AXIS Capital’s third-party capital fee income declines in Q1

AXIS Capital, the Bermuda-based globally-active insurance and reinsurance company, experienced a decline in fee income from its third-party reinsurance capital management business during the first-quarter of 2021.

AXIS Capital reported positive net income of $116 million and operating income of $83 million for the first-quarter of 2021, well up on the prior year when the company experienced a quarterly loss.

While AXIS reported $110 million of weather and catastrophe losses, split $36 million on the insurance side and $74 million in reinsurance, the company still managed an underwriting profit and reported a consolidated combined ratio of 98.9%.

The winter storms Uri and Viola, with impacts largely in Texas, were the significant driver of first-quarter catastrophe losses for AXIS, which the company had previously said would make up roughly $90 million of the cat load for Q1.

It’s likely AXIS will have shared some of these losses with investors in its range of third-party reinsurance capital structures, including its sidecars and insurance-linked securities (ILS) type arrangements.

Which may go some way to explaining the decline in fee income earned under its Strategic Capital Partners initiatives.

AXIS Capital had adjusted the way it manages third-party capital in recent years, shifting business away from its own vehicle to use a third-party transformer.

But at the same time, the company continues to have somewhere around $1 billion of third-party investor capital under management in ILS funds, quota shares, reinsurance sidecars and other private ILS vehicles.

Having experienced a decline in risk premiums ceded to these so-called strategic capital partners through much of 2020, with declines seen in  Q1, Q2 and Q3 of 2020, this bounced back in Q4 of last year when premiums managed and ceded to third-party capital increased again.

In the first-quarter of 2021, overall managed premiums rose to over $2.535 billion, up from $2.431 billion a year earlier, that includes the ILS like premiums, AXIS’s third-party capitalised and total-return joint-venture reinsurer Harrington Re, as well as cessions to other reinsurers.

During Q1, AXIS ceded some almost $244 million of reinsurance premiums to its “other strategic capital partners” group, so third-party and insurance-linked securities (ILS) style investors, which was down on the near $280 million ceded in the prior year.

On the insurance side, AXIS didn’t cede any insurance premiums to these types of investors during Q1 2021, where as in the prior year quarter it ceded over $18.5 million of insurance premiums to them.

The Alturas Re Ltd. collateralised reinsurance sidecar structure sits within these premiums we believe, a structure AXIS has been making increasing use of in recent years.

On the fee income side, AXIS reported $12.3 million of third-party capital related fee income for Q1 2021, which is down from almost $15.7 million in the prior year.

The main reason for the decline was a lack of fee income earned on the insurance side of AXIS’ strategic capital partners business.

The fee income earned was made up of $2 million in other insurance related income and $10 million as an offset to general and administrative expenses during the period.

Part of the reason for the decline may be that AXIS did not sponsor an insurance-related sidecar through its Alturas Re structure around the January renewals this year.

For the first time, the only Alturas Re sidecar transaction we heard of was a reinsurance focused deal, which may explain why the fee income earned declined on the insurance side of AXIS’ third-party capital business.

As a reminder, AXIS is looking to grow its third-party capital business, as we were told recently.