Notes

Axis Capital Group, PartnerRe merger creates fifth-largest global reinsurer

The $11 billion merger of Bermuda-based PartnerRe Ltd. and Axis Capital Holdings Ltd. accelerates the trend of offshore reinsurers combining to remain competitive.

The stock-swap deal announced Jan. 25 is the third in as many months in a sector hit by pricing pressure from an ongoing influx of private equity capital and strong competition among traditional reinsurers. The combination will create the fifth-largest reinsurer in the world.

PartnerRe shareholders will own 51.6% of the combined company, for which a name has not yet been chosen, and Axis shareholders will own 48.4%. This mega-deal is expected to close in the second half of this year.

The transaction follows Dublin-based XL Group P.L.C.'s Jan. 9 proposed acquisition of Bermuda-based Catlin Group Ltd. in a $4.1 billion deal and Bermuda-based RenaissanceRe Holdings Ltd.'s Nov. 24, 2014, acquisition of Bermuda-based Platinum underwriters Holdings Ltd. in a $1.9 billion deal.

“I think it is absolutely a trend and I think, ultimately, it's all driven by the same factors,” said Cliff Gallant, San Francisco-based analyst at Nomura Securities Co. Ltd. “There is a lot of pressure in reinsurance; prices are coming down and the product is changing. I expect that the wave is building and that we'll definitely see more M&A activity.”

Meyer Shields, managing director at Keefe, Bruyette & Woods Inc. in Baltimore, said: “This is a trend, it is accelerating and I don't think we're anywhere near done with this sort of announcement.”

“After a relative calm of several years, it seems the floodgates have opened for consolidation in Bermuda,” Amit Kumar, New York-based vice president and senior analyst of insurance at Macquarie Capital (USA) Inc., wrote in an analyst note that also cited the RenRe/Platinum and XL/Catlin deals.

Axis Capital CEO Albert Benchimol, who will head the combined entity, said in an interview: “I feel very confident that with the increased scale of the organization, strong profitability and cash flow, and capital efficiencies, we will have significantly enhanced resources to support the growth of additional specialty insurance business, either organically or at some point if it made sense through acquisition.”

Following last week's announcement, Standard & Poor's Corp. put Axis on its credit watch negative list as it seeks answers to questions, said Taoufik Gharib, New York-based director of financial services ratings for North American insurance.

The rating agency will meet with company management over the next 90 days and either affirms Axis' A+ stable ratings or put it on negative outlook, he said. Issues include how the combined entity will manage capital, its property catastrophe exposures, overlapping business, and how the enterprise risk management programs will be integrated and define risk tolerances, he said.

He agreed, however, there will be more reinsurer combinations.

“We'll see further consolidation, especially among the smaller companies, which need to compete to remain relevant in the market. They will be under pressure to take action,” Mr. Gharib said.

As for concerns that the deal increases Axis' exposure to reinsurance, Mr. Benchimol was not worried.

“To go from having approximately 50% of our business in a top 20 property/casualty reinsurer to having 62% of our business as the No. 5 reinsurer and leading broker reinsurer, that's a trade I'll do every day,” Mr. Benchimol said.

“It became increasingly clear to us — strategically — that what we wanted to achieve was more scale and size in the reinsurance operation” as well as build a primary insurance capability, David Zweiner, interim CEO of PartnerRe, said in an interview.

The reinsurance brokerage community also sees further consolidation.

“The conditions are all there; it's just a matter of getting the personalities to agree,” said David Flandro, New York-based global head of strategic advisory at JLT Towers Re, the reinsurance unit of Jardine Lloyd Thompson Group P.L.C.

“One could argue this decreases competition, but the reverse is also a possibility,” said Phil Campbell, Edina, Minnesota-based executive vice president of BMS Intermediaries Inc. “These larger reinsurers need to write volume and need bigger lines to get it, so they might be more aggressive in pricing and providing broader coverage just to get a line on the contract.”

Mr. Shields has an opposite view. “If I'm a reinsurance broker, the fact that I have fewer companies to go to is going to be tough,” he said. “Every time we see one of these deals, the top 20 becomes more exclusive” and controls a larger portion of premium volume.

The Axis-PartnerRe deal is expected to produce at least $200 million in annual pretax cost savings and efficiencies in the first 18 months of operations, the companies said.

Mr. Benchimol, who joined Axis in 2012 from PartnerRe, said that includes using PartnerRe's existing offices in Miami and Hong Kong.

He also said the companies' combined accident and health activities will yield an operation in excess of $600 million annually, making it one of the top players in the U.S health market.