AXIS third-party capital income rises in 2021, as net outpaces gross

AXIS Capital, the Bermuda-based globally-active insurance and reinsurance company, grew its managed premiums year-on-year in 2021, resulting in a corresponding increase in fee income from its activities with so-called Strategic Capital Partners.

In reporting its fourth-quarter and full-year results yesterday, AXIS Capital revealed that it retained more risk net, which is likely a function of the improving and hardening insurance and reinsurance market conditions.

In the reinsurance segment, AXIS only grew its gross premiums written by 1.5% during Q4, but its net premiums increased by 15%, demonstrating an increasing appetite for holding onto more of the exposures it has been underwriting.

For the full-year, the growth in gross premiums was just half a percent, but the net premium growth was 2.7%.

AXIS has spent considerable time reshaping its portfolio and culling business it did not want to renew. The upshot of this is that the company has not been growing significantly on the gross side, but has been able to gradually retain more premium as it improves the performance of the books it underwrites.

For the full-year AXIS’ reinsurance book turned a technical profit, with the combined ratio coming out at 99%. For Q4 2021 the combined ratio was 90.8%, resulting in a strong quarter for the company.

Across both insurance and reinsurance AXIS delivered an impressive 3.5% improvement in the accident year combined ratio to 88.7%, excluding catastrophe and weather losses, which helped to drive an operating return on equity of 9.1%. For Q4 the operating return on equity was an impressive 15.1%.

Albert Benchimol, President and CEO of AXIS Capital, commented on the results, “This was a strong fourth quarter highlighted by an annualized operating ROE of 15%, a good finish to a year of meaningful progress. Our results provide further evidence that our work in recent years to reposition our portfolio is delivering its intended outcome, and we’re committed to sustaining this momentum and producing consistent profitable growth.

“In addition to driving significant improvement to our combined ratio, we continued to optimize balance and volatility in our portfolio as we drive PMLs lower across the entire curve. Further, we continued to capitalize on favorable market conditions to build upon our well-established positions in some of the best performing specialty insurance markets.

“Within our Insurance segment, we delivered both record new business growth and total premium, as we produced the largest and most diversified insurance portfolio in the Company’s history. Our insurance business produced a combined ratio of 91.6% for the full year, and we’re focused on delivering performance in-line with the top ranks of the specialty insurance sector.

“Within our Reinsurance segment, which reported a full year combined ratio of 99%, we took substantial portfolio actions during the year and into the 1/1 renewals to improve the quality and reduce the volatility of the book, and we will continue to do so in 2022.

“I’m proud of the commitment and agility demonstrated by our team, as we continued to navigate through a dynamic environment while producing the high level of service that our customers have come to expect from AXIS. We’re excited for the future and focused on building on our progress and further increasing the value that we deliver to all of our stakeholders.”

The overall picture is one of a company building portfolios in which it has far greater confidence and the results are beginning to evidence this, with net premiums rising far stronger than growth AXIS is also seeking to grow profitably into the hardening markets, rather than expanding the gross book like so many other re/insurers have been this year.

Moving onto the managed premiums and AXIS’ so-called Strategic Capital partners, where the company partners with third-party capital investors, other reinsurers and also its third-party capitalised total-return style reinsurer Harrington Re.

Reworking the way the company leverages third-party reinsurance capital has been a focus at AXIS this year, with far more emphasis on the reinsurance side of the book in the results.

The additional income earned through sharing risk with investors and other third-parties has become a boost for AXIS’s results each quarter and the figure reported rose significantly for the fourth-quarter of the year.

Total managed premiums rose to over $1.56 billion for Q4 2021, up from $1.35 billion in the prior year.

Premiums ceded to the so-called “other strategic capital partners” grouping, which is where third-party and insurance-linked securities (ILS) style investors are accounted for, fell in the quarter, but again were all from the reinsurance side of the AXIS business.

This reflects the recent pattern of more risk being ceded from the reinsurance book to ILS style investors, but also for the annual pattern of those cessions to change somewhat, coming more into line with key renewal quarters.

For the full-year, cessions to those other capital partners and investors came out at almost $525 million and were all from the reinsurance side of the business, down a little on the $583 million of reinsurance premiums ceded in 2020.

As AXIS has adjusted the way it works with capital partners of late, including some changes to the investor mix it had previously relied on, the fee income has been on a steady rise and again in Q4 2021 there was an improvement reported.

Almost $27.2 million of fee income was reported from the strategic capital partners activities in Q4, up on the prior years $12.9 million.

For the full-year, the fee income from strategic capital partner activities rose to $73.2 million and was all from the reinsurance side of the business in 2021.

The reinsurance side generated $49.8 million of fee income in 2020, while combined with insurance managed premiums and cessions fees for the prior year were still much lower at $60.5 million.

Net income for the full-year across the entire AXIS Capital business was $588 million in 2021, so at $73.2 million, this third-party capital partner related fee income was a significant contributor.

In 2021 there have been changes at AXIS Capital in its business unit dealing with third-party and ILS style investors, with the unit rebranded AXIS ILS and a number of senior hires coming to the firm.

We expect the strategy will adjust as a result and as a result working with investors through managed premiums and cessions is likely to become an increasingly important lever as AXIS begins to look to expand its business once again.