Axis Capital’s third-party capital management business continues to build and the insurance and reinsurance firm has reported yet another quarter of growth, in terms of fee income earned from its strategic capital partners, with the amount rising by 68% in the most recent quarter.
Continued expansion of the Bermudian specialist insurance and reinsurance firm’s use of quota share and privately transacted reinsurance and retro-cessions, to its so-called strategic capital partners, has seen AXIS bring ILS and alternative capital more deeply within its business.
That’s led to an ability to sustain softer catastrophe reinsurance pricing, while earning fee income as well, with the fee income becoming an increasingly welcome boost to quarterly earnings.
CEO Albert Benchimol said earlier this year that his company AXIS increased its use of third-party reinsurance capital support at the January 1st, 2019 renewals.
As a result, premiums ceded from its primary insurance and reinsurance business to the “other strategic capital partners” group, where AXIS accounts for cessions and quota shares to specialist ILS investors, rose in the first quarter quite significantly.
Part of the Q1 rise in premiums ceded was down to the launch of AXIS’ Alturas Re collateralized reinsurance sidecar, one tranche of which featured a cession of primary insurance property risk to third-party investors, while another tranche featured a retroceding of reinsurance risks to investors.
In the second-quarter, premiums ceded from the insurance business were up again, having not been a feature in the prior year, but premiums ceded from the AXIS reinsurance book to third-party investors declined a little, possibly due to the better pricing seen available in the market making it a little more attractive to retain more of the risk.
But overall, for the first-half of 2019, AXIS ceded $558.6 million of premiums, from its insurance and reinsurance books, to third-party strategic capital partner investors. That’s a significant uplift from the $452 million ceded, solely from the reinsurance book, in H1 2018.
Cessions to total return reinsurance vehicle Harrington Re also rose for the first-half, although dropped slightly year on year in Q2, perhaps also due to the more attractive nature of the underwriting environment for AXIS.
The growing cessions deliver increasing fee income as well.
AXIS Capital reported that total strategic capital partner fee income reached almost $19.2 million for the second-quarter of 2019, up from just under $11.4 million in the prior year.
Of this, cessions of insurance drove $1.164 million of fee income, while cessions of reinsurance the bulk at $17.5 million.
For the first-half of the year, total fees earned from strategic capital partners reached almost $39 million, well up on the $24.4 million from the prior year period.
AXIS only reported $48.5 million of strategic capital partner fee income for the full-year 2018, so is clearly going to eclipse that figure in 2019.
The question still persists, as to whether ceding risk and earning fees can every be as profitable as retaining it on balance-sheet.
But as reinsurers become more adept at this, they will identify the right mix and level of premium and risk to cede outwards, and what is most efficient to retain, with this mixed balance-sheet approach rapidly becoming the norm, in particular as reinsurers navigate the market cycle.