Plan A never changed: Axis CEO Benchimol

When Axis Capital revealed it was to acquire Lloyd’s insurer Novae Group in an all-cash deal earlier this year, it must have felt to outsiders as if the company was finally back in the game in terms of seeking scalability and size through M&A.

Some 18 months had passed since the long and drawn-out bidding war the company found itself embroiled in during 2015 to merge with PartnerRe. Despite a deal in principle effectively being done between the two companies earlier that year, Italian investment group Exor, which made a late bid, was to finally win the bidding war for the fellow Bermudian reinsurer.

The failed merger had the potential to be disruptive for the company, which had otherwise long enjoyed a stable track record, loyal client base and steady returns. And it remains the case that Axis lost on a deal it very much wanted.

Albert Benchimol, chief executive of Axis Capital, does not view it like that, however. He stresses that the PartnerRe deal came about initially as a transaction that Axis was shown at relatively attractive terms. Although not on the lookout for a big merger at that point, he describes it as an opportunity that was too good to pass up.

“The deal would have been in the best interests of our shareholders in its original form,” he recalls. “But in the end, Exor was willing to pay more than we thought it was worth.

“I was asked afterwards if we had a plan B but in reality we had never moved away from plan A, focusing on smart, targeted growth opportunities that advanced our position as a leader in specialty lines insurance and reinsurance.

“The merger only made sense if we felt that it advanced this plan, and we felt that it did until the financial terms of the deal changed.”

What change of plan?

Before, during and since the failed PartnerRe deal, Axis had been expanding its activity in the London Market—a process that started in 2012. It sought approval for its own managing general agent (MGA) and continued to expand its speciality lines operations in the market.

It had already secured a sizable presence in this market when it entered into discussions with Novae. “We were a large and growing player in this market; we knew our competition and we had always respected Novae,” Benchimol says.

“Their talent and book was complementary to ours and our organisations share likeminded cultures that centre around client service, innovation and data-driven decision-making. I met with Matthew Fosh, the chief executive of Novae, and said ‘what if?’. Things went from there and I think this could be a really good deal for both parties.”

The deal, finally concluded in October, will boost Axis’s international specialty insurance business, creating a $2 billion insurer in the London specialty market and a top 10 insurer at Lloyd’s. Based on the companies’ 2016 results, the combination will create a global specialty re/insurer with gross written premiums in excess of $6 billion.

“The acquisition is fully aligned with Axis’s international specialty insurance growth strategy and will combine two highly complementary businesses, substantially enhancing our depth and breadth of product, underwriting expertise, and leadership capabilities to better serve our clients and brokers,” Benchimol says.

“We are excited about the opportunity to leverage the focused and profitable specialty insurance business Novae has created as part of a substantially larger group, with a larger capital base and a global platform.

“We expect the combined operations to benefit substantially from investments already made by Axis to drive efficiencies across its international specialty insurance business and firmly believe this combination will create significant value for Axis’s shareholders with limited execution risk.”

Benchimol adds that one of the things that attracted him to the deal was that Novae had already reviewed its own portfolio in light of softening rates in some lines of business and made the necessary adjustments.

“That was music to our ears. They had shed some unprofitable business, refocused the portfolio and the business was in a stronger position,” he says.

Once the deal has formally closed, the Novae brand will be dropped and some structural changes will need to be made. One is that re/insurers will not require two MGAs. But Benchimol says he is excited by the possibilities of integrating the companies.

“With this deal we are also further reinforcing our commitment to the London Market, which we believe continues to be an international capital for specialty lines insurance and a major talent hub—there is just so much talent in that square mile,” he says.

“To be clear, London has faced challenges. It is not always the most efficient market—the expense ratios remain high but the industry has various initiatives underway to rectify that. We are comforted by some of the market-wide changes taking place. We are confident the talent is there in the market to make it happen.”

He is also unfazed by the process of the UK leaving the EU. He notes that the bulk of business Axis writes in London is international business that would be unaffected by Brexit, plus Axis already has two Irish companies that will retain full access to the EU, as well as a presence in Brussels through its 2017 acquisition of Aviabel, its Belgium-based aviation re/insurer.

“The flow of business is unlikely to be altered,” he says.

Focused on organic growth

Now the Novae deal is complete, Benchimol says further M&A are unlikely in the near term. He is focused on organic growth and integrating Novae, he says. That said, the company does have plenty of other sources of capital should growth prospects emerge, and is investing in innovation.

Axis Capital has itself embraced third party capital in several ways in recent years. In 2016 it partnered with investment group Blackstone to form total return reinsurer Harrington Re, raising $600 million in the process. Meanwhile, Axis Re Ventures manages capital for third party investors in a number of ways including through sidecars, insurance-linked securities (ILS) and other strategic initiatives. These things give it smooth access to third party capital should the need arise.

