Before we begin the
call, I will remind all participants that they are in a listen-only mode.
(Operator Instructions). If you have not received a copy of the press release,
it is posted on the Company's website at www.partnerre.com.
I will now hand the
call over to Robin Sidders, Director of Investor Relations at PartnerRe. Please
go ahead, ma'am.
Robin
Sidders
Good morning and
welcome to today's conference call outlining PartnerRe's planned acquisition of
PARIS RE, which we announced in a press release yesterday evening. Speaking on
today's call are Patrick Thiele, President and CEO of PartnerRe, and Albert
Benchimol, Executive Vice President and CFO of PartnerRe. Joining them for the
Q&A session after the prepared remarks have been concluded is PartnerRe
Global Chairman, Bruno Meyenhofer.
Before we get
started, I would point you to an information slide package that is now posted on
our website at www.partnerre.com in the Investor Relations section.
I will begin with
the cautionary statement. This conference call includes forward-looking
statements based on currently available information, operating plans and
projections about future events and trends. Our actual results could differ
materially from those predicted in such forward-looking statements and we
undertake no obligation to update any such statements, whether as a result of
new information, future events or otherwise. Please see our filings with the
Securities and Exchange Commission, including our annual report on Form 10-K and
subsequent reports on Form 10-Q and 8-K, including the 8-K that we file in
connection with this transaction.
With that, I'll
hand the call over to Patrick.
Patrick
Thiele
Thank you. Thank
you, Robin, and thank you for joining us for this call. From our press release
yesterday evening, you will have seen that we have signed agreements to acquire
PARIS RE, a French-listed Swiss-domiciled diversified reinsurer, in a multistep
acquisition valued at $2 billion.
This is an
important acquisition for PartnerRe, as the enhanced market presence, risk
diversification, capital strength and scale that is created provide more
balance, stability and opportunities to our Company in the face of uncertain and
volatile financial and reinsurance markets. We believe this transaction provides
excellent value for our shareholders over the longer term with limited
risk.
While both
PartnerRe and PARIS RE are well-positioned to achieve their strategic and
financial goals on a stand-alone basis, we believe that this acquisition, which
is expected to add $1.7 billion to PartnerRe's shareholders' equity, enhances
our superior risk-adjusted returns going forward. We will not change our
strategy, our financial goals, our values or the way we think about, evaluate
and managed risk, all of which have made PartnerRe the successful company it is
today.
PartnerRe recently
acquired 6% of PARIS RE's common shares outstanding. The first step will be the
block purchase by PartnerRe of approximately 57% of PARIS RE's common shares
outstanding from private equity firms and their investment entities. Once the
block purchase is completed, including the 6% of PARIS RE's common shares I
mentioned before, likely in the fourth quarter of 2009, upon receipt of all the
regulatory approvals, we will launch an exchange offer for all the remaining
PARIS RE common shares then outstanding and not owned by PartnerRe. When
PartnerRe owns at least 90% of PARIS RE's outstanding shares at the end of the
exchange offer, we will affect a merger to acquire any remaining
shares.
Albert will walk
you through each step of the transaction in detail and provide information on
the deal terms, structure, economics and the timetable, so I will concentrate on
why this is an intelligent move for PartnerRe and the significance of the
timing.
I've talked
recently about the uncertainty and increasingly volatile environment in which we
are now operating. There are any number of risks in today's global economy that
can cause extreme volatility and impact our access to capital, from volatile
capital markets to deep recession and potential inflation. For the reinsurance
industry specifically, there are many factors impacting growth and
profitability, including changes in reinsurance buying behavior caused by a
decline in exposures, the lower level for risk-free rates in government
securities, the uncertainty of loss trends and increased regulation, etc., etc.,
etc. All this highlights how important it is to be well-positioned in the
market, to anticipate extreme scenarios, and to effectively execute our strategy
so as to minimize the operational, economic and strategic risks to clients and
shareholders.
