For Bermudian specialist insurance and reinsurance firm AXIS Capital the use of third-party and insurance-linked securities (ILS) capital within its business has increased again dramatically, with 27% more in premiums ceded to third-party capital partners in 2019 and a huge 66% more in fees earned.
AXIS Capital’s so-called strategic capital partners have become an important source of capital for the firm, allowing the company to share in its profits, reduce its probable maximum loss exposure in peak zones, source efficient retrocession and reinsurance, all while earning attractive fees for its underwriting and management expertise.
The firms third-party reinsurance capital management business has been building up steadily in recent years and in 2019 expanded to include cessions of insurance business, as well as reinsurance, while the level of investor assets under management has steadily risen through increased use of insurance-linked securities (ILS) related cessions.
AXIS has been steadily increasing its use of quota shares and privately transacted reinsurance and retrocessions to the growing range of so-called strategic capital partners, with the result being an increasing volume of ILS and alternative capital sitting within its business structure.
In the fourth-quarter of 2019 AXIS ceded 8% more risk year-on-year from across its primary insurance and reinsurance business to the “other strategic capital partners” group, where the company accounts for cessions and quota shares to specialist ILS investors.
In Q4 2018 that only featured reinsurance cessions amounting to $55.5 million of premium. But in Q4 2019 the cessions of insurance premiums through the quota shares and Alturas sidecar vehicle meant AXIS changed the mix and ceded $13.65 million of insurance premium and $46.34 million of reinsurance premium to its strategic capital partners in the period.
For the full-year 2019, AXIS’ total insurance and reinsurance premiums ceded to these ILS style strategic capital partner relationships reached a huge $755.8 million of premium, a large pool of risk and up 27% year-on-year compared to the $595 million of solely reinsurance premium ceded to investors in FY 2018.
Insurance premiums made up almost $55 million of the premiums ceded to investors in 2019, with reinsurance the other over $701 million.
At the January reinsurance renewals, AXIS renewed its collateralised reinsurance sidecar vehicle Alturas Re Ltd., with a $64.14 million of limit catastrophe reinsurance tranche and a $47.25 million of limit property insurance tranche.
Premiums ceded to AXIS’ other third-party capital backed and total return reinsurance vehicle Harrington Re are also up for the full-year 2019, reaching $247 million, compared to $183 million for 2018.
Interestingly, premiums ceded to other reinsurance firms, which are solely from AXIS’ insurance business, are actually down year-on-year at $1.406 billion for 2019, compared to $1.473 billion in 2018.
This reflects the increasing use of strategic capital partners and ILS type structures at AXIS, which is helping the firm to grow overall while being less reliant on its traditional reinsurer relationships, so third-party capital has become an important additive source of capital and income, given the fact it earns fees through these relationships as well.
On the subject of fees, 2019 has been a much better year in terms of catastrophe losses and it is reflected in the fee income AXIS has earned out of its third-party capital related cessions of risk.
AXIS has reported $23.117 million of fee income earned from its strategic capital partner activities in Q4 2019, up significantly from the just $5.7 million earned in Q4 2018.
The delta there will be the major wildfire losses of Q4 2018 and the hit to its earnings from ongoing loss creep that quarter from typhoon Jebi as well.
In fact, the fourth-quarter of 2019 fee level is so much higher that it perhaps suggests that AXIS hasn’t shared too much in the way of losses through its quota shares and private ILS arrangements during that period, despite the impact of typhoon Hagibis and events including bushfires in Australia (although we can’t be certain here, as losses ceded to strategic capital partners isn’t disclosed).
For the full-year 2019 AXIS’s strategic capital partner fee income came out at a significant $80.25 million, up a massive 66% on the prior years roughly $48.5 million.
Over $80 million is a significant addition to the AXIS bottom-line, helping its results for the year to reach a reported $282 million of net income, so the strategic capital partner fee income is 28% of that.
That’s a really significant contributor to profit for the year for AXIS, underlining the importance of its growing use of and reliance on third-party sources of reinsurance capital and investors.
Of course, profit from fee income is not the only factor here either.
The strategic capital partners are efficient reinsurance and retrocession, a source of companion underwriting capacity to help AXIS grow (making its own balance-sheet go further), a driver of efficiency within the business, a moderator of peak catastrophe zone probable maximum losses (PML’s) for the company and also a source of profits.
On PML’s specifically, analysts have noted that AXIS’s PML’s are down for all peak zones except Japanese wind.
In particular, AXIS Capital’s PML’s for southeast U.S. hurricane events fell by almost 4% of equity, from 10.4% at the start of 2019 to just 6.5% of equity now.
PML’s have also fallen for northeast, Gulf of Mexico and mid-Atlantic hurricane events, as well as for California earthquakes, European windstorms and Japanese earthquakes.
Third-party capital and the use of ILS cessions to investors will be helping to reduce these PML’s, enabling AXIS to mould its portfolio to deliver better results with lower volatility, all while earning fees.
It’s no surprise third-party reinsurance capital use is rising, at AXIS and across the industry. Get it right and the benefits can be huge, just so long as you’re not cannibalising your profits at the same time. AXIS appears to be getting that mix right, for now.