AXIS’ third-party capital income drops, as cessions to investors decline

Bermudian specialist insurance and reinsurance firm AXIS Capital reported a drop in fee income earned from the use of third-party and insurance-linked securities (ILS) capital within its business, as cessions to investors declined considerably in the first-quarter of 2020.

This was to be expected at the end of this quarter, as we reported in February, as 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.

A significant chunk of the disappeared ILS capital backing quota shares and private sidecars at AXIS appears to have been from its relationship with mutual fund investor Stone Ridge asset management.

At one stage in 2018, AXIS had some $657 million of investments in various segregated accounts of the AXIS Ventures Re collateralized reinsurance vehicle.

As Stone Ridge has decreased its allocations to sidecars and private quota shares lately, this figure has decreased significantly to $367.2 million as of the end of January this year.

So that withdrawal, along with other investor pull-back on ILS that has been seen, plus potentially some impacts from continued trapping of collateral, has all resulted in a decline in AXIS’ assets from ILS style investors, reducing fee income and but also the amount of premiums the company can cede to third-party capital as well.

AXIS Capital’s so-called strategic capital partners remain 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.

With reduced third-party capital available, it’s perhaps no surprise that front-end underwriting activity shrank for AXIS Capital this quarter, reflecting just how important a lever the ILS investors have been for the company.

In reporting its Q1 2020 results, as reported by our sister site Reinsurance News, AXIS Capital said its gross premiums underwritten shrank by 6% across the business, a decline of 14% in its reinsurance division and 11% in insurance.

It’s the first time AXIS has reduced its underwriting volumes this significantly for a while, again perhaps reflecting the importance of access to third-party capital for the company in being able to maintain its underwriting of catastrophe exposed property risks.

In total, 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, with $298 million ceded in Q1 2020 compared to $390.9 million in Q1 2019.

The company ceded slightly more premiums to its third-party capitalised total-return joint venture reinsurer Harrington Re, as well as to other reinsurers in the period. But it is the reduction in cessions to ILS style third-party capital partners that is most significant this quarter.

The result of this was reported fee income from strategic capital partners dropping some 21% to $15.68 million, down from $19.78 million in the prior year period.

It’s likely that the reliance on Stone Ridge as a large single investor backing its quota shares will remain reduced now, as Stone Ridge increases its focus on private quota share fund management and its own reinsurance vehicle under the Longtail Re brand.

For AXIS, this probably means the company will focus more on its own sidecar Aturas Re, as well as securing new investors for the AXIS Ventures business.

Interestingly, AXIS’ probable maximum loss (PML) for southeast U.S. hurricane risks and California earthquake risks at both the 100 and 250 year return periods have risen through Q1, perhaps a reflection of the removal of some third-party capital that would have helped to absorb such loss events for the firm, given ILS investors focus on those peril regions.