PartnerRe already
has one of the most successful franchises in the reinsurance sector. This was
strengthened as we emerged from the financial crisis of the last two years with
minimal damage to our capital, and with our people, systems and strategy intact.
Our strategy has proven successful for us and that has been demonstrated through
the financial crisis and the worst natural catastrophes in history.
PARIS RE is a
strong fit for PartnerRe. From a client perspective, we expect that the larger
and stronger PartnerRE will earn a differential position because of our
increased size, risk capacity and technical skills.
Before I hand the
call over to Albert, I want to emphasize that this is an evolutionary
acquisition; it is additive, not transformational. We are creating a more
stable, better balanced, larger and stronger version of the Company you know
today. We believe that by acquiring PARIS RE, a company currently with $2
billion in capital, a compatible book of reinsurance business and solid
technical skills, we will only enhance our franchise.
This acquisition
strengthens PartnerRe's balance sheet and financial flexibility and allows us to
leverage our infrastructure and capabilities over a broader base for the benefit
of key stakeholders of both companies, shareholders, clients and employees. And
again, all that within the risk philosophy and framework we've always
had.
With that, I'll
hand the call over to Albert.
Albert
Benchimol
Thank you, Patrick,
and good day, everyone. Before I discuss the structure of the transaction and
pro forma combination metrics, I'd like to address the depth and breadth of the
due diligence we performed over several months prior to concluding this
transaction.
We had close to 100
PartnerRe staff and executives from all disciplines, as well as outside
advisers, to ensure we had a full understanding of PARIS RE's assets,
liabilities, book of business, staff and operating structure. Our due diligence
confirmed all our initial assumptions and did not fundamentally change our view
of PARIS RE.
Investors and
clients know we are most protective of our capital and balance sheet. In this
regard, we are satisfied that PARIS RE's investment portfolio is of very high
quality; it is entirely comprised of tradable fixed income securities with an
average overall rating of AA minus.
The liabilities are
also in good shape. Losses prior to 2006 are covered by a guarantee from AXA,
PARIS RE's former parent. Liabilities for 2006 and forward are for generally
short-tail lines, and we have the benefit of both our own actuarial review and
that of an independent third party. We are convinced the combined balance sheet
enhances our already strong balance sheet.
The consideration
for this stock-for-stock transaction is a delivery of 0.3 shares of PartnerRe
for each PARIS RE share and 0.167 PartnerRe shares for each PARIS RE warrant.
Given PARIS RE has approximately 82 million shares and 8.5 million warrants
outstanding, we expect to issue approximately 26 million new PartnerRe shares
for a total value at current prices of $1.7 billion.
Separately, PARIS
RE intends to declare a distribution of capital to its shareholders equal to
$3.85 per share, or $310 million in the aggregate, net of the capital
distribution payable on treasury shares held by PARIS RE.
This brings the
total transaction value to $2 billion, which is about 97% of PARIS RE's March 31
book value, or 1.04 times March 31 tangible book value. The consideration is
also less than the economic value of the balance sheet, which is consistent with
the guidelines we have previously shared with you regarding our acquisition
criteria.
PARIS RE also meets
other acquisition criteria. It is the right size in terms of capital, business
and staff to present a manageable integration process. Its book of business is
purely reinsurance, a business we understand deeply. Yet the composition of
their book, with a larger proportion in excess-of-loss and facultative business,
provides opportunities for enhanced balance and diversification to our book of
business. They also have a good percentage of their business derived from
international markets, and this will bring immediate incremental scale to those
markets for us. The net of this enhanced business mix is a more stable book of
business.
We've said in the
past there are certain times in the cycle when intelligent acquisitions can be
pursued. We believe that current conditions have allowed for an acquisition that
makes sense to both sides. In our case, we have the opportunity to buy a
high-quality balance sheet at less than economic book value and get, in
addition, access to a seasoned book of business and experienced staff, which
should allow us to more easily achieve our financial and strategic goals under a
wide range of market conditions or economic environments.
