AXIS cedes more risk to third-party investors, earns more fees in Q3 2021

AXIS Capital, the Bermuda-based globally-active insurance and reinsurance company, ceded more premiums and risk to third-party investors backing its range of insurance-linked securities (ILS) structures, earning more fee income in the process from third-party reinsurance capital management business during the third-quarter of 2021.

It’s the second quarter in a row where AXIS Capital has reported expanding third-party reinsurance capital activities and earned more fees within its so-called Strategic Capital Partner initiatives.

This is despite the fact that, in Q3, AXIS Capital will have had more catastrophe losses to share with the investors in its range of third-party reinsurance capital structures, including its sidecars and insurance-linked securities (ILS) type arrangements.

In announcing its results last night, AXIS reported further improvements in its ex-cat combined ratio, as actions taken to lower volatility and catastrophe exposure continue to take effect.

Part of these actions has been reworking the way the company leverages third-party reinsurance capital, with the focus having shifted back to the reinsurance side of late.

The company reported pre-tax catastrophe and weather-related losses, after accounting for reinsurance recoveries and reinstatement premiums, of $250 million, or 20.7 points on the combined ratio, aligned with its earlier pre-announcement.

The company reported $1 million of operating income and $47 million of net income for the third-quarter, alongside a 24% increase in gross written premiums as AXIS continued to expand its underwriting portfolios.

The underwriting did fall to a loss, with a 107.4% combined ratio, due to the impact of the catastrophes, but that was still a 7.1 point improvement on the prior year.

The insurance segment saw an underwriting profit, with a 98.5% combined ratio, but reinsurance fell to a loss at 114.4%.

Commenting on the third quarter 2021 financial results, Albert Benchimol, President and CEO of AXIS Capital, stated, “Once again our industry was challenged by severe weather events and our focus continues to be on supporting our clients and the communities that have been impacted.

“In the face of these challenges, we continued to deliver, accelerating momentum in our progress highlighted by eight consecutive quarters of year-over-year improvement in our combined ratio ex-cat and weather. Notably, AXIS generated net operating income for the quarter, and our lower market share of the events demonstrates the progress that we’ve made in reducing our net exposure to catastrophes. Our results were underscored by strong top line growth, disciplined underwriting, and solid investment income.

“AXIS is well positioned in key specialty markets and we’re increasingly confident that favorable conditions will continue through 2022 and likely beyond, providing us with an attractive path to further profitable growth.”

It’s in quarters like this that the additional income earned from fees delivered by the third-party capital and ILS business can assist AXIS and without them the operating income would have been negative it seems.

AXIS had almost $1.65 billion of managed premiums in Q3 2021, up from $1.3 billion in the prior year period.

Almost $136.4 million of premiums were ceded to the so-called “other strategic capital partners” grouping, which is where third-party and insurance-linked securities (ILS) style investors are accounted for.

All of this premium was ceded from AXIS’ reinsurance business.

In the prior year quarter, AXIS only ceded $104 million of premiums to these investors, $87.8 million on the reinsurance side and $16.4 million on the primary insurance side.

Year-to-date premiums ceded to the ILS style third-party investors are still down, having declined through the first two quarters of the year, at almost $494 million after nine months of 2021, down on the prior years $585 million.

However, fee income earned bounced back strongly in Q3 2021 and added a welcome nearly $18.3 million to AXIS’ earnings, up from the previous year quarters $15.6 million.

For the first nine-months of 2021, AXIS has earned almost $46 million of fee income from its third-party reinsurance capital activities, just slightly behind the nine-month 2020 total of $47.6 million.

The increased premiums ceded to investors from AXIS’s reinsurance book will have driven more management fee income during this period and its possible any losses have not yet hit the flow of fees significantly at this time.

The Q3 2021 fee income included $6.8 million in other insurance related income, with $13.4 million for the nine-months.

It also included $11.5 million as an offset to general and administrative expenses for Q3 and $32.6 million for the nine-months.

These added revenue streams are meaningful and in a quarter where AXIS has taken losses from the European floods and hurricane Ida they help to improve its performance and return to shareholders.

AXIS is looking to grow its third-party capital business, as we were told recently, while the company recently announced a new Global Head for its renamed AXIS ILS unit, where the company’s insurance-linked securities related third-party capital activities will now sit.