or total return reinsurance strategies.

As the market faces up to the threat of disruption, re/insurers will seek to ensure they have access to the full gamut of third-party capitalised balance-sheet opportunities.