PartnerRe's acquisition of Paris Re, along with involvement in initiatives such as the Global Reinsurance Forum trade group, confirms Patrick Thiele's position as one of the most influential reinsurance executives around.
Patrick Thiele believes he has just brought his firm into a league of its own. PartnerRe may now be the biggest reinsurer on Bermuda in terms of capital.
The firm entered the year having just completed the $2bn acquisition of European reinsurer Paris Re, the former Axa Re.
PartnerRe is one of the most established firms on the island. Following IPC Re disappearing in last year’s other big acquisition story, PartnerRe is one of only two remaining class of 1993 reinsurers set up following hurricane Andrew. The other is RennaissanceRe.
PartnerRe has long been praised for its consistent good performance. Thiele has often labelled his firm boring during his almost decade in charge.
By contrast, Thiele has never been worried about speaking his mind on industry issues. In a wide-ranging interview with Reactions, he gave his thoughts on his acquisition and the state of the reinsurance market.
He’ll always have Paris
Thiele says PartnerRe decided in the autumn of 2008 that it wanted to get larger. The decision was spurred by the extreme uncertainty at the time.
“The world was falling apart,” says Thiele. “It was very uncertain what the capital markets would do, and how the reinsurance and insurance market would respond to the crisis. In that kind of event, what you want to do is get larger and stronger to deal with the issues.”
The quickest way to do this was through acquisition. But any potential deal had to meet strict criteria: the target had to be reinsurance only, it had to have a book that would complement and diversify PartnerRe’s, and it had to be up for sale.
Paris Re met the criteria. “It is reinsurance. It was the right size. Its book of business was compatible with ours and it was owned by private equity so you knew you would at least get an audience with some kind of acquisition proposal,” says Thiele.
Getting into insurance does not appeal to Thiele for a number of reasons.
“We see more failures than successes in organisations that try to provide both insurance and reinsurance. The only place it has ever worked is Bermuda, and I think that the short history of these companies makes it difficult to declare the strategy a success. Certainly in the US and Europe any insurance company that owned a reinsurer basically got out of it [eventually sold it]. So it is a difficult model to execute,” he says.
“Secondly, I don’t like competing with my clients, and inevitably if you have an insurance and a reinsurance arm, your reinsurance arm is disadvantaged because clients view it as a competitor. Thirdly, there is a different skill set involved in the underwriting of individual risks than underwriting treaty or portfolios of risks like a reinsurer. The skills, processes and complexity are significantly different.”
The Paris Re deal was announced in July last year as a stock for stock exchange with a total transaction value of about $2bn. Paris Re brings with it $1.4bn in premiums and 400 employees.
By the time the deal was announced the reason for doing it had changed slightly after the financial world rebounded in early 2009. Thiele notes that the reinsurance market had stayed stable through the crisis.
“The ability to manage through a difficult period of time with reasonable profitability became more important to us. And Paris Re gave that to us as well,” he says.
The same, but bigger
Thiele categorises the deal as moving PartnerRe into the “light heavyweight division”. He says the acquisition will not change PartnerRe’s approach. Rather, it will enable it to keep the same return goals – PartnerRe targets a long-term goal of 13% return on equity – while reducing the risk.
“It is a refinement of what we have already done rather than a different direction for the company,” he says. “We are now positioned between the mid-sized companies and the larger, scale players. The fundamental nature of the company doesn’t change, but the new size and the new diversification does begin to differentiate us a little from some of our other peers.”
Overall, Thiele says the acquisition will make PartnerRe a bigger, stronger version of the company it was before. But, while the acquisition is not a game changer for the firm, it will change its business mix slightly. It will have a higher percentage of catastrophe business, for example. “Given the current relative profitability, that is not a bad thing,” says Thiele.
Paris Re’s cat business is more focused on frequency cover with smaller clients as opposed to PartnerRe’s focus on severity cover with large clients. Paris Re is also more focused on excess of loss than PartnerRe, which has a much higher percentage of quota share business.
The two firms have about a 20% overlap on treaty premium. “There are only so many insurance clients in the world, so there has to be significant overlap in terms of clients,” says Thiele. “But there wasn’t as much overlap in actual participation. Paris Re tended to play in the lower layers, and more on the excess of loss business.”
