Two more of the big Bermudian reinsurance players have announced a merger. AXIS Capital and PartnerRe have agreed to combine to form an $11 billion reinsurance player, which they hope will strongly position them to respond to structural changes in the market.
It’s the latest example of reinsurers seeking scale, diversity an opportunity to reduce their expense costs and to increase efficiency, as they attempt to position themselves as a top-tier global reinsurance player, while also making themselves more competitive with lower-cost ILS and alternative reinsurance capital.
Announced last night, the deal is billed as a “merger of equals” bringing together two roughly equal sized Bermudian reinsurance firms to create a single entity which underwrites over $10 billion of premiums, wields total capital of around $14 billion and invests assets of over $33 billion.
It is however a direct response to the challenging reinsurance market environment, as a result of which AXIS CEO Albert Benchimol expects the merged firm to be; “Strongly positioned to turn the challenges presented by the structural changes in the reinsurance market into opportunities.”
The aim is to create a “broadly diversified global specialty insurance and reinsurance company” with the combined entity becoming a top-five global reinsurance company and a leading broker-based reinsurance market.
As such this is the largest M&A deal yet and propels the combined entity into what could be expected to be a shrinking group of truly global players. The question of how big is big enough still remains, but as a top five player the combined AXIS – PartnerRe will be bigger than the XL – Catlin combination and significantly larger than RenaissanceRe – Platinum.
Of course the mainstream financial press continue to see these mergers as a response to ‘hedge funds’ and other ‘investors’ entering the reinsurance sector. In reality the growth of insurance-linked securities (ILS), alternative capital and hedge fund reinsurers is just one factor. Reinsurers are also competing with their extremely well-capitalised traditional counterparts and hence the ‘size is everything’ mantra is increasingly stimulating M&A deals.
The combined AXIS – PartnerRe will have a leading industry position in some specialty insurance and reinsurance lines and hopes to benefit from substantial capital efficiencies, expense savings and business synergies. The transaction is seen as accretive to both firms earnings and return on equity, although it should be pointed out that complex mergers take both time and money.
This “merger of equals” has been unanimously approved by the boards of directors of both AXIS and PartnerRe. AXIS Capital CEO Albert Benchimol will serve as CEO of the combined company while PartnerRe chairman, Jean-Paul L. Montupet will take the role of non-executive chairman.
To complete the deal, PartnerRe shareholders will receive 2.18 shares of the newly combined company’s common shares in return for each PartnerRe common share they own and AXIS Capital shareholders will receive one share of the combined company’s common shares for each share of AXIS Capital they own. Once the deal is completed, shareholders of PartnerRe and AXIS Capital will own approximately 51.6% and 48.4% of the combined company, respectively.
Albert Benchimol commented; “This transformational combination will leverage the complementary strengths of both companies and create an organization with the size and breadth to enhance product and service offerings, maximize growth opportunities, optimize portfolios, and deliver both economies of scale and capital efficiencies.”
The economies of scale and capital efficiencies are really the two key areas that the combined firm will hope to capitalise on. The two reinsurers are a good fit, with different product offerings, to a degree, and global operations that will compliment being brought together.
As a result of the merger the firms expect to achieve at least $200 million in annual pre-tax cost synergies in the first 18 months of operations, something that will likely be largely achieved with rationalisation of the work-force and offices.
One area of consolidation that will be interesting to watch is the bringing together of PartnerRe’s weather risk management product team and the AXIS Capital Weather & Commodity markets team, both experienced groups with the potential now to grow their footprint considerably.
Also interesting to watch will be how AXIS Ventures, the reinsurers third-party reinsurance capital management team is prioritised within the combined entity. Third-party or alternative capital management has been receiving an increasing level of profile at AXIS to date, it will be interesting to see whether that continues as a complement to the merged entities larger balance-sheet. The merged company will offer a much greater spread of business and line of business opportunities that could be underwritten with third-party capital if the combined reinsurer should choose to.
Jay Nichols, the CEO of AXIS Re will move to a new role to be responsible for Strategic Business Development and Capital Solutions at the combined firm. Nicholls has been instrumental in some of the AXIS Ventures third-party reinsurance capital strategy over the last few years.
