As expected, one of the drivers of such a reinsurance merger is of course an expanded ability to leverage third-party or alternative reinsurance capital and to partner with investors seeking to access the returns of the insurance and reinsurance market.
Both firms have a bit of a track record in this area, AXIS with its Ventures unit, which provides institutional investors with a way to share portions of its reinsurance books returns. And PartnerRe with a number of initiatives that have seen it partner with ILS or third-party capital in the past including its 2013 launched Lorenz Re collateralized reinsurance sidecar. PartnerRe has also been managing a portfolio of insurance-linked securities (ILS) and catastrophe bonds for some time.
The AXIS Re Ventures unit and the PartnerRe reinsurance sidecar and ILS investment activities will be a good fit together that should enable the combined entity to increase investor interest in participating in its underwriting business. With large ILS investors increasingly looking for shares of portfolios of risk, larger reinsurers which place a focus on third-party capital management and ILS stand in a good position to attract more alternative capital from them.
Once again this shows the importance that traditional reinsurers are placing on the management of alternative capital. Wielding lower-cost capital sourced from institutional investors that they partner with is an increasingly important part of the reinsurer business model as they seek to navigate a challenging market with lower prices.
The increased scale of the combined AXIS and PartnerRe is expected to provide the firm with an “enhanced ability to partner with other capital providers to deliver value to all stakeholders,” according to the firms presentation.
This is one way that the combined firm will hope to create value through increasing the efficiency of its capital base, something that scale will assist with but a growing use of lower-cost third-party capital will also help the firm to be efficient.
Representatives of the firm discussed improving the combined firms capital structure, which use of third-party capital will assist with. As even the largest reinsurers in the world increase their use of alternative capital, it looks set to be a major part of the strategy of any of the currently merging firms.
In terms of capital structure, it will be interesting to watch how third-party capital is used within these merging reinsurance firms and how much of their overall capital base third-party capital could become in the future.
Once again synergies are a key discussion point for the executives of the merging firms, but many of these may be synergies in the cost-cutting that has to follow. Benchimol said that a significant amount of the savings expected from the deal are to be made from consolidating offices in markets where both firms are active. That will result in a reduction in head-count.
Other synergies will be made from broadening the diversification within the combined portfolios of risk that the two firms bring together. There are seemingly benefits both ways which should help to engender capital efficiencies for the firm.
However, some of the biggest synergies may be found in the alternative risk arena, in areas such as the specialist weather and commodities businesses, where both are active and also in the third-party capital management divisions.
Neither of the firms are currently managing large amounts of third-party capital in their reinsurance business, AXIS managing just over $60m as of the last quarter of 2014 and PartnerRe’s Lorenze Re sidecar only $75m in size.
That gives the firms a large opportunity to increase this and make third-party capital and ILS offerings a more meaningful part of their capital base. Given the size of some other reinsurers third-party capital operations it has to be assumed that the firms will quickly look to increase these figures and roll-out more options (perhaps funds) that investors could allocate capital to.
It looks like these third-party reinsurance capital activities will come under the watch of Jay Nicholls, who was CEO of AXIS Re and hence oversaw its Ventures unit, in his new role at the combined entity as Head of Strategic Business Development and Capital Solutions.
Benchimol said on the call that neither AXIS Capital or PartnerRe needed this deal, but that sometimes an opportunity that is “so compelling” presents itself that you cannot pass it up. Benchimol said this is “an opportunity to create a global powerhouse” with diversity, specialisms and the scale to help the firm increase its market share.
Benchimol also said that third-party capital could help the combined firm to balance its risks and portfolio, to avoid over-exposures or concentration risks.
The firm will be able to “take advantage of the very strong appetite in the third-party capital markets, to share some of these risks with third-party capital partners,” Benchimol explained when asked how the firms would manage bringing their portfolios together.
The deal provides both firms with a greater “ability to succeed and take advantage of market disruption is much greater,” Benchimol said. It “increases the ability to be competitive” and if “we can take a couple of points out of the expense ratio” it will enable the combined entity to be more efficient and compelling.
Third-party reinsurance capital and ILS is set to be an increasingly important piece of this powerhouse, particularly as it tries to capture benefits from efficiencies within its capital structure, something that ILS will greatly assist with.
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