For the sellers,
they get a premium for a stock that was trading at a depressed multiple of
tangible book value and conversion into a much more liquid share of a stronger
and larger reinsurer.
The multistep
structure of this transaction is due to PARIS RE's history, shareholdings and
legal structure. PARIS RE embodies the business of the old reinsurance
operations of AXA. In 2006, a group of private investors established a new
company to assume some of the reinsurance business and liabilities of AXA. As
part of that transaction, PARIS RE benefits from a reserve guarantee from its
former parent for losses incurred prior to 2006. This guarantee will continue
post our transaction.
In 2007, PARIS RE
completed an IPO where certain founding investors sold some shares to the
public. Prior to our transaction, approximately 87% of PARIS RE's shares were
still owned by founding investors, comprised of private equity firms and
investors related to these firms. And 13% was held by public shareholders, with
the stock traded on Paris's Euronext Exchange.
We recently
acquired outright approximately 6% of PARIS RE. Separately, we entered into a
block purchase agreement with six private equity firms for approximately 57% of
the shares outstanding and 8.2 million warrants. After the block purchase, we
will file for a voluntary exchange offer for the remaining shares we do not own,
and once we have passed the 90% ownership level, we will begin a mandatory
merger.
Let me come back to
these steps with more detail and color. The closing of the block purchase for
57% of the shares and the warrants is dependent on a number of closing
conditions, including PartnerRe's shareholder approval, regulatory and antitrust
approvals, and the payment of PARIS RE's capital distribution equivalent to
$3.85 per share.
It also requires
the shareholder approval of PARIS RE's shareholder, but we have already secured
a majority of the vote and the shares through commitments embedded in our
transaction agreements.
We expect it should
take approximately four months to obtain the various approvals necessary, and so
anticipate closing of the block purchase early in the fourth quarter of 2009.
Recognizing the amount of time between signing and our ability to take control
of the company at the closing of the block purchase, our transaction documents
include a number of operating covenants to ensure that PARIS RE continues its
operations in a manner consistent with past practices and within previously
established and communicated risk management guidelines.
Upon the close of
the block purchase, PartnerRe will own it least 63% of PARIS RE. I say it least
63% because we are likely to pursue purchases of additional shares from
investors who are either part of PARIS RE's founding group or related to them.
These additional purchases would be on similar terms as those offered at the
block purchase, and they would close concurrently with it, with delivery at the
same time as the block purchase.
Immediately upon
closing of the block purchase, we will assume majority control of the Board,
with which we will be able to oversee the operations and risk management of
PARIS RE. However, each company will continue to manage, negotiate and renew its
book of business until the effective merger of operations, anticipated in the
first quarter of next year.
After the block
purchase, we intend to file for a Voluntary Exchange Offer for any shares we do
not own at essentially the same terms as those paid in the block purchase. The
share exchange ratio may be modified slightly to compensate PARIS RE
shareholders for any PartnerRe dividends that may have been declared after the
closing of the block purchase but before the consummation of the exchange
offer.
Assuming there is a
dividend declared between the block purchase and the exchange offer, this would
represent approximately $0.14 per share of additional consideration for PARIS
RE's share in the exchange offer.
Conditions
precedent for the exchange offer include approval of the AMF, which is the
French Autorite des Marches Financiers; a listing of PartnerRe shares on the
Euronext Paris stock exchange, and a concurring opinion from an independent
financial
expert. We expect
this exchange offer to close early in the first quarter of 2010. As of today, we
have secured commitments from holders of 6% of PARIS RE shares to tender their
shares in the exchange offer.
Once we have
reached a 90% ownership level, we would initiate a mandatory merger to bring in
any remaining shares and start integrating the operations of PARIS RE into our
Company. We also expect this to happen in the first quarter of next year. At
that point, all operations would be under the PartnerRe name.
