Is the Page Turning
Sometimes things happen that when you look back you can see them as epochal events that marked the end of an era or the start of a new one.
There are some obvious ones that come to mind. The Sarajevo assassination of the heir to the Hapsburg throne in 1914 is said to have marked the end of centuries of control by European royal families. The assassination of John Kennedy in Dallas in 1963 is said to have marked the beginning of the social upheavals in the US for the next decade.
It's not only assassinations that are epochal events. In 1965, to the horror of the audience, Bob Dylan's "roadies" rolled out mountains of amplifiers and sound equipment to the stage at the Newport Jazz Festival. Then Dylan walked out onto the stage with an electric guitar and played a rock & roll set. He was roundly booed and jeered for having "sold out" folk music to rock and roll but after that nothing was the same in music.
Curiously it is rare that someone present during these events recognizes it for what it is -something that will ripple forward across generations. We may be seeing something like that right now in the reinsurance industry.
Consider the basics -this is a well-worn road so feel free to skip ahead -there is more capacity now in the market than ever before and premium prices continue to tumble. Even those who feel the market may be finally bottoming out are still gloomy enough to think that rate decreases NOT reaching 10% will indicate that an end to the free fall may be near.
Warren Buffett who has made more money in this business than just about anyone is lamenting the fact that reinsurance has now become a "fashionable asset class" and the line of deep-pocketed investors lined up around the block still waiting to come in means that reinsurance returns will never be the same.
Warnings, some apocalyptic in nature, that medium and small reinsurers had better merge with other risk bearers or face extinction are commonplace. Merger activity would have one's head spinning with announcements coming seemingly every month.
One such announcement came in January and when it came it barely raised an eyebrow. PartnerRe announced that it had been examining the future of reinsurance and decided because of the nature of the market that it would be helpful to have a global insurance presence too.
You've heard the logic before -only a large multi-line, multi-national (re)insurer can provide a client the full service today's clients need and have the risk distribution to provide a full line of coverage for that client at competitive pricing etc., etc., etc.
PartnerRe looked around and, depending on what version you believe, decided that Axis Capital was the right fit for it. Axis is a large global insurer with a well-developed insurance operation. PartnerRe figured that the time and expense and uncertainty involved in building and growing a similarly sized and operated business was prohibitive. Buying, or should we say "merging" with "equals" seemed to be the better course.
The Axis CEO, Albert Benchimol had spent the three years prior to his tenure at Axis with PartnerRe and was well known to them and Benchimol knew the PartnerRe executives.
There was the little matter of Costas Miranthis, who was the PartnerRe CEO, which had to be addressed. After discussions with Axis it was decided that Benchimol would become CEO of the newly merged company (although Partner shareholders would own 51% of it) so Miranthis moved on immediately -with a severance reported to be about $17 million.
Of course Benchimol couldn't take over yet because there was the little matter that the newly formed company had yet to be approved by both boards and the PartnerRe shareholders. Named as the new interim PartnerRe CEO was David Zwiener an outside member of the PartnerRe board. Perhaps as a logical incentive, Zwiener is to receive a $3.5 million cash bonus upon completion of the Axis deal.
It did seem a little odd -after all Miranthis resigned immediately before the deal was announced. The CEO of the smaller (not by that much but smaller just the same) was to be the CEO of the new entity and the interim CEO of Partner had a lot of money on the table as an incentive to get the merger done.
Technically it was an acquisition by PartnerRe of Axis but some observers think it is clear that the deal is an acquisition in all but name, with PartnerRe's board and management surrendering control of the company to Axis CEO Albert Benchimol.
Some were puzzled that Axis would be picking up more reinsurance exposure --a lot of it --in a time when the cyclical and structural pressures on the industry could not be any more stark.
But, as we said, at the most only eyebrows were raised. Maybe it was a good deal for PartnerRe. The new entity would be a behemoth with combined gross premiums in excess of $10bn and a top-five ranking among global reinsurers. Plus Benchimol's knowledge of PartnerRe would help quickly identify the $200 million in cost savings the deal was expected to yield.
And, most important, conventional wisdom had it that "pure" reinsurers were a thing of the past and didn't stand much a chance in the risk integrated world of the 21st century. After all, clients were interested in being nurtured by their (re)insurer from the cradle to grave of the risk cycle.
Well someone didn't get that memo. That someone in this case is John Eikann the heir to the Italian Fiat Agnelli fortune who is the CEO of Exor Ltd., the Agnelli family investment vehicle.
In fact just about everything that John Eikann has said and done in his takeover effort of PartnerRe flies in the face of the so-called conventional wisdom about the future prospects of the reinsurance industry we've been hearing lately.
We hate to do this but it may be a useful exercise. Just exactly from whom have we really been hearing this so called conventional wisdom?
Is it from the people already running very large insurance and reinsurance operations with global reach and diverse lines of business? Are they who are saying that only companies of their status stand the best chance to succeed?
Nobody running one of those big companies has failed to point out these exact attributes (that their own companies possess) as reasons why their company is well positioned for the future. Point taken. Signal sent. Message received by the broker community and cedent buyers. Over and out. (We're strong enough and big enough to handle all your needs.) We get it.
Who else has been talking about how important it is to become a very large insurance and reinsurance operation with global reach and a diverse coverage offering of many lines of business?
Two groups quickly come to mind. First there are those who in the hunt, who hope to become just such an entity, and who are signaling to potential acquisition targets or aquirors, shareholders and possibly even their own Board members that consolidation brings the benefits of the "bigger is better strategy".
Then there are of those who have been acquired or who have been merged already into parts of a larger whole.
Hefty shareholder payments and executive golden parachutes aside, the public post acquisition statements from those who've run well established franchises for years always seem a bit rehearsed to us.
We strain to find any sign of discord or unhappiness at the fact that they've been swallowed up and are no longer in control of their own fate but rarely do. The line is always toed -at least until the employment contracts terminate or the individually owned share sale lock-in periods expire.
Sometimes it's interesting to see who is not commenting on events. Silence can tell you just as much as words in some cases. This may be one of those times. We could give you a list of pure-play reinsurers and risk bearers with heavy reinsurance footprints but you wouldn't be seeing any quotes from them lately. Eikann may be speaking for more of them than he knows.
Since this is in the public domain we can mention it. It is reported that Dinos Iordanou and Arch have made several "friendly approaches" to Axis Capital dating back to 2012.
Apparently, according to reports, when John Charman was the Axis CEO he rebuffed Arch's interest. Insurance Insider reports that the Axis proxy statement filed in connection with the PartnerRe bid showed that again in June 2014 Axis rebuffed an "informal oral communication regarding a potential transaction".
How informal? Well, as a publicly traded company prudence always wins so the proxy continued saying "After consideration of all relevant factors by the Axis board of directors and the senior management, the Axis board of directors determined that it would be preferable for Axis to continue to pursue its strategy as an independent company."
If the "informal oral communication" did come from Arch this time it was Albert Benchimol who said no.
The real question is, should the PartnerRe board recommend that the Exor bid be accepted, what will happen to Axis? Axis will receive the $300 million break-up fee from Partner should the Exor bid win but would Axis themselves then be a takeover target?
Back to Iordanou and his supposed interest in Axis. Writing on May 18th about that "interest" Charlie Thomas of Insurance Insider asks "Is now the right time to significantly increase one's specialty insurance and reinsurance presence. But maybe the canny Iordanou --like the Agnelli's -- feel the doom mongering around the international (re)insurance market is a little overdone."
Has anyone seen Bob Dylan's guitar lately?