Other senior positions which have already been identified include, Emmanuel Clarke becoming CEO, Reinsurance; Peter Wilson CEO, Insurance; Chris DiSipio CEO, Life, Accident and Health. Joseph Henry will be CFO and Bill Babcock will be Deputy CFO and Lead Integration Officer. Babcock will assume the role of CFO upon Henry’s retirement in July 2016.
“The combined company will have three strongly positioned businesses – a top-five global reinsurer, a $2.5 billion specialty insurance underwriting business, and a highly successful and growing life, accident and health franchise – all with increased strategic flexibility. As a top five global reinsurer with leading positions in a number of specialty lines, we will be strongly positioned to turn the challenges presented by the structural changes in the reinsurance market into opportunities.”
PartnerRe CEO Costas Miranthis has stepped down as CEO and board member already, as a result of the deal, with PartnerRe Director David Zwiener assuming the position of interim CEO of PartnerRe until the completion of the transaction.
Jean-Paul L. Montupet, Chairman of PartnerRe stated; “On behalf of the entire board of directors, I want to express my appreciation to Costas Miranthis for successfully leading PartnerRe for the past four years and positioning the Company to be able to move into this exciting new phase. PartnerRe has benefitted greatly from his leadership and guidance and we wish him well in his next endeavor. This is an exciting opportunity that offers tremendous potential with many benefits for PartnerRe, our clients, brokers and shareholders.”
Michael A. Butt, Chairman of AXIS Capital added; “I have for a long time, since 1993, been an admirer of PartnerRe and what it has achieved. I am delighted therefore that we can now combine our businesses and people to create an even more exciting future.”
Miranthis said; “It has been my pleasure to serve as PartnerRe’s CEO as we continued to build upon its leadership position in reinsurance. This merger with AXIS Capital offers a unique opportunity to enhance PartnerRe’s scale in the reinsurance sector and to enter the primary insurance market with a high quality partner with a global franchise. This is the right step for PartnerRe at the right time – squarely addressing the strategic imperatives that today’s markets are demanding. I want to thank the PartnerRe Board and all of my colleagues for their support and contribution to our success. I am confident that the new company will enjoy an exciting future.”
Benchimol also said; “For our clients and brokers, this transaction brings together two companies with outstanding underwriting talent and service to deliver more comprehensive solutions backed by the financial strength they have come to rely on from both companies. I look forward to working closely together to make this vision a reality, while achieving diversified and consistent earnings growth for our shareholders.”
The firms expect to close the merger transaction in the second half of 2015, subject to all the approvals, however work on rationalising the firm will likely begin almost immediately with plans for where these cost-efficiencies and expense savings will be realised. As two of the larger Bermudian reinsurance firms this does of course, alongside the XL-Catlin, RenRe-Platinum mergers, have ramifications for the island and its workforce.
Merging or acquiring is of course just one of the things that these reinsurers can do to leverage all this ‘superabundant’ re/insurance capital, the question will continue to be whether size is really everything in a market that also requires innovation, efficiency, lower cost capital and perhaps an entirely new way of thinking about the global reinsurance business.
By positioning themselves in the top-five reinsurance groups globally, AXIS and PartnerRe will have every chance of prospering as the larger combined firm. However the merger process and actually realising these efficiencies and cost-savings they talked about is absolutely key.
Mergers can be expensive processes and it is typically only a few years down the line that the cost-savings are truly realised. So while the reinsurance sector increasingly comes together, shrinking the number of top reinsurers and consolidating much of the industry capital towards the upper tier of players, it will only be a few years down the line that we will really see whether size is indeed everything in reinsurance, just how much efficiency is enough and how big you need to be to remain relevant.
More of these deals are expected, analysts commenting on this deal today believe that the M&A wave in reinsurance will continue with a particular focus on Bermuda.
In favour of this deal over others, KBW analysts note that Benchimol served as PartnerRe’s CFO for ten years, so he knows the firm well and is perhaps better placed to bring these two reinsurers together than anyone.
Read our two follow-up articles on this deal: ‘Big enough’ to be relevant in reinsurance keeps getting bigger and AXIS + PartnerRe enhances ability to leverage third-party capital.