PartnerRe: Building on stability

It has been two years since PartnerRe signed the agreement that led to its acquisition by Italian investment company Exor for $6.9 billion. The deal, which took another six months to be fully ratified, ended a prolonged battle for the reinsurer, which had previously been set to merge with Axis Capital.

Such wrangling and periods of uncertainty are not good for staff morale or for staff and client retention. CEO Emmanuel Clarke is the first to admit it was an uncertain time for the company.

“There were some 14 months of uncertainty in all but we responded by focusing on taking care of clients,” he says. “The stability of private ownership has been very much welcomed by clients and employees. It is now a question of how we use that to our competitive advantage.”

Following that period the company has moved quickly to reposition itself and refocus its brand and offering. Because there was no integration with another reinsurer to consider, which would have brought with it further uncertainties such as streamlining and clash of cultures inherent in such a process, PartnerRe was able to get back on track quickly and Clarke made some important strategic decisions designed to set it apart in the long term.

“Since the deal, we have been able to give both staff and clients a great deal of certainty; there has been a lot of energy in the team since then to build a different kind of reinsurer geared to the future,” Clarke says.

Don’t eat other people’s cake

Possibly the most significant change the company has made, which has gained growing resonance with the reinsurance industry, has been the decision to exit insurance and primary business. PartnerRe had been in the relatively early stages of building out a primary operation—a process that ended with the Exor deal, as it prefers to operate as a pure-play reinsurer.

The logic of this decision, fully backed by Exor, was twofold, Clarke
says. First, he admits that building a successful insurance operation globally is hard, presenting very different challenges from those of the reinsurance industry.

“We had a few ventures into insurance previously but we had never reached the scale to be truly successful,” he says. “The business model underpinning insurance is very different from reinsurance; distribution is much harder and while it offers diversified access to risk for a reinsurer, it does not offer diversification of risk and very few companies are good at doing both.”

The more pertinent reason is that Clarke does not want to compete with his clients. This, he says, is becoming a growing concern for cedants who are grateful to work with a partner that will not compete with them on any level.

“The fact is that we do not want to be competing with our clients,” he says. “Our owners felt strongly about this issue and I felt strongly about it too. We found ourselves on exactly the same page. There are very few reinsurers not operating in insurance now and that is a regular theme of conversations with our clients and brokers.

“If we want to be their primary preferred partner for reinsurance, then we cannot be in competition with them. They need to completely trust us and have confidence in the solutions they are seeking from us.

“It is a growing concern for cedants. It varies by line of business and market. The London Market has always been at ease with it, but in the commercial segment in the US and Europe, we hear this voiced as a frustration and a concern about reinsurers who have a growing appetite to take risks directly in this space themselves.”

This is hardly a new phenomenon, but Clarke suggests that the prolonged soft market has forced reinsurers to seek diversification and ways to use their capital in recent years.

“I think it used to be tolerated on a smaller scale but if you start losing clients to your reinsurer or, worse, your reinsurer has poached one of your teams, that really hurts. Cedants don’t want to end up in that situation.”

The benefits of private ownership

The pure-play reinsurance business model is one of a couple of factors that, Clarke believes, now sets PartnerRe apart. The other big one is the nature of its ownership.

“Being privately owned means we can now focus far more on long-term strategic plans as opposed to our quarterly earnings,” Clarke says. “Because of its cyclical nature and volatility, the reinsurance industry lends itself better to private ownership, in my opinion. We need that long-term mindset.”

This, he says, is better for clients. “We are here to take volatility off the balance sheets of our clients and that is much better done by dealing with a private balance sheet. We have more of an appetite for short-term volatility—as long as it pays in the long term. Our clients like that and the fact that we have very stable ownership.

“The biggest thing for clients is knowing that their reinsurer will be there to support them after a big event. We are here long term and have no other business interests to muddy the waters.”

It also means, Clarke adds, that PartnerRe is willing to consider taking on more esoteric risks and more innovative covers, as well as multiline or multiyear contracts.

“We can be more flexible with cedants and work as they wish to work in a way that aligns better with their aims and goals.”

Private ownership brings other benefits. PartnerRe now has a leaner and more efficient board, simplified reporting and faster decision-making, something its peers envy.

“Exor cares more about the next quarter of a century than the next quarter, which is refreshing,” says Clarke.

The downside of having an owner external to the business could potentially have been an element of naivety on the part of the owners over the vagaries and technicalities of the reinsurance industry.

But, Clarke says, Exor had done a huge amount of research on the industry before purchasing the company. “They had done their homework for at least two years before the deal,” he says. “They are also very quick learners. They understand the business extremely well and help set the objectives and high level direction.

