Rating agencies concerned over PartnerRe/Axis risks

The proposed merger of PartnerRe and Axis Capital has caused mixed views from rating agencies some of which have raised concerns over a smooth integration.

Standard & Poor’s (S&P) has placed its ratings of PartnerRe and Axis Capital on creditwatch with negative implications. Although the rating agency said it is confident the merger will create a stronger global franchise in the next two to three years it is also concerned over integration risks between the two complex entities.

"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 S&P credit analyst Taoufik Gharib.

“More importantly, it is not clear how the enterprise risk management (ERM) programmes will be integrated rapidly and efficiently and how the new risk tolerances will be defined. However, these risks are partially mitigated by the familiarity between both companies' management teams,” said S&P.

AM Best also placed the companies under review with negative implications, which it said was a reflection of the complexity and scale of the merger.

“Along with combining two company cultures under one leadership team, the successful integration will need to be completed in a timely manner and optimise operational and systems infrastructure while retaining key personnel,” said the rating agency.

“During the integration period, AM Best believes there is greater inherent risk to the ongoing operations of the combined company. This transaction has inherent execution risk although this is partially mitigated by the collaborative nature of both management teams.”

Fitch has also placed PartnerRe on negative watch citing possible complications during integration.

“Nevertheless, execution and integration risk should be somewhat reduced given the similar reinsurance lines of business written by PartnerRe and Axis Capital and cooperative nature of the deal, with key AXIS Capital senior management and underwriters expected to be retained,” said Fitch.

The rating agency added that the immediate departure of Miranthis and the potential for other key PartnerRe employees that are not expected to part of the combined company to depart PRE before the merger is an additional risk.

“As such, Fitch considers PartnerRe to be in a more vulnerable competitive position currently, which could lead to a rating downgrade, particularly should the merger fail to be completed,” it added.

Moody’s affirmed PartnerRe’s ratings while placing Axis Capital’s ratings under review for an upgrade. It said that the merger will provide both franchises with strategic and financial benefits.

Moody’s said: “The combination of the two platforms would result in a firm with significantly greater scale, increasing their relevance to clients, and a highly diversified business mix.

“While the transaction carries some business and operational risks, Moody's believes that the integration and execution risks are manageable given Mr. Benchimol's prior tenure as chief financial officer of PartnerRe and the complementary nature of much of the businesses, with the exception of moderate overlap in the P&C reinsurance lines.”