PartnerRe recognises cost of AXIS M&A termination, retro use rises

Bermudian reinsurance firm PartnerRe recognised the full costs of terminating the merger deal with fellow-Bermudian AXIS Capital in  the third-quarter, leading it to report a net loss of $243.3 million, or $5.08 per share for the third quarter of 2015.

At the same time the reinsurer retained lower premiums in its catastrophe reinsurance segment, as it made greater use of retrocessional protection, perhaps signalling that another reinsurer has become less comfortable with retaining as much of the lower-priced reinsurance it has underwritten in recent quarters.

The amalgamation termination fee and reimbursement of expenses that was paid to Axis Capital in the quarter totaled $315 million, a sizable chunk of change for PartnerRe to pay out and this will be reflected positively in AXIS’ results in the coming days, no doubt.

Also impacting PartnerRe’s results this quarter was investment returns, something that we’re already seeing as a trend in these results and not just with the hedge fund reinsurers. Higher volatility in reinsurer investment portfolios is beginning to show through, due to the financial market volatility of recent months. PartnerRe reported net after-tax realised and unrealised losses on its investments of $121.8 million.

The M&A termination fee and expenses paid to AXIS are the cost of deciding to remain a standalone reinsurance firm with the backing of Italian investment holding group EXOR S.p.A. which agreed to acquire PartnerRe for $6.9 billion.

Despite the charges for pulling out of the AXIS deal and the investment hiccup due to financial market volatility, PartnerRe’s results seem solid.

Interim CEO David Zwiener commented; “Our results this quarter reflect a number of factors, most notably the amalgamation termination fee paid to Axis Capital, and continued difficult financial and investment markets, both of which had a negative impact on our book value. Despite the noise, and the impact of the Chinese Tianjin loss in August, our underlying results remain strong. All in, we posted a 1.4 point improvement in our Non-life combined ratio to 82.8% when compared to the third quarter of 2014. Our Life and Health portfolios also remain strong. Overall for the third quarter, we recorded an operating ROE of 14%, which on the back of our solid performance for the first half of 2015, resulted in an operating ROE of 10.5% for the year to date.”

One area of noticeable change is in the catastrophe reinsurance segment at PartnerRe, where the reinsurer saw net premiums written decline by 75%, as it took advantage of global retrocessional capacity to cede more risk away, while non-renewals and cancellations of treaties also accounted for a portion of the decline.

It’s a significant shift in catastrophe premiums retained by PartnerRe, for the first nine months the catastrophe sub-segment net premiums written were down only 29%, which means the use increasing amounts of retro capacity has really ramped up in the third-quarter of the year.

On a gross premiums written basis PartnerRe still wrote $57m, compared to $59m in the prior year period, but net that translated down to just $13m in Q3 2015, compared to net of $55m in Q3 2014. That’s a dramatic change in how much business has been ceded out.

We understand that no additional business was ceded to the Lorenz Re SPI, PartnerRe’s collateralized reinsurance sidecar type vehicle which allows it to take advantage of capital market capacity efficiencies, during the third-quarter, meaning that this increase in retrocession has solely been ceded out into the market.

It has to be considered that PartnerRe has found business written in the last quarter to be less attracively priced and hence found it better to pass more of the risk on via retrocession than it had in prior quarters.

PartnerRe President Emmanuel Clarke commented that the market remains competitive in reinsurance, saying; “As we look ahead to the important January renewal season, which accounts for more than 60% of our Non-life treaty premium, reinsurance markets remain competitive across the board.”

Clarke also noted that the pressure to merge and the lengthy process that can tie reinsurers up in, which PartnerRe now knows only too well, is distracting for some of the firms competitors.

“In addition, M&A activity is continuing to be a distraction for some market participants,” he said.

For PartnerRe, getting the AXIS termination costs out-of-the-way will allow it some runway through the fourth-quarter and up to the January reinsurance renewals. It will be interesting to see whether this new retro strategy of ceding more catastrophe risk away continues, perhaps reflecting the firms view of underpriced business, or whether January brings it opportunities that it would rather keep on its books.