Not an asset manager, but generating “substantial” fees: Benchimol, AXIS

AXIS Capital Holdings is not an asset manager, CEO Albert Benchimol said recently, but the firm is making “substantial fees” for managing and deploying third-party capital into its reinsurance underwriting business.

Albert Benchimol spoke at the recent Bank of America Merrill Lynch 2018 Insurance Conference and some of his commentary provided a little insight into his and AXIS Capital’s thinking about how they leverage their growing pile of alternative reinsurance capital.

AXIS has expanded its third-party capital under management to $1.9 billion by the end of 2017, around 55% (or $1.05 billion) of which is dedicated to the property catastrophe reinsurance space, while the rest is deployed into other lines of business.

This growth means that the total amount of premiums that AXIS Capital ceded to third-party capital rose 60% in 2017, hitting $489 million for the year, up from $304 million in 2016.

Fee income earned for the work of originating, structuring and passing on reinsurance risks to its third-party capital investors rose as well, to $36 million in 2017, up more than 65% on the prior years $21.8 million.

Despite the growth of this capital and the impressive fees AXIS Capital is earning from it, Benchimol does not liken his firm to an asset manager, preferring to focus on its reinsurance traits.

“We’re very focused on making sure that we leverage all forms of capital, for the benefit of our customers,” Benchimol explained, adding that on third-party capital, “We believe strongly it’s here to stay. It has an appetite. It wants to participate in the risk transfer universe.”

“We believe it’s a real opportunity for us to make that capacity, at the returns that capacity wants, available to our customers,” he continued.

However there is a ‘but’ when it comes to third-party capital for AXIS, the CEO believes that reinsurance is the better product.

Benchimol said, “We are absolutely convinced, as are our customers, that reinsurance is the better product.

“Reinsurance has consistency, it’s provided by experts who are focused on long-term relationships, we provide multiple lines of business, and it makes sense.”

Any ceding companies that have been trading with the longest established ILS funds, which have existed for the last twenty years now, may feel that the relationship argument is now moot, as far as alternative capital goes.

But on the multiple line-of-business front, there is still an argument that you can get more of the protection you want for your portfolio from a reinsurer.

But in a reinsurance market where cost and efficiency are increasingly vital, alternative or third-party capital is becoming the preferred option for some areas of the risk universe, and it seems Benchimol is keenly aware of this.

He continued, “There is a lot of third-party capacity out there, that is willing to do that, but at a lower return. We believe it is our job to make that capacity and those prices available to our customers, but wrapped with the service and customisation that reinsurance requires.”

Benchimol believes this results in a win-win situation, for the ceding companies and the third-party investors. The amount of fees AXIS is now earning from its work with third-party capital suggests this is a win-win-win, as all parties are benefiting from the relationship.

“Our customers get the capacity they want, at the best rates available. Our partners in third-party capital get a great portfolio at the market price that they want and we generate fees in the process,” he said.

Despite the growth of third-party capital under management at AXIS, Benchimol does not believe the firms business is shifting towards becoming one focused more on managing other peoples money though.

“I would argue that we do not think of ourselves as an asset manager,” he explained. “This is really all about helping us provide our customers with capacity at the best price possible, but we’re nevertheless generating a substantial amount of fees in the process.”

Not an asset manager perhaps (at least in how they view it), but certainly AXIS Capital is leveraging multiple balance-sheets. It may suit traditional reinsurance firms to think of their embrace of third-party capital in this way, but they are now doing the same job as ILS fund managers (managing third-party assets, matching them with risks), in most cases.

Reinsurance firms, like AXIS and its competitors, are going to find their transition into firms that increasingly arrange and manage the matching of risk and capital a change to their modus operandi.

But those that embrace it successfully will find it offers them a new way to get paid for the expertise that sits within their organisations, allowing them to generate income while another party holds onto, or shares in, the ultimate risk.