The deal was completed on December 7. At the January 1 renewals – during which the two firms renewed their books separately – Paris Re renewed 80% of its book up for renewal, compared with PartnerRe renewing 92% of its book. Thiele says Paris Re renewed 90% of the business that met its portfolio objectives. A the time of going to press, PartnerRe expected to write about $2.6bn of non-life business during the renewals, with $440m coming from Paris Re.
PartnerRe is now busy integrating its new purchase. In February, PartnerRe reported net income of $354.4m for the fourth quarter of 2009, compared with net income for the fourth quarter of 2008 of $95.3m. For the full year, net income increased to $1.5bn from $46.6 million in 2008.
Gross premiums written for the fourth quarter of 2009 were $920.6m, compared with $752.1m in the fourth quarter of 2008. Gross premiums written for both 2009 and 2008 were around $4bn
Also in February, PartnerRe announced organisational changes, following the acquisition of Paris Re. These include Paris Re’s chief executive officer leaving the company at the end of June.
Thiele says the acquisition will be fully integrated quickly.
“The integration will be completed in the second half of the year and there will be one company left and that will be PartnerRe,” says Thiele.
He adds: “There are two ways to look at putting companies together. You can either do it as a merger where you put the two together and come up with something new; or an acquisition where one company survives. We completed an acquisition. We will take this opportunity to adapt, and blend approaches, but fundamentally the same company comes through.”
PartnerRe has experience of acquisitions to draw on. Before Thiele became chief executive officer in 2000, it bought French reinsurer SAFR in 1997 and the reinsurance operations of Swiss insurer Winterthur in 1998. The SAFR acquisition gave the firm experience of working through French labour laws when integrating companies.
“We do know the complexities of the French environment and we are working through those,” says Thiele. “You can integrate French companies. It just takes longer and costs more money.”
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A global voice
The Paris Re deal firmly establishes PartnerRe as one of the most important players in the reinsurance business. Its CEO has also become an increasingly influential and outspoken character in the industry over the years. For example, Thiele was instrumental in the establishment of the Global Reinsurance Forum (GRF), which was unveiled at last year’s Monte Carlo Rendez-Vous.
The GRF has been formed to develop industry positions on issues affecting the industry such as regulatory, legal, tax and accounting developments. Its founding members are Gen Re, Hannover Re, Lloyd’s, Munich Re, PartnerRe, RGA, Scor, Swiss Re, Toa Re, Transatlantic Re and XL Capital.
Thiele says the reinsurance industry was well represented at the regional level through associations such as the Reinsurance Association of America in the US, the Association of Bermuda Insurers & Reinsurers and Europe’s CEA.
“But it was apparent to me and several other CEOs that there wasn’t really anyone speaking for the reinsurance industry on a global basis,” he says. “As regulatory changes occur increasingly on a global basis and as the economics of the world pull themselves closer, we thought there was an opportunity to have the leading reinsurers speak as one voice around truly global issues.”
Reinsurance is a global business based around free movement of capital. Thiele says it makes sense for the industry to speak out against regulation or trade restraints that restrict that model.
He says these issues are hard to bring up in a regional association. “You find that in some cases companies will have one position in one regional association and another position in another regional association and we thought there should be an overarching view,” he says.
Thiele adds that most of the work will still be done at a regional level. “This is not intended to be an activist organisation,” he says. “It is not intended for lobby on its own.”
On the subject of regulation, Thiele says Europe is leading the way. At an Insurance Information Institute event in New York in January he commented that the regulatory leadership has moved to Europe with Solvency II.
“My biggest concern frankly is Europe,” he said. “The impetus for regulatory change is not in the US. There is a tradition in the US that capitalism works, that shareholder return and shareholder value is a good thing. In Europe that is not as deeply embedded. In fact, the regulatory and political leaders in Europe believe that the consumer and business in society in general needs to be protected against capitalism. The best we can hope for is that they recognise the differences in all these issues.”
On US regulation he said: “There is nothing like the US regulation system anywhere in the world. I used to think that the US was normal and the world is different. But it’s the other way around, the US is different, the rest is normal. There is a rush to re-regulate the industry. I’d like to see the process stretched out and more thought put into discussions. I think we can safely say that any legislation and regulation formed in a crisis is going to be bad.”
