By John Lyons
THE Bermuda headquartered reinsurers PartnerRe and AXIS Capital, both of which have Dublin offices, announced a “merger of equals” on 25th January. The new company will have a combined gross premium income of over $10 billion and, according to their statement, be a top 5 global reinsurer and the leading broker based one.
Shareholders of PartnerRe, which had a market capitalisation of $5.59 billion will have 51.6% of the combined company, while shareholders of AXIS, with a capitalisation of $5.04 billion, will receive 48.4%.
The merger follows on other consolidation taking place among the top 25 reinsurers and highlights continuing pressure on reinsurance rates and the need for companies to reduce their overhead and improve scale. In November Renaissance Re (also with a Dublin presence) acquired Platinum Underwriters in Bermuda for $1.9 billion, and on January 9th the Irish headquartered XL Group announced the acquisition of Catlin Group for $4.1 billion.
The falls in reinsurance rates are particularly severe on the property catastrophe side and have been driven by favourable claims experience, increased retentions by direct writers as well as extra competition for business from so-called Cat Bonds. There has been no category 1 storm in the US for over 8 years and this long period of good experience has attracted institutional investors, in their search for higher and uncorrelated investment returns, to participate in the risk through Catastrophe Bonds.
PartnerRe and AXIS, according to the CEO of AXIS (and CEO designate of the combined company) Albert A. Benchimol, expect that ‘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.’ The merger is expected to save $200 million in costs annually. The two companies have 2,300 employees worldwide and duplicate offices in New York, Zurich and Bermuda as well as Dublin.
The deal is expected to close in the second half of 2015. However, it is subject to shareholder approval and some observers believe other bidders could still come through. The Platinum and Catlin acquisitions were both at a premium of 24% to the market price and the PartnerRe and AXIS shareholders may be disappointed by the proposed non-premium deal.
A M Best have placed the Financial Strength Ratings of PartnerRe and AXIS Capital (currently both A+) under review “with negative implications” on the basis that “the new combined organisation will face execution risk and challenges relating to the integration, retention of key management and the merging of infrastructure, as well as company culture”. On the other hand they also acknowledge the potential upside of the combined organisation including “its diversified product offering, increased scale and business profile”.