The announcement of the $11 billion merger between reinsurance giants Axis Capital Holdings Ltd. and PartnerRe Ltd. is filled with familiar arguments of strategic vision, needed scale and the “disruption” of the existing catastrophe reinsurance model.
The most important takeaway for investors, according to analysts, is that the consolidation in the reinsurance industry is being driven fundamental weakness that continues to eat away at shareholder capital and the resulting mergers and acquisitions only exemplify industry problems.
Axis and PartnerRe announced that they plan to merge into an $11 billion reinsurer on Sunday. PartnerRe shareholders will receive 2.18 shares of the combined company’s stock for each share of PartnerRe that they own. Axis shareholders will receive one share of the new company’s stock for each share of Axis Capital that they own.
In an investor presentation issued Monday, the reinsurers argued that the deal will create shareholder value “through combined franchise strengths including significant capital efficiencies and meaningful synergies.”
Most notable among those efficiencies is “$200 million in identifiable, actionable and concrete expense savings,” including significant layoffs or “redundancies” following the merger.
Despite the argument for the strategic importance of the deal from the companies, Wall Street analysts were less than optomisting of the Axis/PartnerRe merger and other reinsurance deals such as the $3.9 billion XL/Catlin merger announced earlier this month.
“As this deal is ‘no premium’, and the XL/Catlin takes until 2017 to be accretive, we continue to perceive these deals as acts of necessity rather than strategic opportunities,” according to Citigroup analysts Todd Bault and James Naklick in a research note issued Monday. “The pressure to cut even more costs will be enormous given the lack of significant deal premiums”
The analysts kept their “Sell” rating on the shares, adding that that the argument that reinsurers need “scale” to survive competition from third-party capital providers as unconvinced.
“Rightly or not, primary companies facing low catastrophes and continued reserve redundancies perceive a lesser need for reinsurance (which could prove very wrong in years to come),” the note says. “Reinsurance scale will not solve this problem: in fact, it simply leaves fewer reinsurers for brokers to focus on and pressure to lower pricing across the board.”
Adding to the skepticism regarding the deal, Standard & Poor’s placed both Axis and PartnerRe on Credtiwatch “negative.”
“There are uncertainties around how the combined entity will manage its capital adequacy and efficiencies, property catastrophe exposure, and potential business overlap and the resulting attrition,” said Standard & Poor’s credit analyst Taoufik Gharib in a statement.