“It’s for the executive management team to define the company strategy, vision and organisational structure to achieve those goals. They are very engaged owners who are interested and supportive of our business.”

Small fish, big pond

The other aspect to PartnerRe’s new strategic approach post-acquisition has been to build a larger presence in life and health reinsurance. Earlier this year, it acquired North American life reinsurance company Aurigen Capital for $286 million.

Formed in 2007, Aurigen was a Bermuda-domiciled reinsurer with operations in Canada and the US, providing mortality risk solutions in the US since 2013. It posted gross premiums written of $126 million in 2016, and has delivered a gross premium compound annual growth rate of 18 percent over the last five years.

Clarke says the deal expanded PartnerRe’s life reinsurance footprint in North America with minimal overlap in market coverage while allowing it to provide a wider range of life reinsurance solutions to existing and future clients.

Growth in this area is potentially lucrative for the company, Clarke says, for three reasons. First, he believes there is a great demand for life and health reinsurance solutions but an imbalance in the supply and quality of solutions.

Second, there are very high barriers to entry in terms of the capacity and expertise required, meaning that it is not easy for smaller companies to enter the market. That means that rates and returns are also healthier in this field than in increasingly commoditised lines of business such as property-catastrophe reinsurance.

“It takes a lot of expertise to analyse the risk on a UK longevity transaction,” he says. “Very few companies can do it but that also means the pricing on those deals is more in line with expectations.”

Finally, growth in this sector offers PartnerRe diversification away from its core market of property/casualty (P/C) reinsurance. It is another revenue stream, but the pricing is not linked to pricing in the P/C sector.

“It is not correlated with non-life pricing cycles and given the duration of life business and the economic value creation aspect of such business, it is also well aligned with our private ownership.”

To carry out its strategy in this area, in December 2016, the reinsurer appointed Marc Archambault as head of PartnerRe’s Life & Health business. Archambault joined the business from SCOR, most recently as CEO of SCOR Global Life Asia-Pacific, where he led the company’s regional growth strategy in those markets, and as a member of the senior management team for Global Life.

Archambault is now working on a strategy that will continue PartnerRe’s growth in this area—one that is likely to involve a mixture of organic growth and acquisitions.

“We are a small life and health player in what is a big industry so it will be a case of building a bigger platform and filling gaps in the portfolio,” Clarke says. “There is plenty of room for organic growth but we will also consider acquisitions.”

Moving with the times

Looking ahead, Clarke sees the reinsurance industry changing in the coming years. This is not necessarily because of the influence of insurtech which, he believes—while reinsurers must watch closely for how it will disrupt distribution models—is more relevant to insurers. “I think reinsurers remain one step away,” he says.

Instead, he thinks things will change for reasons closer to home to the reinsurance industry. The prolonged soft market has meant that rates in many lines of business are simply not sustainable at their current technical margins, he believes.

“Technical margins today aren’t sustainable over the long run. However I do believe that the better diversified reinsurers with better access to the business, will be more successful.”

Some lines have stabilised their pricing and even hardened in some instances, but Clarke describes the market overall as having reached “a soft bottom with some further marginal downward movement still possible”.

“The $64 million question is what will change the market, and the truth is that no-one knows—but something will have to. It could be capital depletion as casualty reserves dry up, fear and uncertainty, changes in the investment environment, a big loss or a combination of all those factors that will move the market.

“Personally, I continue to believe in cycles in reinsurance and we will see corrections locally or globally. I don’t know what form these corrections will take—whether they will be sharp after a severe capital depletion or gradual because the reinsurance industry will have passed the point of diminishing returns that it can live with. Following a market-changing event in the property cat space, we’ll see a lot of capital coming into play that will reduce the amplitude of the correction and its length in time,” he says.

This more gradual shift in the industry will be exacerbated by changes in the way cedants want to work with reinsurers. Most of the bigger players have rationalised their reinsurance buying plans in recent years; Clarke sees this trend continuing, with smaller players following suit. The winners of such changes, however, will be the bigger, global reinsurers—especially those dedicated to reinsurance, as PartnerRe now is.

“Cedants want deeper, more meaningful relationships and stable long-term partnerships,” he says. “They want a core group of partners they can trust and rely on and share information with without fear of conflicts. We find that, while buyers are increasingly managing some lines such as property-cat on a commodity basis and using other risk transfer tools for diversification, they still want that core expertise that is able to offer relevant, innovative solutions.

“That is exactly where we now position PartnerRe: a long-term, stable partner with an appetite to handle short-term volatility and a complete focus on our clients and the solutions they need to address their challenges.”