While the 0.3
-for-1 exchange ratio is fixed and does not change with the price of our shares,
there is a potential adjustment to that exchange ratio. The 0.3 -for-1 exchange
ratio assumes that the tangible book value of each party moves in relatively
close alignment. But to the extent that the tangible book value of one firm, as
defined, goes down in percentage terms by more than 15% as compared to the other
firm, the exchange ratio increases or decreases for each percentage point of
difference by 0.004 shares of PartnerRe per PARIS RE's shares. This adjustment
continues until the difference exceeds 40%, at which point the party with the
smaller tangible book value has a termination right. We believe this is a
creative mechanism to ensure that each party gets the deal they bargained for
and presents an additional protection of value in the transaction.
The information
package posted on our website provides information on the pro forma business mix
and invested assets of the combined entity. The combined 2008 reinsurance
premiums of the two entities aggregated to $5.4 billion in gross written
premiums. The combined book of business has a larger proportion of specialty
lines, facultative, excess-of-loss per risk and emerging marketing business than
we currently have in our own portfolio. Life and US casualty would represent a
smaller proportion, reflective of PARIS RE's business mix in those
lines.
The proportion of
business relating to Europe or the US does not change significantly. While it
isn't evident from the published data, there is only about 20% overlap in
treaties between the two companies, so the overall diversification should be
further enhanced. The investment portfolio totaled in excess of $16 billion as
of March 31 of this year and, as I noted earlier, they are very high quality and
liquidity.
The illustrative
consolidation of the two March 31 balance sheets reflect total assets of close
to $23 billion, total capital of $6.5 billion and shareholders' equity -- common
shareholders' equity of $5.5 billion.
This should
position us among the top-five reinsurers in terms of capital, but with the
second-highest ratings package in the industry. We have reason to believe our
ratings will be confirmed by each of the four rating agencies. Because PARIS RE
is debt-free, our leverage ratios will decline, providing greater financial
flexibility for PartnerRe.
Excluding any
purchase GAAP adjustments, which we will not finalize until the closing
date of the block purchase, this transaction is essentially neutral to book
value and modestly accretive to tangible book value per share, given the closing
prices at the end of last week. The actual Purchase GAAP adjustments will depend
on our stock price and the fair values of PARIS RE's assets and liabilities on
the closing date of the block purchase.
Accounting rules
are such that we will fully consolidate the financial results of PARIS RE as
soon as we assume majority control. The portion of PARIS RE we do not own during
the period between the block purchase and the effective merger of the companies
will be reflected as minority interest on our balance sheet and in the
calculation of earnings per share.
As you know, it is
difficult to project reinsurance revenues or earnings, as so much depends on
market conditions at renewals and the vagaries of large losses. However, under a
number of different scenarios, pro forma results for the combined company are
higher than for those of a standalone PartnerRe. So we can expect this
acquisition to be accretive to earnings per share in 2010 before any transaction
or integration costs.
We believe this is
also a risk-reducing acquisition, as the broader and more diversified book of
business should deliver more stable results across the cycle. Importantly, a
feature of this combination is that our resulting combined exposures to all key
risks will remain within our existing guidelines and limits expressed as
percentages of our economic book value. The net of all
this is our
expectation that this acquisition should help us achieve enhanced risk-adjusted
returns for the benefit of all of our stakeholders.
And with that, I'll
return the call to Patrick.
Patrick
Thiele
Thanks, Albert. I'd
like to add to Albert's comments and talk a little bit about how the integration
of PARIS RE will work, given that this acquisition will take place over a series
of transactions over the next several months.
Until the block
purchase, PartnerRe and PARIS RE will operate completely independently, with
them under the control of their existing board and CEO. Upon completion of the
block purchase, we will attain majority representation on PARIS RE's Board and
the ability to influence their operations.
Albert has already
covered the timing of financial consolidation, but from an underwriting and
investment standpoint, both companies will run independently through the January
1, 2010 renewal. Upon successful completion of the merger, PARIS RE, together
with its operating subsidiaries, will be fully integrated into PartnerRe's
existing operational and legal structures.
