AXIS cedes 60% more risk to third-party capital, but fees slightly down

Bermudian specialist insurance and reinsurance firm AXIS Capital ceded significantly more of its risk through to third-party capital partners during the third-quarter of the year, but the fees earned did not rise commensurately.

AXIS Capital’s third-party reinsurance capital management business has been building steadily and the growth in assets under management and in the volume of insurance-linked securities (ILS) related cessions to investors is again clear.

The company has been steadily increasing its use of quota share and privately transacted reinsurance and retrocessions to its so-called strategic capital partners, with the result being AXIS growing the amount of ILS and alternative capital within its business.

It’s helped the company sustain softer catastrophe reinsurance pricing in recent years, while earning fee income as well, with the fee income becoming an increasingly welcome boost to quarterly earnings.

During the third-quarter of 2019 growth was evident again, as AXIS Capital ceded 60% more risk from its primary insurance and reinsurance business to the “other strategic capital partners” group, where the company accounts for cessions and quota shares to specialist ILS investors.

In Q3 AXIS ceded $12.165 million of insurance premiums and $125.033 million of reinsurance premiums, for a total cession of almost $137.2 million of premiums through these third-party capital relationships.

It’s significantly higher than the $87.412 million of solely reinsurance premiums that AXIS ceded to its other strategic capital partners in the prior year period.

Year-to-date to the end of September that takes the total insurance and reinsurance premiums ceded to these ILS style strategic capital partner relationships to almost $696 million of premium, a really significant sum and up 23% year-on-year compared to the almost $540 million of solely reinsurance premiums ceded in the first-nine of 2018.

Ceding primary insurance premiums  to third-party investors as well as reinsurance has helped, expanding the range of offerings AXIS has for investors. But so far this year insurance premiums are only $40 million of the total ceded, leaving the reinsurance risk premiums the main source of underwriting shared.

Premiums ceded to AXIS’ other third-party capital backed venture, the total return reinsurance vehicle Harrington Re, also rose for the year-to-date, reaching almost $207 million, compared to $162.8 million for the first nine months of 2018.

Premiums ceded to other reinsurance firms are roughly static year on year, showing that for AXIS the use of its strategic capital partners and ILS type structures is helping it to grow overall and has become an important additive source of income, given the fact it earns fees through these relationships as well.

On fee income though, there is perhaps evidence of AXIS’ overall quarterly result for Q3 2019, which was deemed “disappointing” by the firm’s CEO, as our sister publication Reinsurance News reported earlier this morning.

Having fallen to an operating loss, on the back of losses including from catastrophe lines, AXIS has not managed to grow its fee income from third-party capital, which is to be expected.

With AXIS’s own losses elevated, it’s safe to assume that third-party and strategic capital partners have taken their shares, through the various quota shares and private ILS structures the firm has in place.

As a result, it stands to reason that AXIS’ fee income earned would be down a little, as you cannot expect to earn the same high fees when your investors are helping you to pay claims.

But even considering the losses and the fact this drove an operating loss for AXIS, the firm has reported almost $18.2 million of fee income from its strategic capital partner activities.

It’s very slightly down on the prior year period, when AXIS earned $18.3 million, but had it not been for the elevated losses this quarter we suspect it would have been quite a bit higher this year.

Year-to-date, AXIS Capital has earned $57.1 million of fee income from its strategic capital partner activities, up almost 34% on the prior year’s $42.75 million.

In this “disappointing” quarter, as CEO Benchimol called it, earning this fee income will have been a welcome boost to income for the re/insurer, helping to moderate the impact of industry impacting events even more than just by sharing the loss with third-party investors.

Demonstrating the increasing importance of the third-party capital management business model for AXIS and precisely why all its peers are accelerating their efforts in this area as well.