Bermudian insurance and reinsurance specialist AXIS Capital Holdings Limited significantly increased its activities with third-party investors in 2018, doubling its premiums ceded through ILS type arrangements to so-called strategic capital partners to nearly $600 million.
That doesn’t include another just over $183 million ceded to the re/insurers Harrington Re vehicle, AXIS’ total-return style reinsurance firm that it set up in partnership with asset manager Blackstone, which is also third-party investor backed in the main.
So in total AXIS Capital ceded a significant 25% of its overall roughly $3.11 billion of reinsurance premiums underwritten to investors, funds and vehicles capitalised by third-parties during the year, up from roughly 18% in the prior year.
Premiums ceded to the Harrington Re total-return strategy actually declined slightly in 2018, as AXIS found its work with other strategic capital partners perhaps more compelling, doubling the amount of premiums ceded to them.
This has helped AXIS adopt a gross to net underwriting strategy, particularly in property catastrophe risks. Enabling the re/insurer to remain relevant and increase its capacity using third-party funds from investors seeking returns from reinsurance risks, while earning fee income at the same time.
AXIS Capital’s activities involving these strategic third-party investors, some of which are ILS funds and other investment managers, is driving increasing amounts of fee income and becoming an increasingly important lever within the firm’s overall operations.
For the full-year 2018, AXIS Capital reported fee income from its strategic capital partner relationships amounting to almost $48.5 million, up from $36 million in 2017.
But the fourth-quarter saw the fee income drop, likely due to the impact of losses suffered in the quarter and losses still being dealt with from prior quarters as well.
In Q4 2018 the fee income earned from strategic capital partners was only $5.7 million, down from $7.7 million in Q4 2017.
But with the amount of premiums ceded having increased so significantly, $20 million to Harrington Re in Q4 2018 and $55.5 million to other third-party capital partners (compared to $16 million and $12 million in Q4 2017) it’s clear that going forwards, in periods of lighter losses, the contribution these activities will make to AXIS’ earnings will be much higher.
AXIS continues to grow its third-party capital activities as well, in terms of premiums ceded, with its new collateralized reinsurance sidecar vehicle Alturas Re, which launched at $130 million for the January renewal, although this may register growth in the premiums ceded in the next quarter’s results.
So AXIS looks set to continue passing on more of its reinsurance premiums underwritten to institutional and ILS investors, while its Harrington Re vehicle has remained relatively static in terms of size, here cessions have largely stabilised or shrunk slightly in recent periods perhaps constrained by Harrington Re’s level of capital.
The re/insurer could choose to raise more capital there as well in future, with an initial public offering (IPO) always an option further down the line.
Harrington Re adds its own unique benefits though as well, for AXIS, given its total-return or investment oriented approach to reinsurance business with Blackstone managing the portfolio of assets.
AXIS is clearly leveraging its access to efficient capital from third-party investors, not just as a source of retrocessional capital to better manage its exposures and PML’s, but as a source of capital designed to deliver capacity for growth and expansion into areas of the business where its own balance-sheet may not be as efficient, while also driving increasing amounts of fee income at the same time.
In fact in this latest quarter AXIS said that “benefits related to arrangements with strategic capital partners” had helped to reduce its general administrative expense ratio in the period, which benefits its overall return to shareholders showing that the benefits are shared across the company, its equity holders and the third-party capital partners.
The majority of the cessions to strategic capital partners now seem to be channeled through the AXIS Re Ventures unit, which interfaces with institutions and ILS investors to deliver portfolios of reinsurance risk they can invest directly into.
AXIS continues to demonstrate the value of evolving the traditional reinsurance business model into one where efficient third-party capital augments their own balance-sheet capacity and sharing underwritten premiums in return for fee income and profit shares are increasingly valuable to the firm.