Bermuda headquartered insurance and reinsurance group AXIS Capital Holdings expects to expand the capabilities of its third-party reinsurance capital management unit, AXIS Ventures Re, in 2015 as it aims to create an increasing role for investors in its business.
The AXIS Ventures Re unit (or AXIS Re Ventures depending on whether you follow the naming used on the firm’s website or not) is part of the re/insurers’ strategic expansion initiatives.
The unit was launched at the start of 2014, with a $50m capital injection from New York based mutual ILS fund manager Stone Ridge Asset Management providing most (or perhaps all) of the initial capitalisation.
At the end of the first-half of 2014 AXIS reported that non-controlling interests, which are the third-party investors share in its AXIS Ventures Re vehicles, sat at $52.795m up 5% from the initial $50m. That number grew again by just under 17% to reach $61.635m at the end of Q3 2014.
In AXIS’ latest results the firm reported non-controlling interests of $58.819m, a reduction of $2.816m, which reflects losses attributable to the third-party investors in the fourth-quarter. Over the full course of 2014, the losses borne by third-party investors in AXIS Ventures vehicles amounted to $6.181m.
As we wrote back in November, one of the transactions that AXIS ceded to third-party capital through AXIS Ventures Reinsurance was a crop derivative or agricultural contract which suffered a loss of around $6m. With multiple cells in the AXIS Ventures Reinsurance vehicle this loss may not have hit all of the investors, we cannot be sure.
Interestingly, looking at Stone Ridge’s accounts and the ILS mutual fund managers’ holdings of AXIS Ventures vehicles, it seems some of the loss may have hit the manager.
At 30th April 2014, Stone Ridge reported a $50m investment in a cell named AXIS Ventures Re Cell 0001 which had a value of $51.825m at 30th April, up from the $50m when it allocated the capital at the beginning of last year.
In Stone Ridge’s 31st October management report however, the investment in AXIS Ventures Re Cell 0001 is listed as costing less at $40m, with a current value at the time of the report of $44.839m. However in this report Stone Ridge also declares an investment in AXIS Ventures Re Cell 0002, costing $25m at the end of August, but having a value at time of the report of just $20.976m.
We’re unsure what happened to the $10m of Cell 0001, or whether the change in cost is a typo in the reports perhaps, but the Cell 0002 change in value would signify a loss to that contract, so it’s possible that this is due to the agricultural deal, or crop derivative.
Also of note there is the fact that Stone Ridge has clearly put at least $65m into AXIS Re Ventures during the course of 2014, suggesting that the third-party investment management units’ capitalisation is growing.
Note that with AXIS reporting non-controlling interests of $58.819m at 31st December, if you add on the $6.181m loss it would give you $65m. So perhaps that is all Stone Ridge’s capital and the mutual ILS fund manager has borne all of that loss and it will have been booked in the fourth quarter.
So, despite this small loss due to the crop contract, AXIS Ventures is entering its second year having taken on more capital during 2014 and with a desire to expand according to AXIS management.
During the re/insurers fourth-quarter earnings call yesterday, CFO of AXIS Capital Joseph Henry commented; “We expect that our third-party capital initiative, AXIS Ventures, will expand on its capabilities in its second year of operations.”
Henry gave a little colour on third-party capital activities at AXIS in 2014. During the course of the year AXIS Ventures completed 8 transactions, he said, and while the results are not material to 2014, Henry said this start in 2014 sets AXIS Ventures up very well for 2015.
Henry explained that income earned from the AXIS Ventures segment amounted to around $3m for 2014, which bearing in mind the fact that AXIS itself will likely have shared in the crop contract losses during the year, given reinsurers tendency to maintain a share in third-party capital vehicles, is not a bad start.
CEO Albert Benchimol reiterated his expectation that after merging with PartnerRe he expects the combined firm to be able to increase its use of third-party capital to leverage the larger production capabilities of a bigger firm.
Benchimol said that in catastrophe risks AXIS views this as an opportunity to not just produce premiums for itself but also for its investors in Ventures. “Increasingly we view our production of catastrophe premium both as an opportunity to create a good book for ourselves and also to generate attractive risk for our third-party capital partners,” he explained.
In fact, Benchimol suggested that the firm could continue to grow its catastrophe premiums even if they are not growing that on a net basis, which would suggest growing further in catastrophe business solely for the third-party capital arm.
Benchimol also explained that AXIS is ceding some risks to third-party investors outside of its Ventures unit, through transformers and other rated parties, which he said still gives the firm the same benefits as in managing third-party capital directly.
So AXIS Capital continues to develop its use of third-party capital, its relationships with investors and its model which is slightly different to some others. It’s going to be fascinating to watch how the firm comes together with PartnerRe, how the combined entity leverages third-party reinsurance capital and how Lorenz Re and Ventures Re continue to operate.
Of course, it will also be fascinating to watch the re/insurers using third-party capital increasingly and see whether that strategy is adding profits, or perhaps just cannibalising returns it used to make on its own balance-sheet.