Talking to Reactions, however, Thiele sounds less worried. He is optimistic that any regulatory reform in the US will be focused on the banks and the not the insurance and reinsurance industry. He believes the industry has made a good case that American International Group’s problems had nothing to do with a failure of state regulation.
I think the NAIC [the National Association of Insurance Commissioners] is going to be able to continue to prove to the federal government that in fact this system works,” he says. “From a regulatory standpoint I don’t really see a lot of change going forward. And if it does change it will take a good deal of time. One thing about the US system - getting 50 state regulators to agree and then getting the federal government to agree too is a long and arduous process.”
The financial crisis has brought about a heavy focus on regulation that will have big ramifications for the industry. But Thiele says the crisis also underlined the stability of the insurance and reinsurance industry.
Despite the industry’s headline results fluctuating, core earnings were stable. Thiele says the industry merely “misplaced the money” last year, with unrealised losses quickly turning to gains. He says the crisis suggests accounting needs to be looked at.
“I am concerned that the crisis has been used by some as a reason to create a single financial statement that serves both statutory and financial reporting purposes. The regulators and society in general need to know if the company is solvent or not. Can they meet the financial and social obligation they have? But that is different from what investors need. They want to know the market value of assets, our best estimate of our liabilities and how much money we made. Trying to reconcile two different uses of financial statements into one accounting system I think is at the very least a mistake.”
Touchy Thiele
Despite prices falling in most lines, Thiele seems pretty content with the market and his firm’s place in it. He believes there is too narrow a focus on prices when people discuss the market. Rather, he believes the focus should be on profitability.
“You get commentary about price movements in the marketplace but you get very little commentary about what the underlying profitability is,” he says. “The fact of the matter is that, in many lines of business, loss trends and loss emergence has been quite muted now for a number of years. So even though the pricing movements have been flat to down in many lines, the profitability is still quite good.”
Thiele says improving loss trends would normally lead to improving profitability. But low interest rates are depressing this trend. Thiele says it is not yet clear whether loss emergence rates will change in the near future.
Thiele says it is not clear whether loss emergence rates will change in the near future. “That’s the $64,000 or $64bn question,” he says. “There was some concern that the credit crisis in Europe and US would lead to an emergence of liability casualty claims. That hasn’t appeared yet. It may still, but two years on we really haven’t seen it. We do still put in a loss trend on casualty but it gets harder and harder to justify to clients if no losses have emerged and the prices that we were charging three or four years ago based on current loss emergence are now seen as too high.
“It is difficult to go back and say: ‘We should charge you more money now because we think this is going to happen in the future.’ It will happen in the future. There is no doubt in my mind that loss emergence will reappear, but as of the moment there are no signs of it.”
Thiele says the industry does not get the credit it deserves. The industry is still producing an adequate rate of return.
To prove his point, Thiele did an analysis of the industries in the Standard & Poor’s 500 index that are capital intensive and looked at the correlation between their expected return on equity (ROE) and price to book.
“The correlation between price to book and expected ROE in 2010 is actually very good for capital intensive industries,” he reveals. But with one exception: “The only one that doesn’t fit is the insurance industry.”
He continues: “We are the lowest rated industry in the S&P 500. Lower than the banks. Lower than the steel companies. Lower than the airlines. Lower than the chemicals. It is hard to find an industry that is thought of as poorly as the insurance industry. The discrepancy between the results and the perception is certainly wider than any other industry I am aware of.”
It does not make any sense to Thiele that an industry that is expected to generate an ROE of about 11% to 12% – compared to the stock market’s expected return of about 8% – is not valued higher. He says the industry’s stocks should be selling at least at book value or a small premium to book value.
“I don’t understand it,” he says. “I really don’t. It seems very strange to me.”
He says equity analysts are educated reasonably well about the industry. “But the portfolio manager, the person who makes the actual allocation decisions within the portfolio, is wilfully uneducated about the reinsurance industry and really has no desire to learn. That’s the problem.”
Thiele says the industry’s risk-adjusted returns are not too bad and that more needs to be done to get the message out. The industry does not do itself too many favours, however.
“We sit there and tell clients why we are better than each other. And we spend so much time trying to differentiate ourselves from our peers that I think all of us do a disservice to the industry as a whole,” he says.
If there were more leaders like Thiele perhaps this would change.