Benchimol says he is fairly agnostic on sources of capital and that it is more about matching the right risk to the right investors in a way that also gives investors what they want: continuity, capacity, analytics and good claims management, he says.

“It doesn’t matter where the capital comes from, what matters is what differentiates us,” he says. “The fact is that the need for new companies these days is minimised by the fact that these vehicles already exist. That is the quickest way for capital to enter the industry now and we play in that space.”

In terms of innovation, the company is keeping a close eye on developments in insurtech and making investments where it feels the technology is right. In August this year, for example, it unveiled a partnership with digital startup Plug and Play to boost digital innovation.

Plug and Play is a global innovation platform that connects startups to corporations and invests in over 150 companies every year. Axis said the partnership will help it gain access to digital insurance startups while providing mentorship and technical support, along with underwriting and actuarial expertise, to help turn their ideas into products or services.

Benchimol says he is warm on all aspects of insurtech that can help the industry become more efficient and deliver a better product to customers. Any initiatives that help the industry better manage and use data will be especially important.

“The future of the industry will depend on data and at Axis we want to be at the forefront of any developments. Plug and Play is a high profile example of where we have partnered with a company but there are other initiatives we are trialling behind the scenes.

“For all the potential of technology to change the industry, I think it will be more evolution than revolution. The industry remains based on promises made and promises kept—with, of course, an increasingly sophisticated risk analytics and regulatory overlay.”

Benchimol also believes that it remains in the power of the incumbent players in insurance and reinsurance to embrace and leverage technology for their own means—as opposed to technology companies becoming insurers.

“You can use and leverage technology; you cannot do the same the other way around with an insurer,” he says. “The industry leaders ought to have the ability to adapt to technology. Those that don’t could get left behind.”

Damp peaks and pricing

Benchimol was interviewed in Monte Carlo in the aftermath of Hurricane Harvey, which caused devastating floods in Texas, and Hurricane Irma, which at that point looked as if could be one of the worst storms ever to lake landfall in the US. Its course changed in the days following the interview.

In the context of the proliferation of third party capital in the industry and Axis having its own vehicle capable of leveraging this money in the form of Harrington Re, Benchimol was asked his view on whether the traditionally cyclical nature of the industry has changed.

His response was that, while he believes that the proliferation of sidecars, re/insurance funds and other instruments that enable capital markets investors to easily invest in risk transfer will dampen potential peaks in pricing following big losses, that does not mean that prices will not rise.

While the abundance of such vehicles in the industry will affect the dynamic around pricing, they will not change the fundamental principles behind the industry’s cyclical nature.

“Pricing follows losses in reinsurance: in a period of low claims levels prices fall, and when claims increase, they rise,” he says.

“The pace and extent to which prices change is a function of the amount of capital in the industry. If capital is low, they will rise quickly and decrease slowly as companies recover balance sheet strength. If the industry is capital-rich, prices will be slower to rise and faster to decrease again.”

Benchimol stresses that losses stemming from this hurricane season will add to growing claims levels in other areas of the industry, including parts of the casualty side such as D&O. On this basis, he expects that prices should increase; the extent and timing of how that happens remain to be seen and could depend on investors’ appetite to reinvest in the industry using these vehicles.

“The industry has many of these vehicles already in place to write business,” Benchimol said. “Rather than form new companies, as used to be the case, that is now the quickest and most efficient way for capital to enter the industry.

“It may have the effect of potentially shaving the peaks from pricing. The spikes in rates we saw in 1993 or 2002 are unlikely to be repeated but it should not mean that capital entering the industry will not expect an adequate return.”

Asked how he prepares for potentially sizable losses as a hurricane approaches the US, Benchimol said that his first rule is to stay calm, as experience shows that storms can change path quickly. Once heavy losses are confirmed, he says, that is his company’s “chance to shine” in the way it responds and helps its clients.

“We want to ensure we have a good handle on the exposure of our clients so we can react very quickly to help them,” he said.

“On the reinsurance side, if it is clear that losses are very high we may send a client the cheque before they have submitted a claim. We appreciate that people are suffering in the aftermath of such an event and that is what we are here to do. That is what differentiates us in the eyes of our clients.”

Axis did this in the aftermath of losses stemming from the Fort McMurray wildfires in Canada in 2016. “On the reinsurance side, if we can see that they have blown through their reinsurance programme, why wait? It is the right thing to do and it certainly earns loyalty,” he says.

Benchimol knows investors in the company are prepared for such losses. “If you cannot handle the marketplace challenges, you should not invest in the re/insurance business,” he says.

“That is why the investor base in re/insurance is relatively narrow. But that is not a problem for us. The best companies are built for this.”