Longer-term, we
will maintain our business unit structure and we will maintain the continuity of
capacity, which is the primary goal in managing client relationships during the
integration process. We believe this acquisition presents us with enhanced
growth opportunities as our larger capital base and greater capabilities will
allow us to offer more risk management products and services to our combined
client base, while our stronger market position will also make us a more
attractive reinsurer to clients and brokers.
We have a history
of successful acquisitions -- SAFR in 1997 and Winterthur Re in 1998 -- and we
expect this one to be similarly successful. The exhaustive analysis and due
diligence already performed and the commitment and loyalty of all those involved
in that process gives me a high level of confidence that the integration will be
completed quickly and efficiently with minimal disruption to clients and
employees, and that all employees will be treated fairly and with the same level
of respect that is an important part of the culture at PartnerRe.
We do not have an
employee plan nor a redundancy forecast. The amount of rationalization, if any,
will depend on the state of the market and the amount of business that we
retain.
Before opening the
call for questions, I'd add one final point. The opportunity for PartnerRe to
further strengthen its capital position and build upon a successful franchise
comes at a critical time, when the global economy in general and the reinsurance
industry in particular faces an uncertain future. This acquisition positions us
to better anticipate and manage that uncertainty however and wherever it may
occur and to achieve our goals under a variety of circumstances for the benefit
of all our stakeholders.
With that Albert,
Bruno and myself will be happy to take any questions. Operator, we're ready for
the first question.
QUESTIONS AND ANSWERS
Operator
(Operator
Instructions). Jean d'Herbecourt, Chevreux.
Jean
d'Herbecourt
Good morning,
everyone. Do you hear me? Actually, I have a couple of questions. I'd just like
to know -- first of all, I would like to know if there is some overlap in terms
of businesses between PartnerRe and PARIS RE. And what is potentially the
support for you that you might use lose or you plan to lose, if there is
any.
My second question,
you highlight the positive impact in terms of diversification. So any impact in
your diversification premium in terms of solvency calculation?
My third question
is with regard to the integration of PARIS RE. I've not heard any synergy. Is
there any cost -- integration costs that you are expecting?
And my last
question is with regard to Q2 figures, any clue on what has been the
profitability of PARIS RE on the second quarter '09. Did they face any specific
losses? Do you have a good visibility on their figures? Thank you.
Patrick
Thiele
I'll ask Bruno to
discuss the overlap in the business.
Bruno
Meyenhofer
Yes, Jean. I think
Albert mentioned in his part of the presentation that in terms of 3Q, we have an
overlap of 20% with PARIS RE. That's a very low number in reinsurers operating
in the same kind of markets. And of course, on that part of the business, when
ultimately after the next renewal, when we operate as one entity next year, we
have some risk that one and one doesn't make exactly two. So there is some risk
of that, but it is manageable.
And I would say, to
put it in the larger context, when we look at the opportunity to produce larger
shares or additional business, in connection with the fact that the portfolios
are of good quality but different, that can probably be compensated maybe even
by a multiple on the side of the potential opportunities for the combined
entity.
Patrick
Thiele
Albert, would you
answer the question on the impact of the acquisition on our solvency ratios,
either the current solvency ratios [or what] our regulators are solvency
to?
Albert
Benchimol
We did not look to
calculate improved diversification benefits from the rating agencies, so we
don't have that. With regard to our own book of business, Jean, as you point
out, there is an improvement to the coverage ratios because the enhanced
diversification improves the coverage of the tail.
One of the things
that we look at is both the capital coverage of our known losses and the capital
coverage of our modeled losses. In terms of known losses, our capital coverage
improves by approximately 5% on a pro forma basis. In terms of the coverage of
the one-in-000 loss numbers, the coverage improves by close to 15%. So there is
an improvement both in terms of the average book and in terms of the coverage of
the tail.
Patrick
Thiele
As to your question
around integration and synergy, we do not have a quote, synergy, unquote plan.
