Bermudian specialist insurance and reinsurance firm AXIS Capital has reported another year-on-year decline in the level of fee income earned through the use of third-party and insurance-linked securities (ILS) capital within its business for the second-quarter of 2020.
In Q1 2020 AXIS Capital ceded 31% fewer premiums to its “other strategic capital partners” group, where the company accounts for cessions and quota shares to specialist ILS investors.
At the same time its reported fee income from strategic capital partners declined by some 21% in Q1 to $15.68 million, down from $19.78 million in the prior year period.
The decline in fees has continued in the second-quarter of the year, which we believe reflects fewer third-party assets under management at this time.
We’ve previously explained 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.
With reduced capital available in private ILS arrangements and quota shares, AXIS’ fee income earned has declined year-on-year, although the latest quarter does show evidence of a potential turnaround, as the amount of premiums ceded to third-party investors through ILS style structures has increased in the second-quarter of the year.
AXIS’ total managed premiums rose thanks to higher cessions to its so-called “other strategic capital partners”, so generally third-party and insurance-linked securities (ILS) style investors in Q2 2020.
The company ended the quarter with over $1.7 billion of managed premiums, up from $1.65 billion a year earlier.
Premiums ceded to the other strategic capital partner group rose to just over $183 million in Q2 2020, up from $167.7 million in the prior year period.
That’s helped the figure catch-up a bit for the first-half, now reaching just over $481 million, although still lagging H1 2019’s $558.6 million due to the much lower cessions made in Q1 of this year.
Both insurance and reinsurance premiums ceded to investors rose in the period for AXIS, likely driven to a degree by the firms 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 the 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.
The Alturas Re sidecar structure does now appear to be taking up some of the activity that had been undertaken in private quota shares with ILS investors, likely providing AXIS with a way to syndicate these offerings more broadly to an expanded investor-base.
Total fee income earned from AXIS’ strategic capital partners activities, which as well as the ILS activities also includes income generated through its third-party capitalised, total-return joint venture reinsurer Harrington Re, as well as via cessions to other reinsurance companies in the period, declined to $16.313 million in Q2 2020, down from $19.155 million in Q2 2019.
For the first-half of 2020 the total strategic capital partners fee income dropped to just under $32 million, from just under $39 million for H1 of 2019.
It is the fee income earned that has declined, categorised as “other insurance related income” which AXIS Capital reports as $0.8 million and $1.6 million for Q2 and H1 of 2020, down from $3.3 million and $8 million for H1 2020 and H1 2019, both respectively.
The rest of the strategic capital partner fee income is booked as an offset to general and administrative expenses and this was down by just $500k for each period, so continues to be how AXIS books most of this revenue from its third-party reinsurance capital related businesses.
Over time we expect these figures to catch back up to prior years, as AXIS Capital places increased focus on its own sidecar vehicle Alturas Re, as well as on securing new third-party investors for the AXIS Ventures ILS style business.