Third-party capital fee income rises 51% at AXIS in Q1 2019

AXIS Capital has continued to expand its use of third-party capital within its business, ceding an increased amount of premiums to insurance-linked securities (ILS) investors and other strategic capital partners in Q1, earning significantly higher fees in the process.

The Bermudian specialist insurance and reinsurance firm has been steadily growing its use of quota share and privately transacted cessions to its so-called strategic capital partners in recent years, as it brings ILS and alternative capital more deeply within its business.

CEO Albert Benchimol had said his company was able to increase its use of third-party reinsurance capital support at the January 1st, 2019 renewals. The proof is in the figures reported last night.

In the first-quarter of 2019, the results of which AXIS Capital reported today, for the first time reports premiums ceded from its primary insurance business to the “other strategic capital partners” group, which is where the firm accounts for cessions and quota shares to specialist ILS investors.

This was thanks to the launch of the firms 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.

Impressively, during the first quarter of 2019, AXIS Capital ceded $390.9 million of gross premiums to its ILS related strategic capital partners, a huge 36% increase on the $288.6 million of cessions seen in Q1 2018.

This growth saw the other strategic capital partners, where the ILS related quota shares and other cessions sit, rising above AXIS’ cessions to other reinsurers in terms of importance to the firm this quarter, as only $306.6 million of premium was ceded to other reinsurers during the period.

That demonstrates the key position that AXIS is giving to ILS partners within its overall business model and capital structure, as it leverages their efficient cost-of-capital and appetite for managed insurance-linked returns to deliver fee income and efficiencies across its own capital base.

The re/insurer also doubled its cessions through to total-return reinsurance vehicle Harrington Re, delivering $108.7 million of premium to the strategy in Q1 2019, up from $55.4 million in the prior year quarter.

With total cessions to these capital partners still on the rise, it will be encouraging for the firm and its shareholders to see that fee income earned has risen as well.

AXIS Capital reports a massive 51% increase in strategic capital partner related fee income, which rose to almost $19.8 million for the first-quarter of 2019, up from just $13.1 million in the prior year.

It’s a strong start to the year for AXIS’ work to deliver ILS type arrangements to so-called strategic capital partners, which in the full-year 2018 only saw almost $600 million of premiums ceded.

With more than half that ceded in the first-quarter of 2019, it seems AXIS is well on the way to increasing the importance of its ILS investor relationships once again in 2019.

In addition, AXIS reported $48.5 million of strategic capital partner fee income for the full-year 2018, which it is now well on the way towards beating again thanks to this strong start to 2019.

As ever, the question still hangs whether the income earned from underwriting this growing amount of risk and ceding it onto ILS and other third-party capital partners can ever compensate the company and its shareholders as much as underwriting for its own balance-sheet had in the past.

But as certain risks cannot deliver the returns of the past anymore, this strategy is only likely to become increasingly embedded as firms like AXIS work out exactly which risks to underwrite and hold, versus which risks to write and pass on for a fee.

AXIS continues to evolve its insurance and reinsurance business model into one where efficient third-party capital stands as a growing accompaniment to their own balance-sheet capacity, sharing underwritten premiums in return for growing fee income and profit shares.

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