First, as you know, it is a sensitive issue, obviously, in a number of
jurisdictions in the world. But two, more importantly, we have an extended
period of time to develop an integration plan, a total integration plan, as this
will not close probably until the end of the year.
And in fact, that
integration plan will then take into account the market place that we're looking
at at the time and our ability to retain business. Once we have a revenue plan
and a better understanding of the market, we will be able to do a better job of
laying out an integration plan and any impacts that might have.
And obviously, on
your final question is we're not prepared to give any guidance toward
second-quarter results either at their company or our company.
Operator
John Armitage,
Egerton Capital Limited.
John
Armitage
Hi there and good
morning. Could you say a little bit about the reserving philosophy at PARIS RE?
Because one of the things about your business is that you have over the time
generated significant surface reserves. And in a way, your book value is
understated by the surplus possibly inherent in your reserves, or what has been
(inaudible) to have been understated.
Do you think they
follow the same philosophy? And do you see upside to their book value, over and
above what it's stated at?
Patrick
Thiele
To start with,
there will be no change in PartnerRe's reserving philosophies or reserving
policies as a result of this acquisition. We will apply the same techniques, the
same policies, to PARIS RE's reserving as we do to our own, once we're in full
control of the organization. We don't expect major changes in the
reserves.
But I'll give it to
Albert to talk about due diligence.
Albert
Benchimol
Right. Thank you.
John, good morning. They have a good approach to reserving, and in fact they
have also benefited from reserve releases in prior periods. You might not see as
much of that in their income statement, because along with the AXA guarantee of
the 2006 and prior reserves, any adverse development goes to AXA, but any
favorable development on the 2006 reserves go to AXA.
And if you study
their financial statements, you see that they have in fact paid back AXA some of
the benefits of the prior-year reserves. So you see reserve releases both for
the '06 and after on their current income statement, but the '06 and prior, you
actually have to dig a little deeper to find that.
The other issue is
that PARIS RE has a predominantly short-tail book of business, and therefore
there's more clarity with regard to the view of the reserves for short-tail book
of business.
Overall, we were
very satisfied with our reserve review, and we performed not only our own
reserve review, but we also had the benefit of an external third-party
review.
John
Armitage
Thanks very
much.
Operator
Lee Dunlop,
Cazenove Cap.
Lee
Dunlop
Good morning,
gentlemen. Just the first question, how tight is the agreement with the 57%
shareholders? Could they exit the transaction themselves if someone else was
interested in their holding? Or is there a threshold that another offer would
have to exceed?
Albert
Benchimol
There is an
unconditional delivery of their shares under the block purchase agreement. The
only conditions precedence relates to regulatory approvals, the delivery of the
PARIS RE share capital repayment, and of course that the relative differences in
the book values don't increase by more than 40%. But there are no other factors
that could prevent the closing of this trade.
Lee
Dunlop
Okay. And when the
voluntary offer commences, will that have a 90% acceptance condition as
well?
Albert
Benchimol
No, the exchange
offer will be for any and all shares received.
Lee
Dunlop
Okay, so even if
you don't have a total of 90% acceptances, the transaction still completes? You
may not be able to do the compulsory merger with less than 90%.
Albert
Benchimol
From a technical
basis, you are right, but we are highly confident that we will in fact achieve a
very high turnout for those shares. And our expectations right now are that in
fact we will achieve the 90% through the exchange offer.
Lee
Dunlop
Okay. And you
suggested that there may be $0.14 per share dividend impact upon the ratio. How
does that translate into the actual ratio?
Albert
Benchimol
That ratio would be
calculated based on the value of the shares at the time of the declaration. So
it would be almost like a dividend reinvestment calculation. The way the $0.14
sense is derived, to give you a sense, is that we pay $0.47 per share quarterly
dividend. You multiply that by 0.3, which is the exchange ratio; that gives you
the $0.14. And that's only assuming --that's only assuming there is a dividend
declaration between the block trade and the exchange offer.
