AXIS falls to loss, third-party capital fee income slides further

AXIS Capital, the Bermuda-based globally-active insurance and reinsurance company, has reported a net loss for the fourth-quarter and full-year 2020, as improved underlying accident year combined ratios couldn’t offset significant catastrophe and COVID-19 losses.

AXIS Capital reported a net loss of $5 million and operating loss of $16 million for Q4 2020 and a net loss of $151 million and operating loss of $174 million for the full-year.

Driving these figures were net of reinsurance catastrophe losses of $198 million, including $125 million from the COVID-19 pandemic in Q4, and $774 million, including $360 million from the pandemic for the full-year 2020.

The company is keen to demonstrate its underlying is improving still though, reporting a 4.5 point improvement in its current accident year combined ratio, excluding these losses, and a 4.6 point improvement for the full-year, again excluding the catastrophe and COVID loss impacts.

It seems these catastrophe losses may have been the cause of another slide in AXIS Capital’s fee income earned from its third-party reinsurance capital management business, as its so-called Strategic Capital Partners likely took their share of loss impacts for the quarter and full-year.

AXIS has again reported a decline in the level of fee income earned, through its use of third-party and insurance-linked securities (ILS) capital, for the fourth-quarter of 2020, some of which is likely down to catastrophe losses experienced and shared with its investors during the period.

In its results statement, AXIS recognises this saying that its expense ratio increased by 1.8 points in Q4 2020, which was largely because of a reduction in net premiums earned and fees related to arrangements with its strategic capital partners.

AXIS Capital has been adjusting the way it manages third-party capital in recent years, shifting business away from its own vehicle to use a third-party transformer. But it continues to have somewhere around $1 billion of third-party investor capital under management in ILS funds, quota shares, reinsurance sidecars and other private ILS vehicles.

The amount of risk premiums ceded to these so-called strategic capital partners has reduced through 2020, with declines seen in  Q1, Q2 and Q3 of 2020.

Partly this is following a reduction in assets from some investor relationships, as well as the adjustment in how AXIS is managing third-party funds.

In the fourth-quarter of 2020, AXIS’ managed premiums  actually rose for the first period in a while, with almost $1.35 billion managed, up on $1.26 billion in Q4 of 2019.

Cessions to the so-called “other strategic capital partners” group, so third-party and insurance-linked securities (ILS) style investors, rose for the first time in a while as well.

Almost $18.9 million of insurance premiums and $49.5 million of reinsurance premiums were ceded to these investors during the period, for a total of $68.4 million, up on the almost $60 million ceded a year earlier.

The Alturas Re Ltd. collateralised reinsurance sidecar structure sits within these premiums we believe, a structure AXIS has been making increasing use of in recent years.

For the full-year 2020, cessions to these investor capital partners came out at $653.7 million, down on the nearly $755.8 million AXIS ceded to them in 2019.

In fact, the only vehicle AXIS ceded more premiums to in 2020 was its total-return and third-party capitalised Harrington Re in 2020.

As a result, it’s no surprise fee income earned from strategic capital partner activities is down, but we also believe the catastrophe and COVID loss burden plays into this as well.

For Q4, strategic capital partner fee income was $12.9 million, the majority or $10.2 million from reinsurance related business, down significantly on $23 million earned in Q4 2019.

For the full-year 2020, fee income from these third-party capital activities came out as almost $60.5 million, down again from $80.3 million in 2019.

Breaking down the fee income earned from strategic capital partners shows impacts felt in Q4, likely from loss activity.

AXIS reported that its other insurance related income was -$4 million for Q4 2020, down from $3 million in the prior year and -$2 million for the full-year 2020, down from $12 million in 2019. AXIS also booked $62 million as an offset to general and administrative expenses for 2020, down from $68 million in 2019.

So, in part, it continues to appear that the reduction in cessions indicates less capital managed, at least in certain types of private ILS arrangements.

Remember, AXIS had a huge amount of third-party capital from strategies under Stone Ridge’s management back in 2018 and that has reduced steadily since, we believe.

But the catastrophe loss activity will also have dented the fee income earned, while there is also a chance some COVID-19 pandemic related losses may have been shared with third-party strategic capital partner investors as well.

Read more on AXIS’ quarterly and full-year 2020 results over at our sister site Reinsurance News.