AXIS’ third-party capital fee income rises, but ceded premium falls

AXIS Capital, the Bermuda-based globally-active insurance and reinsurance company, has reported an increase to its fee income from third-party reinsurance capital management business during the second-quarter and for the first-half of this year.

AXIS Capital reported its results last night and revealed record operating earnings and strong growth in its book, as the company took advantage of improved market conditions and also reported an improved combined ratio of just 90.6% for the quarter.

Lower catastrophe losses helped, as AXIS reported only $29 million for Q2, $11 million in insurance and $17 million in reinsurance, down on the prior years $36 million.

In addition the company revealed no increase to its net loss estimate for COVID-19.

Net income was $228 million for the quarter, up significantly from the $112 million reported in the prior year.

Gross premiums written increased by 13%, or $225 million, to $1.9 billion, with reinsurance relatively flat and insurance growing more strongly this year.

Albert Benchimol, President and CEO of AXIS Capital, commented on the results, “We are pleased to report record operating earnings per share for the quarter and first half of the year, along with excellent production and robust underwriting and investment performance.

“Our core underwriting results were strong, as evidenced by this quarter’s current year ex-cat combined ratio of 88.7%. Our continued progress in underwriting performance provides tangible proof that our efforts to reposition our portfolio are delivering meaningful improvements.

“Our insurance business is well positioned in the markets experiencing the strongest conditions, leading to 22% growth in gross premiums written to achieve a record level of premium production. Our reinsurance business demonstrated agility and discipline, growing in attractive classes, but also holding the line where terms were not deemed sufficiently attractive, and continuing to manage down catastrophe volatility.

“During the quarter, we recorded average rate increases of 14% across our insurance book, which is higher than the previous quarter and on par with the prior year period – and we remain confident that pricing will remain at or above loss cost trends well into 2022 and likely beyond, providing a tailwind to ongoing improvements in underwriting profitability.”

As ever, we’re most interested in the firms third-party capital management activities, where AXIS Capital shares insurance and reinsurance premiums with a range of investors in various vehicles, including its collateralized reinsurance sidecar.

This quarter, it seems AXIS won’t have had anywhere near as much in the way of catastrophe losses to share with the investors in its range of third-party reinsurance capital structures, including its sidecars and insurance-linked securities (ILS) type arrangements.

As a result, fee income earned under AXIS’ Strategic Capital Partners initiatives improved for the quarter.

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 manage a significant amount of capital for third-party investors, who support its underwriting in and earn returns from its books of largely catastrophe exposed business, both insurance and reinsurance.

In the second-quarter of 2021, overall managed premiums rose to more than $1.94 billion, up from almost $1.72 billion a year earlier.

This includes the ILS like premiums, AXIS’s sidecar vehicle, its third-party capitalised and total-return joint-venture reinsurer Harrington Re, as well as cessions to other reinsurers.

During Q2, AXIS ceded fewer premiums to its “other strategic capital partners” group, so third-party and insurance-linked securities (ILS) style investors, continuing a decline seen in previous quarters.

During the period, AXIS ceded $113.8 million of reinsurance premiums to these investors, down from almost $166 million a year earlier.

Again, in Q2 2021, AXIS didn’t cede any insurance premiums to these types of investors, where as in the prior year quarter it ceded almost $17.3 million of insurance premiums to them.

Despite the reduction in cessions to third-party investors through ILS style vehicles, AXIS has reported improved fee income from its Strategic Capital Partners business.

Fee income reached almost $15.5 million for the quarter, up from $13.6 million in the prior year.

This fee income earned was made up of $5 million in other insurance related income and $10.5 million as an offset to general and administrative expenses during the period.

For the first-half, third-party capital fee income is also up, at almost $27.7 million, compared to $26.6 million in the previous year.

It’s positive that fee income is up while cessions are down, as it reflects the improved quality in AXIS’ overall underwriting results of the last year or two.

Part of the reason for the decline in cessions to third-party investors may be that AXIS did not sponsor an insurance-related sidecar through its Alturas Re structure around the January renewals this year.

For the first time, the only Alturas Re sidecar transaction we heard of for the current year was a reinsurance focused deal, which may explain why the fee income earned also declined on the insurance side of AXIS’ third-party capital business.

As a reminder, AXIS is looking to grow its third-party capital business, as we were told recently, while the company recently announced a new Global Head for its renamed AXIS ILS unit, where the company’s insurance-linked securities related third-party capital activities will now sit.