Lee
Dunlop
Okay, thank you.
And finally, can you just repeat, just for clarification, the thresholds of the
tangible asset movements and the impact upon the ratio?
Patrick
Thiele
Sure. There is no
adjustment to the price if the changes -- relative changes in tangible book
value are up to 15 -- that's a 15%. And there is a walkaway right at 40%. For
each percentage point between 15 and 40, the exchange ratio changes by
0.004.
Lee
Dunlop
Okay. Thank you
very much.
Operator
Vinay Misquith,
Credit Suisse.
Vinay
Misquith
Good morning. My
understanding was that PARIS RE had some sort of start-up [penalty] in terms of
its capital. Would that be freed up with the merger with PartnerRe?
Patrick
Thiele
You are referring
to the way the rating agencies look at capital as opposed to the economic
analysis of capital adequacy. I think it's fair to say that as a start-up, they
were required to keep more capital as a percentage of the various levels of the
rating agencies.
The fact that they
can distribute $310 million as a capital distribution and with the remaining
capital that stays with them, the combined companies, we can maintain improved
capital adequacy of the combined companies, gives you an indication that net of
that $310 million, the combined entities still have an abundance of capital to
support the risks.
Vinay
Misquith
Okay, so probably
the $310 million worth of capital is of the excess capital that PARIS RE will be
taking out, and so Partner will not really benefit more just because of the
capital (inaudible) reduction, okay.
The second question
was -- curious whether you had explored other options with other [Bermudians],
and why you chose PARIS RE or other Bermudians that are also trading at low
valuations.
Patrick
Thiele
As we've said
before, we started this process in the fourth quarter of 2008 in the midst of a
financial crisis, which evolved into an economic crisis. At the time, we thought
it would be better for us to be a -- have a larger capital base and a better
diversified book of business.
As -- we had always
maintained a potential acquisition list, had refreshed it at various points of
time. But we pulled it and made it a little more relevant in the fourth quarter
of last year. We had a good understanding of other companies, and we felt quite
strongly that the best fit, coupled with the best availability coupled with the
best price, was PARIS RE. We really didn't have a second choice.
Vinay
Misquith
Okay, that's great.
Thank you.
Operator
Jay Cohen, Merrill
Lynch.
Jay
Cohen
Good morning. Two
questions. The first is, was PARIS RE or is PARIS RE in any businesses that
PartnerRe chooses not to participate in?
And then the second
question is, I guess, relative to size -- you were already a top 10 reinsurance
company, you had one of the highest ratings. Were you really at any sort of
disadvantage by not being as big as you will be following this merger? In other
words, how important is this exercise relative to your business, given that you
were already a pretty big player?
Patrick
Thiele
Bruno?
Bruno
Meyenhofer
Jay, as to any
businesses PARIS RE is in that PartnerRe would choose not to be, they do write a
very small book of retrocession, and we are not a retrocession writer. So it's
unlikely that in 2010 that will continue.
Other than that,
they are involved in one or two segments we have so far decided to look at, but
not to enter. It's segments which have opened up recently, and we can profit
from their experiences made in that respect, and that's about the extent of
it.
For the size
question, I think that's a CEO question, so this goes to
Patrick.
Patrick
Thiele
I think -- and it's
a good question. It's our view that the sweet spot in the industry in terms of
capital and premium is rising as a result of this financial and economic crisis.
It is better to be larger, all things being equal, than it was a year to two
years ago. So we want to maintain our preferred position within the industry,
but the industry is moving.
I guess the other
point I would make is that I think we are potentially opening up a little ground
here. There is room, we believe, for a reinsurer who is larger than the other
midsize companies in terms of capital and premium, but not so large as the two
to three very large-scale players in the industry.
If you took the
sports analogy, I think we're talking about a light heavyweight division, where
we can retain the flexibility, the fluidity and the speed of a middleweight, at
the same time have the punching power of a heavyweight, and bring scale where we
can use it, but also retain the flexibility and the ability to move around where
that's important as well.
