Bermudian insurance and reinsurance specialist AXIS Capital Holdings Limited has continued the trend of placing an increasing reliance on its “strategic capital partners,” ceding a much larger amount of premiums to them in the first-quarter while at the same time earning increased fee income.
AXIS Capital has been increasingly utilising capital from third-party investors within its business, through insurance-linked securities (ILS) type arrangements and its total-return reinsurance vehicle Harrington Re.
The firms relationship with its third-party capital providers has deepened significantly, as the amount of premiums ceded to that capital has grown steadily and in 2017 the figure jumped by almost 60%, as AXIS ceded $489 million of premiums to strategic capital partners in 2017, up from $304 million in 2016.
AXIS works with third-party reinsurance capital through its total-return reinsurance joint-venture, Harrington Re, and its AXIS Re Ventures unit, where its insurance-linked securities (ILS) fund management type activities take place.
The amount of premiums ceded through to the firms overall third-party investor-base increased significantly again in Q1 2018, with AXIS reporting that it ceded almost $344 million of premiums to Harrington Re and other strategic capital partners during the period.
That is again a 60% increase on the prior year, when AXIS only ceded $214.5 million of premiums to its capital partners in the first-quarter.
Interestingly, AXIS actually ceded fewer premiums to Harrington Re in Q1 2018 though, as premiums ceded to Harrington Re dropped by 8% to $55.4 million for the quarter.
On the other side of its third-party capital business though, the more ILS style relationships AXIS has with third-party investors through its Ventures activities, the company reports an 87% increase in premiums ceded year-on-year, with almost $288.6 million of premiums ceded to “Other Strategic Capital Partners” in the period, up from $154 million in Q1 2017.
AXIS Capital also reported increased revenue from this third-party reinsurance capital linked business, with fee income from strategic capital partners amounting to $13 million for Q1 2018, up from $11 million in the prior year.
This fee income includes service fees earned by and the reimbursement of certain expenses to AXIS Capital’s reinsurance segment, which acts as the underwriting and servicing manager for the business ceded to third-party capital investors.
For 2017 AXIS reported total fee income of $36 million for its work with third-party capital partners. 2018 should likely see that eclipsed, as the company is managing increasing amounts of third-party assets and ceding more risk to it.
The increased cessions will translate into greater service fee income, given the greater effort required to source and underwrite the enlarging pool of reinsurance business for third-party investors.
AXIS Capital said it had access to $1.9 billion of third-party capital as of the end of 2017. That number may now have increased further, enabling the greatly increased cessions of reinsurance business to go ahead.
Of course, questions remain about strategies like this, of passing on risks you underwrite to capital partners and sharing in their profitability. Could this ceded business generate more profit for AXIS if retained on its own balance-sheet? Is the strategy cannibalising, rather than adding to, profits?
Only time will tell here, as the additional reinsurance balance-sheet provided by third-party capital grows and becomes an increasingly integral piece of the overall underwriting pot for companies like AXIS.
The way AXIS is growing this business suggests that third-party capital will play an increasingly vital role for the firm. The question is whether the company can make sufficient income from it to compensate for the outlay of expertise in sourcing and underwriting the risk, compared to holding it to maturity itself.
Our sister site Reinsurance News covered new efficiency initiatives at AXIS Capital this morning as well, read the article here.