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Xactanalysis Insights and PCS

AXIS’ cessions to third-party capital partners continue to rise in Q2


Cessions to third-party capital partners continued to balloon at Bermudian insurance and reinsurance specialist AXIS Capital Holdings Limited in the second-quarter, as the firm continued the trend of placing an increasing reliance on its “strategic capital partners.”

AXIS ceded a much larger amount of premiums to the capital partners during the second-quarter, while the fee income earned remained relatively level for the quarter, but benefits in terms of offsets to the expense ration rose more significantly.

AXIS Capital’s relationship with third-party capital providers is becoming an increasingly important piece of the overall operations, as the amount of premiums ceded to strategic capital partners has grown steadily.

In 2017 the figure jumped by almost 60%, as AXIS ceded $489 million of premiums to strategic capital partners during the year, up from $304 million in 2016.

The extent of AXIS’ work with third-party investors was made even clearer in the recent results of mutual fund investor Stone Ridge, who as we documented had roughly $657 million of investments in various segregated accounts of the AXIS Ventures Re collateralized reinsurance vehicle and another almost $26 million invested into AXIS’ Northshore catastrophe bonds.

It’s a clear demonstration of the evolving business model of major re/insurers, now looking to earn income for underwriting on behalf of other parties and leveraging the third-party capital to augment their own capacity as well.

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, largely in the form of private collateralized quota shares and ILS arrangements.

During the second-quarter of 2018, the volume of premiums ceded through to AXIS’ third-party investor-base increased significantly again, as the firm reported that it ceded almost $222 million of premiums to Harrington Re and other strategic capital partners during the period.

For the second quarter running that is a 60% increase in premiums ceded to third-party capital partners year-on-year.

The cessions to Harrington Re actually declined slightly again, as they did in Q1 of this year as well, but the cessions to the other third-party capital partners, which will include the likes of fund manager Stone Ridge, are where the growth continues to be seen.

AXIS ceded over $163.5 million of premiums to strategic capital partners during the second-quarter of 2018, up by a huge 115% on the prior year quarter.

It’s clear that AXIS is both capitalising on investor demand and the availability of efficient capital here, in significantly growing this part of its business where it can get paid for underwriting and managing third-party capital, but without bearing all of the risk.

For the first-half of 2018 AXIS’ cessions to these strategic third-party capital partners are up almost 97%, with over $452 million of premiums ceded this year, compared to $230 million in the prior year.

The evolution of the reinsurance business model continues apace and this part of it, sharing underwritten premiums in return for the fees and profit shares, while benefiting from an augmented capital pool to deploy at renewal time, is accelerating fast and increasing amounts of third-party capital now sit alongside reinsurers traditional balance-sheets.

It’s going to be interesting to see just how large these third-party backed balance-sheets can get and whether they can ever overtake the “owned” balance-sheet in terms of size and influence in the underwriting market.

In terms of revenues from this third-party reinsurance capital activity, AXIS’ fee income from strategic capital partners amounted to $11.4 million for Q2 2018, just slightly down from $11.6 million in the prior year.

Timing is important in how profit shares and commissions come through from this type of activity and with AXIS having grown its cessions to third-party capital partners more significantly this year, we’d expect to see these figures leaping further ahead in 2019.

The increasing cessions will translate into greater service fee income, profit share and commissions, given the greater effort required to source and underwrite the enlarging pool of reinsurance business for third-party investors.

These fees include income derived from service fees earned by AXIS and the reimbursement of certain expenses to the firm’s reinsurance segment, which acts as the underwriting and servicing manager for the business ceded to third-party capital investors.

For the first-half AXIS reports over $24.4 million of fees from strategic capital partners, up on H1 2017’s $22.7 million.

Impressively, the growth in business underwritten for third-parties is driving AXIS Reinsurance’s overall book to become much larger, with the firm reporting total managed premiums of over $2.4 billion for the first-half of 2018, compared to almost $1.97 billion of premiums for H1 2017.

That growth helps AXIS to become an even more relevant partner for its large ceding clients, giving it more influence at renewals, while also earning the fees of course.

But that’s not all, AXIS also reports additional income that is reported elsewhere in its financial accounts from the third-party capital activity, with “$1.65m and $6.519m included in other insurance related income for the three and six months ended June 30, 2018, respectively and $4.855m and $9.225m for the three and six months ended June 30, 2017. It also included $9.705m and $17.924m as an offset to general and administrative expenses for the three and six months ended June 30, 2018, respectively and $6.749m and $13.52m for the three and six months ended June 30, 2017.”

Those other income elements and offsets to the expense ratio will be incredibly useful for AXIS, in helping to better manage its own balance-sheet and reflect the broader impact of engaging with third-party capital this deeply, on an accounted basis.

So AXIS continues to grow this part of its business, which is making third-party capital an increasingly important driver of income and source of underwriting capacity for the firm.

The question remains whether the income derived from underwriting using someone else’s capital can really pay for the outlay of expertise in sourcing and underwriting the risk, compared to assuming the risk on its own balance-sheet and holding it to maturity itself.

Time will tell with this strategy and it is going to be vital for re/insurers like AXIS to remain right-sized, in terms of the balance between rented and owned capital or capacity. But the early signs are that for AXIS this partnership with and management of third-party capital is proving a profitable addition to its traditional underwriting businesses.

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