The week began on a high note for PartnerRe Ltd. (PRE) and AXIS Capital Holdings Ltd. (AXS) as they announced their intention to unite in a stock swap merger agreement. The deal is expected to culminate by the second half of 2015, once the regulatory and shareholders approvals are attained.
Both PartnerRe and AXIS were formed when the firms were able to capitalize on the rising premiums that ensued from the disasters of Hurricane Andrew and the September 11 terrorist attacks in 1993 and 2001, respectively. Both are based in Bermuda, and deal with insurance and reinsurance of catastrophe and accident coverage for property and life policies.
Per the agreement, AXIS shareholders will receive one share of the merged company against each existing share, while PartnerRe investors will own 2.18 shares of the new entity for each of its present share. Accordingly, the swap will give PartnerRe a 51.6% stake in the merged company, whereas AXIS will attain the remaining 48.4%. Additionally, the 14-member board, seven each from both the companies, will lead the union.
Value of the Merger
With PartnerRe’s approximately $5.7 billion and AXIS’ $5.3 billion in present market capitalization, the merged entity is presently worth about $11 billion. Moreover post amalgamation, the new entity would have gross premiums of over $10 billion, an investment portfolio of over $33 billion and total capital of more than $14 billion, along with a $2.5 billion worth of underwriting business.
These figures estimate the PartnerRe-AXIS fusion to be among the top-five global reinsurers in terms of premiums, thereby adding to its competitive edge against rivals like Munich Re, Swiss Re AG and Berkshire Hathaway Inc.
Furthermore, PartnerRe and AXIS expect pre-tax cost synergies worth $200 million from the merger within the first 1.5 years only. This is projected to arise from the restructuring of the companies’ multiple offices in New York, Ireland, Zurich and Bermuda. Additionally, the joint entity is estimated to be accretive to earnings as well as return on earnings (ROE), although no figures were provided.
Survival of the Fittest
The merger appears to be a crucial given the intensely competitive environment that the reinsurance industry is facing amid declining premiums. This is a prudent step that will to guard against future losses and reserve shortfalls. This year’s annual renewal season was also lackluster as property-catastrophe coverage rates fell 11%, according to Guy Carpenter.
Previously, these factors had also compelled XL Group Plc (XL) to enter into a purchase agreement worth $2.8 billion to acquire UK-based Catlin Group Ltd., earlier this month. In Nov 2014, RenaissanceRe Holdings Ltd. (RNR) also agreed to acquire Platinum Underwriters Holdings Ltd. (PTP) in a $2-billion deal.
While more mergers are expected going forward, the pending deals elucidate the need for consolidation to counter the rapidly changing industry dynamics and gain from the economies of scale as well as operating and capital flexibility.
Similarly, the PartnerRe-AXIS merger is anticipated to gain from the far-sighted board of management and its vision to expand globally. The merged company plans will continue to have specialty, life, accident, and health coverage products in its diversified kitty, and explore the developing economies of Middle East, Asia and Latin America, thereby expanding clientele.
Alongside, PartnerRe’s recent expansion into newer markets of Asia-Pacific, through PartnerRe Asia, and other strategic alliances in France and Morocco are further expected to boost the strategic and financial growth prospects of the joint entity.
Moody’s Gives a Thumbs Up
Based on the bright opportunities of this merger, Moody’s Investor Service affirmed the debt and financial strength ratings (FSR) of “A3” and “A1” on PartnerRe and its reinsurance wings, respectively, all with a stable look.
Additionally, the ratings agency placed AXIS and its operating subsidiaries under review for a ratings upgrade, both of which currently hold a senior debt rating of “Baa1” and FSR of “A2,” respectively. Moody’s believes that the amalgamated firm could be eligible for senior debt rating of “A3” and FSR of “A1” based on its superior reinsurance platform, market goodwill and varied business mix.
Preliminary Results
Alongside, both PartnerRe and AXIS laid out their preliminary fourth-quarter 2014 financial results. PartnerRe, slated to release financial results after the closing bell on Feb 4, expects to generate operating earnings of $210–230 million or $4.20–4.60 per share. This is expected to exceed $157.4 million or $2.91 per share reported in fourth-quarter 2013.
Annualized operating ROE would be within 15.4–16.9% for the quarter (higher than 11.5% recorded in fourth-quarter 2013), while reported book value is expected to be between $126.04 and $126.44 a share.Tangible book value will likely be $114.59–114.99 per share.
On the other hand, AXIS is expected to generate operating earnings of $117–123 million or $1.15–1.21 per share, lower than $159 million or $1.41 a share reported in fourth-quarter 2013. Annualized quarterly operating ROE would be within 9.0–9.5% (below 12.3% recorded in fourth-quarter 2013), whereas reported book value would likely be within $50.60–50.65 per share, higher than $45.80 a share in the year-ago period.
Tangible book value is expected to be between $49.73 and $49.79 a share. The company is scheduled to release financial results after the closing bell on Feb 3.
AXIS Hits 52-Week High
Shares of AXIS scaled a new 52-week high of $53.02 on Jan 26, buoyed by the merger news flow that even overshadowed the low preliminary results. Notably, the stock appreciated about 5.7% yesterday and 14.4% since the beginning of 2014.
Yesterday’s closing price represents a solid six-month return of about 18.8%, against 4% clocked by the S&P 500 index. The average volume of shares traded over the last three months stands at approximately 614.8K.
On the other hand, shares of PartnerRe also ended on a high note, marking a 1.2% appreciation, and eventually closing at $115.50 per share yesterday.
Zacks Rank
PartnerRe currently carries a Zacks Rank #2 (Buy), while AXIS has a Zacks Rank #3 (Hold).
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