AXIS’ reinsurance adjustment continues, but Strategic Capital Partner fees drop

AXIS Capital reported its third-quarter 2022 results yesterday, with another decline in reinsurance premiums written as its exit from property reinsurance underwriting takes hold, but a more significant dip in Strategic Capital Partner fee income, which could also be a sign of hurricane Ian’s impacts.

As we’d previously reported, AXIS Capital pre-announced an estimation that it would report $212 million ($186 million, after-tax) of catastrophe and weather losses for the third-quarter of 2022, including $160 million from hurricane Ian.

That $212 million figure remained in the results announcement last night, with no further update on hurricane Ian’s impacts.

Having announced back in June that AXIS Capital’s reinsurance underwriting division, AXIS Re, would exit the property reinsurance business, the companies overall reinsurance premiums written continued to decline in the quarter.

AXIS has been focused on improving its underlying reinsurance underwriting business, with the property reinsurance pull-back part of that , as it has been managing down its catastrophe exposure for some quarters in a row now.

Despite that and despite less property reinsurance written, AXIS’ reinsurance business still suffered an underwriting loss, with a combined ratio of 109.1% and over $99 million of catastrophe and weather losses.

However, compared to Q3 of 2021, when the company suffered almost $145 million of catastrophe and weather losses, the downsizing in property and catastrophe risk volatility is perhaps becoming more evident, especially when you consider the severity of hurricane Ian in this year’s Q3.

Overall reinsurance premiums written fell around $80 million in the quarter, year-on-year.

“Our specialty insurance business continues to perform strongly with higher underwriting profits for both the quarter and nine-month period, and our reinsurance business has demonstrated the benefits of its lower property cat exposure with a manageable loss for the quarter and an improved underwriting result for the nine-month period,” CEO of AXIS Albert Benchimol explained.

As we explained previously, the pull-back has no bearing on the insurance-linked securities (ILS) business that operates under the AXIS ILS brand, with activities continuing and even set to expand there, albeit now with a focus on broadening the range of risks ceded to so-called strategic capital partners.

However, there is perhaps some evidence of losses flowing through to AXIS’ third-party capital partners after hurricane Ian.

While managed premiums across the Strategic Capital Partner business were up a little in Q3, the fee income earned fell.

Reinsurance premiums ceded to so-called “other strategic capital partners” grouping, which is where third-party and insurance-linked securities (ILS) style investors are accounted for by AXIS, dropped in the quarter to just over $86 million in Q3, while again, no insurance premiums were ceded to them.

Year-on-year now, after nine months, the amount of reinsurance premiums ceded to these third-party investor style relationships stands at almost $402 million, down from almost $494 million at the same stage of 2021.

It’s now four quarters in a row where premiums ceded to these ILS type third-party investors have all been from the reinsurance business and have also declined year-on-year.

It continues to reflect the significant catastrophe PML pruning AXIS has undertaken, as well as now the pull-back from property reinsurance at AXIS Re.

But fee income is where the real difference is seen this quarter and is perhaps related to hurricane Ian, to a degree, although it’s impossible to know for certain.

AXIS Capital reported just over $11.1 million of fee income from its Strategic Capital Partners in Q3 2022, down from almost $18.3 million in Q3 2021.

But, of this, the contribution from “other insurance related income” dropped to just $519k, down from almost $6.8 million in the previous year.

While it’s impossible to be certain whether the underwriting loss in reinsurance and the impact of hurricane Ian has driven this decline, as the change in how AXIS is ceding business to third-party capital partners is likely a driver too, it seems likely some influence from the catastrophe experience of the last three months could also be evident here.

AXIS will still accumulate natural catastrophe exposure and partnering with ILS investors, through a range of structures, to share in the economics of this type of risk with third-party investors and acquire protection, is expected to remain core to the company.

As AXIS’ strategy continues to adjust, it’s likely to find the flows of third-party capital fees change over time and it will be interesting to see how this works out for the company as the new AXIS ILS strategy beds in.