If beauty is indeed in the eye of the beholder, so is paying the price to acquire and protect the value of that beauty. This is especially true in today’s world of new investors seeking a balanced mix of aesthetic and economic value and a safe place to park their cash that won’t fall prey to short-sellers and rating agencies.

“We find that people are investing heavily in art as they seek alternative sources to preserve their assets,” claims Ulrich Guntram, Global CEO of AXA Art – one of the world’s leading speciality art insurers - in the corporate headquarters in Cologne, Germany. “There’s immense liquidity out there and investors are increasingly searching for safe, alternative sources of investments with good returns.”

The art market provides that. Fine art sales last year (2010) saw a record US$11.5 billion change hands, adjusted for buyer’s premium, according to Artnet, which also points out that modern art accounts for 38 percent of the sales volume for all categories.

So it’s not just old masters such as Rembrandt which are demanding six-figures. The fastest-growing segment in the art world today is contemporary art. Auctions results in early 2010 saw records for artworks sold at auction with a Giacometti painting commanding more than US$104 million and a Picasso at US$106.5 million later in May. The beginning of 2011 Sotheby’s in New York sold an abstract still life, “1949-A-No. 1,” by the late American artist Clyfford Still in November for US$61.7 million in a record-breaking auction totalling US$315.8 million. Down the street at Christie’s the same month, a painting by American artist Roy Lichtenstein of a man looking through a peephole went for a record US$43 million.

New collectors, higher prices

Who is paying these prices? The answer is not surprising. The growth in wealth of emerging economies has contributed to the rise of investments in so-called ‘objects of passion’, with the rise in demand for works of art as a way to diversify asset portfolios. “Last year China became the number country in demand for art,” says Guntram. “We have always had the U.S. as the first market; London used to be number two. Now we have the U.S. number one, China number two, and the U.K. number three. Lots of the international auctions are fuelled by Asian money.”

These new buyers are to a large extent people who have ‘made it,’ who have liquidity and who are investing in art not only to enjoy it and build a collection but to gain social prestige and to diversify their asset portfolio.

Art as an investment is not for everyone: a work of art doesn’t ‘work’ in the same way as stock in a company would: it doesn’t pay dividends, and it has virtually no ‘book value.’ Arts valuations are almost entirely ‘goodwill.’ Reselling takes a lot of time and money. Like gold, art just sits there. However it can sit on your wall or in a display case, where you can enjoy it.

Enter the pure investor

Today’s art market is also becoming a place for pure investors, rather than collectors - a new business and a different relationship to the artwork. “A collector has his whole heart, his whole emotion behind this piece of art, which for me as an insurer is the best re-insurance,” says Guntram. “If someone is investing and looking for the return, that’s a different relationship to the art. It is extremely important to understand the investor’s intention: if it’s an institutional investor or an art fund, for example, we do due diligence to understand the business model so we can understand the risks involved.”

In some cases, the art is used as collateral against a business or financial operation. The returns can be high but so are the risks, and it’s a big challenge for AXA to consider.

“We do insure collateral from a property point of view; we are a property insurer – this is our history,” explains Guntram. “Now more and more we are confronted with the demand for financial insurance. But we so far have not insured a credit default. For us, this is a different business, and you have to be aware of the risk profile of an investment. It’s very different from insuring a collection.”

AXA Art insures private collections, corporate collectors, museums, exhibitions, dealers… the list is long, as is the list of risks to be covered. “Art insurance is probably the most powerful and comprehensive insurance of all,” says Guntram. “Basically, almost everything is insured: terror is insured, damage, theft, loss, even loss in value. War is not insured, however, nor is inherent aging.” This last item is especially relevant for modern or contemporary works of art which use acrylic paints or plastics in their construction. Unlike the self-made paints of the old masters, neither acrylics nor plastics last forever. “You need to be aware of this and factor it into your risk assessment,” explains Guntram, who has sponsored research into plastics and acrylics as raw materials for art works.

You’d think with new buyers, higher prices, and sectors within sectors proliferating, that insurance premiums would also be on the rise. This is not the case, especially in insuring big exhibitions, one of the most lucrative segments of the business.

Fierce competition

“The competitive environment has completely changed. What we have seen is double-digit decline in prices (for insurance premiums), each year for the past decade,” claims Guntram. “Why? Because the art insurance space is being invaded by the big general property insurance companies who are looking to replace losses in their general property business. So now they are pushing into the niche markets, and art is one of them; the art insurance business is flooded by capacity and that pushes prices down.”

AXA Art is itself a wholly-owned subsidiary of a financial services giant: AXA. But it is a self-standing legal entity, responsible for the conglomerate’s art insurance business worldwide. It competes against the big guys pushing into the art insurance niche on its own. But how?

“First of all, we look for demand in the collection of sub-niches,” explains Guntram. For example, we insure something today we call ‘passion assets’ – basically they can be musical instruments, antiques, rare books…we are servicing demand for collectors who invest in sub-niches.”

Then there is the definition of ‘cover’ in the broad sense. Guntram is prepared to play Sherlock Holmes himself if a property is stolen, for example. “If something is stolen, we don’t give up until the painting is found and restored. We work with Interpol, with Scotland Yard and even with the FBI. “Working in conjunction with Serbian police, German police and police in two Swiss cantons, AXA Art recently recovered in Serbia, two Picasso paintings of German provenance stolen from a museum in Switzerland nearly three years ago.

Risky business

The company may be a niche player but the market AXA Art covers is big and so is the balance sheet risk. “We cover on our balance sheet probably between €150-200 billion cross exposure, depending on the number of exhibitions,” says Guntram. “No one company can cover this with equity, so we have to be extremely accurate in our exposure management: we have to trace each and every object that we insure basically around the world, to make sure if they come together at an exhibition or an art fair or even at an airport that we keep control of the total exposure.”

In covering risk, in growing the company, AXA Art is – like many of its customers – also concerned in getting a better than 1.5 to 2 percent return on its own investments. But the company does not itself take risks on investments. “We have been very conservative over the past ten years since I took over,” says Guntram. “Because the nature of our business is so volatile, so highly exposed, we try to avoid other sources of volatility in our business. So we have not gone into derivatives, we have not even gone into equities. We have had no impairments over the last three years; we still make a nice fixed income return on our invested book.”