AXIS Capital, the Bermuda-based globally-active insurance and reinsurance company, has reported a decline in the level of fee income earned through the use of third-party and insurance-linked securities (ILS) capital for the third-quarter, some of which is likely down to catastrophe losses experienced and shared with its investors.
At the same time, the level of risk premiums ceded to these so-called strategic capital partners has declined again, following on from declines seen in both Q1 and Q2 of 2020.
It continues to seem likely that this is partly due to AXIS having fewer third-party reinsurance capital assets under management this year.
We explained before that AXIS Capital’s assets under management from ILS style investors shrank in late 2019, as activities within the insurance-linked securities (ILS) fund management related and private ILS partnership platform AXIS Ventures Reinsurance Limited shrank.
Given the reduced level of capital available in private ILS arrangements and quota shares, AXIS’ fee income earned has declined year-on-year.
However, in the third-quarter AXIS suffered a more significant catastrophe loss burden of $240 million net of reinsurance, from events including Hurricanes Laura and Sally, the Midwest U.S. derecho storm event, wildfires on the West Coast U.S., the Beirut port explosion and other weather-related events, some of which will have been shared with its strategic capital partners and thus fee income reduced further.
AXIS has reported a drop in managed premiums for the quarter, to $1.3 billion, down $100 million on the prior year period.
Cessions to so-called “other strategic capital partners”, so generally third-party and insurance-linked securities (ILS) style investors, fell significantly in the reinsurance segment, with AXIS ceding $87.8 million of reinsurance premiums in Q3 2020, compared to $125 million in the prior year.
Insurance premiums ceded to these investors did rise slightly, perhaps thanks to AXIS’ Alturas Re Ltd. collateralised reinsurance sidecar structure which has been active in 2020 so far.
Alturas Re issued a tranche of reinsurance-linked notes at the end of last year to investors and a tranche of insurance-linked notes in January, then more recently issued preferred shares that appear to represent another reinsurance cession to investors at the mid-year renewals.
AXIS has increased the use of its Alturas Re sidecar structure it seems, acting as a partial replacement for some of the activity that had been undertaken in private quota shares with ILS investors.
But, even with a slight increase in insurance cessions, AXIS Capital’s overall cessions to third-party and ILS style investors fell to $104 million for Q3 2020, down from $137 million in the prior year.
For the first nine-months 2020, cessions to these investor capital partners came out at $585 million, down on the nearly $696 million AXIS ceded to them in the first three-quarters of 2019.
Total fee income earned from AXIS’ strategic capital partners activities, which as well as its ILS management activities also includes income generated from its third-party capitalised, total-return joint venture reinsurer Harrington Re, as well as via cessions to other reinsurance companies in the period, dropped to $15.574 million in Q3 2020, down from $18.194 million in Q3 2019.
For the nine-months of 2020 the total strategic capital partners fee income dropped to just under $47.6 million, from just over $57 million for the same period of 2019.
Breaking down the fee income earned from strategic capital partners, AXIS reported other insurance related income now sits at just $2 million for the first nine-months of 2020, down from $8.6 million in the prior year. As well as $45.6 million booked as an offset to general and administrative expenses, down from $48.5 million in 2019.
Of course, AXIS’ third-party capital management business has suffered in recent years, like every ILS fund, from catastrophes, trapped capital and also evolving investor appetite and focus.
With the company steadily improving the results of its broader book, leveraging third-party capital to support its catastrophe exposure is likely to become an increasing focus over time, both within the reinsurance and property insurance arms of its business.
It will be interesting to see whether AXIS lifts its cessions to third-party investors at the end of the year, as it will no doubt write more catastrophe exposed business in the hardening January reinsurance renewal environment.