While characterizing their opinion as neither an endorsement nor a recommendation of the proposed merger of AXIS Capital and PartnerRe, rating analysts from A.M. Best clarified that their stance on the deal is “not negative” from a credit perspective on Friday.
Greg Reisner, a managing senior financial analyst for the Oldwick, N.J.-based rating agency, made special note of the fact that Best’s action to put both AXIS and PartnerRe “under review with negative implications” in late January does not mean that Best has a “negative outlook” on AXIS’s ratings.
A.M. Best Vice President Robert DeRose went a step further stating that the merger deal “from a credit perspective is actually favorable.”
The analysts’ comments came during an interview that aired on A.M. Best TV on Friday, immediately following a video interview with AXIS CEO Albert Benchimol and PartnerRe Chair Jean-Paul Montupet. The transcript of both interviews, including a link to the video, is part of an AXIS filing with the Securities and Exchange Commission.
Reisner explained that “under review” is an event-driven rating scenario, while an outlook is longer term in nature. In this situation, the event is the signing of a merger agreement.
“It is important to clarify that we don’t have a negative outlook on the ratings of AXIS at this point in time,” Reisner said, noting that outlooks can refer to periods as long as 36 months. With an outlook, A.M. Best would be “assessing market conditions or a company’s positioning through that market condition.”
In contrast, “the ‘under review’ in the case [means] we’re looking for more details, more information. And as that information gets finalized or more baked in and concrete and comes to us, we’ll evaluate it and analyze it and then we’ll remove the rating from under review and come up with our rating decision.”
DeRose added: “With any material transaction where two organizations are significant to the transaction, it’s very common to put the transaction under review because there is a greater degree of execution risk. We just really want to make sure that that execution risk is managed through a completion of the merger.
“‘Under review’ is really our way of taking the time to see how those risks are managed,” he said.
Responding to the direct question, “What is A.M. Best’s opinion of the AXIS Capital-PartnerRe merger,” DeRose explained why it is favorable from a credit perspective, characterizing both firms as good franchises with leadership positions in the market. Noting that AXIS has both insurance and reinsurance operations, DeRose highlighted a particular benefit for reinsurance-focused PartnerRe.
“In this current, challenging reinsurance market, having the dual capability is certainly very very important in order to manage the cycle in a prudent way. So I think bringing the two organizations together in essence will be an advantage to Partner in that it can take advantage of the existing insurance infrastructure that AXIS already has and allow it to basically deploy its capacity in a more prudent, judicious way as the market dynamics continue to evolve.”
DeRose also suggested that a larger combined balance sheet would be a benefit for both firms in an environment where the capital markets are increasingly interested in reinsurance. “Larger balance sheets” of capital markets players “probably are more attracted to those large balance sheets” on the reinsurance industry—”to the larger scale and business opportunities that the combined organization will, in essence, provide going forward,” he said, concluding that “the combination makes a lot of sense” strategically on many fronts.
Answering a direct question about A.M. Best’s opinion of an alternative linkup between PartnerRe and rival bidder EXOR, DeRose initially stated that it’s not something the rating agency has considered because there is not definitive agreement between Partner and EXOR.
Referring again to PartnerRe’s status as a pure reinsurer, DeRose quickly added: “One would have to ask the question … what would Partner do over the near term in order to broaden its distribution capabilities and really put itself in a better competitive position within a very challenging reinsurance market” if the reinsurer accepted a deal with EXOR.
A.M. Best put the “A+” financial strength ratings of AXIS and PartnerRe operating companies under review with negative implications on Jan. 26.
“A.M. Best’s rating is our opinion of the company’s ability to meet its senior obligations,” said Reisner during the video interview that was aired and disclosed Friday. “There are a lot of details that go into that equation but ultimately it’s our opinion. I wouldn’t characterize that as an endorsement or a recommendation,” he said when asked specifically if the characterization was appropriate.