AXIS cedes more risk to ILS investors, who in turn help pay Q3 losses

AXIS Capital Holdings’ strategic capital partnership activities generated increased fee income for the re/insurer during the first nine months of 2017, as a decrease in profit commissions related to retrocessional agreements in Q3 was offset by more than $9 million in service fees and reimbursement of expenses to its reinsurance segment.

AXIS reported a decrease in profit commissions associated with retrocessional agreements with its strategic capital partner activities in Q3, which is a result of catastrophe losses in the quarter driving a loss to business which it retrocedes to third-party investors, showing that its third-party investors took losses as they helped the carrier pay claims.

The re/insurer actually reported that its strategic capital partner activities included a loss in Q3 of $4.3 million from other insurance related expenses, compared with income of $3.4 million a year earlier, and other insurance related income of $4.9 million for the first nine months of this year.

However, an offset to general and administrative expenses of roughly $9.8 million for the quarter and $23.3 million for the first nine months of the year, driven by service fees and reimbursement of expenses to AXIS Reinsurance from its strategic capital partners, saw fee income from the segment, which includes the firm’s insurance-linked securities activities (ILS) and total-return reinsurer Harrington Re, drop to $5.5 million for Q3, but increase to $28.2 million for the nine-month period.

This is compared with fee income from strategic capital partners of more than $8 million in Q3 2016, and just over $15 million for the first nine months of last year, representing a decline of roughly 31% for the quarter, but an increase of more than 86% for the nine-month period, year-on-year.

The $9.8 million and $23.3 million offset to general and administrative expenses for the third-quarter and nine-month period in 2017, respectively, are significantly higher than the $4.7 million reported by the firm for both of the periods in 2016.

Looking at the company’s financial supplement, it appears this is likely a result of the AXIS reinsurance segment ceding more business to its Harrington Re vehicle, and its other ILS activities, and subsequently receiving more service fees and reimbursement expenses.

For the third-quarter, premiums ceded to Harrington Re declined from $101.6 million to $55.9 million, but increased for the first nine months of the year to $178.5 million, from $101.6 million in 2016.

Premiums ceded to other strategic capital partners (its ILS type activities) in the third-quarter increased to $52.5 million and to $282.1 million for the first nine months of 2017, compared with $20.5 million for Q3 2016 and $169.5 million for the nine-month period.

Overall, the firm’s reinsurance segment managed total premiums of $441.2 million in Q3, compared with $284.5 million a year earlier, and $2.2 billion of premiums for the first nine months of 2017, compared with $2.1 billion a year earlier.

Taking into account premiums ceded to all of its strategic capital partners, the reinsurance segment recorded net premiums written of $332.7 million in Q3, and $1.7 billion for the nine-month period, which is an increase for the quarter but a decline of roughly $90 million for the first nine-months, year-on-year.

Year-to-date, AXIS continues to cede more business to its ILS activities, and the increased fee income of more than $13 million, when compared with last year, shows how beneficial and effective third-party capital activities can be. And as the re/insurer cedes more risk to its strategic capital partners, it will likely see its fee income continue to rise.