AXIS cedes less risk to third-party capital partners, fees tumble

Bermuda-headquartered re/insurer AXIS Capital ceded significantly less in reinsurance premiums to third-party capital partners in the first-quarter of 2023, earning much lower fee income at the same time.

As the company has pulled back from catastrophe risks it has adjusted the way it works with so-called Strategic Capital Partners, placing a greater emphasis on a wider range of perils, while shuttering large quota share arrangements it used to have in place with major investors.

A quarter a go though, AXIS Capital ceded more in the way of reinsurance premiums to third-party capital investors, year-on-year, following a few quarters of contraction.

But in the first-quarter of 2023, AXIS’ re-adjustment has seemingly continued apace.

AXIS Capital has adjusted its reinsurance strategy, pulling-back from property reinsurance, while the part of its Strategic Capital Partner business where it cedes risk to third-party investors using insurance-linked securities (ILS) style arrangements has evolved to encompass an increasingly broad range of risks.

As part of the reduction in volatility of its business, AXIS saw its gross reinsurance premiums written drop over 26% in the first-quarter of 2023, with the exit from the catastrophe and property lines one of the key drivers.

Catastrophe and weather related losses to the reinsurance business fell to $13 million in Q1 2023, down from $27 million in the prior year, as the reduced volatility in the reinsurance book continues to become more evident.

AXIS Capital ceded only $110.3 million in premiums to its so-called “other strategic capital partners”, so third-party and insurance-linked securities (ILS) style investors, during Q1 of 2023.

That’s almost half the $208.6 million of premiums ceded to these third-party capital partners in the prior year.

This reduction in risk ceded to third-party capital will have been a driver in AXIS’ strategic capital partner fee income tumbling during the period.

Fee income was only $7.9 million for Q1 2023, down from $17.6 million a year earlier.

It’s clear that AXIS’ business adjustment continues to play into how it is sharing risk with third-party investors, driving the reduction in premiums ceded and fee income earned.

However, with the reduced catastrophe and weather volatility in the AXIS reinsurance book, the premiums that are ceded may be at a more profitable level, suggesting third-party capital partners might be earning better returns since AXIS’s trimming of cat exposure.

Albert Benchimol, President and CEO of AXIS Capital commented on the re/insurer’s Q1 results, “AXIS once again delivered strong performance as we continued to advance our strategy to achieve specialty leadership, demonstrating resilience despite dynamic market conditions that included turbulence in the financial markets and heightened weather and cat activity. In the first quarter, we produced very good results across our core metrics that included a combined ratio of 91%, operating income of $200 million, and record operating income per diluted common share of $2.33.

“As I prepare to complete my tenure as CEO of AXIS, following nearly 13 years with the Company, it is gratifying to see the continued progress in our performance following years of hard work to reposition the business to a more focused specialist underwriter, well positioned to consistently deliver profitable results. I have complete confidence that the best is yet to come for AXIS. In Vince Tizzio, we have the right leader to take the Company to the next level.”

Vince Tizzio, CEO Specialty Insurance and Reinsurance of AXIS Capital and incoming President and CEO, effective May 4, 2023, also said, “With a clear focus on delivering sustainable value creation to our shareholders, we continued to drive strong growth in our priority markets while capitalizing on favorable market conditions that included a general resurgence in pricing momentum across the majority of our lines. Our Specialty Insurance business delivered record first quarter production, generating $1.4 billion in gross written premiums, a combined ratio of 87% and underwriting profit of $103 million.

“Our Reinsurance business contributed a combined ratio of 91% and $36 million of underwriting profit as we further transitioned the business to a specialist reinsurer with a smaller and less volatile book of business.

“Looking to the future, I feel confident about the growth potential for the business and believe that AXIS is on a positive trajectory toward achieving its place as a specialty leader defined by the strength of our underwriting and the value that we provide to our customers and shareholders.”