So I think there's
a chance through this acquisition to carve out a little territory for us that
differentiates us from the two major groups in the industry.
Jay
Cohen
Great. Thanks,
fellas.
Operator
Ian Gutterman,
Adage Capital.
Ian
Gutterman
Just a couple of
numbers questions. First, the AXA guarantee for the '06 and prior reserves, is
that a complete agreement or is that a dollar amount and then if it goes over a
certain dollar amount it goes back to Paris?
Albert
Benchimol
It's for every --
it's for all losses incurred prior to January 1, '06. I want to make sure that
we clarify that. It is a complete guarantee and it includes lack of collection
of reinsurance or otherwise; it has no limit.
I also want to say
that it's probably the best structure for a guarantee that you can have, and let
me explain why. Under most transactions that you will see, you buy a company
that has liabilities to a number of third parties, and then they have to pay the
third parties and then go back and collect on the guarantee. So there's always a
bit of a collection risk in that environment.
In this case, the
January 1 in '06 prior liabilities are all to AXA, and AXA guarantees
it.
Ian
Gutterman
Okay.
Albert
Benchimol
So it is the most
locked-up guaranteed you could get for reserves.
Ian
Gutterman
Got it. Okay,
that's helpful.
Secondly, just can
you talk a little bit about their Cat book as far as where they play? Do they
tend to be low layers, high layers? Are they more overweight Europe or Australia
than the US or vice versa? And wind versus (inaudible) -- just some kind of
rough overview of how their Cat book compares to yours.
Bruno
Meyenhofer
Jay -- Ian --
sorry, they're Cat book is rather well diversified. They tend to be a little
more in the middle or sometimes lower layers as opposed to high up. And they
have, for instance, compared to us, a relatively high proportion of secondary
and third-tier Cat exposure zones. They are, from that perspective, less
balanced toward the peak zones; they're more evenly distributed across the
geography.
Ian
Gutterman
Okay, great. And I
think my last one, just, Patrick, if I recall, traditionally you guys have been
more fond of proportional than XOL business. And this obviously brings in a big
amount of XOL business. Can you just talk about your thoughts on that, and has
your view on that changed? Is that a play on where you think the cycles going or
is that a long-term change in your philosophy of XOL versus treaty?
Patrick
Thiele
I
don't think we've ever had a bias toward quota share versus excess of loss. We
have a bias toward positive risk-adjusted rates of return. And we're perfectly
happy to move between the two, based on where we are in the cycle and what we
can negotiate with our client.
Certainly for the
last four or five years, quota share business has been profitable business. And
you get along with the quota share business a fair amount of premium, which
helps us in terms of our expenses as well. But I don't think I would say there's
a bias.
During the current
environment, with pricing outside the peak zones, Cat peak zones being basically
stagnant, you do have more control over your pricing with an excess of loss
book. So I wouldn't view it as a change in philosophy. I think it probably
brings us a little bit more in balance with the reinsurance industry as a whole.
Do you have any other comment, Bruno?
Bruno
Meyenhofer
No, that's
well-expressed. We haven't had a policy of writing towards a particular type of
treaty; it's always been a question of what are the risk-adjusted returns,
looking at the overall reinsurance program of a buyer.
To
some extent, it's been influenced a little bit by the one or the other line of
business we have been focusing on, in combination with our managing-the-cycle
approach. As the line of business, which you emphasized, may have a bias towards
the (inaudible) were more in a proportional form or an excess of
loss.
But no policy to
type. So in that sense, as Patrick says, this is -- more balanced in terms of
type should not be reflective of a particular policy towards type, but comes at
an interesting point in time where we potentially see a bit of an inflection
point in the market.
Okay. Thank you,
guys. Good luck.
Operator
Jay Gelb, Barclays
Capital.
Jay
Gelb
Thanks very much.
For PARIS RE, it looks like the company is a pretty significant buyer of
retrocessional coverage. Is that a correct statement? And would that change over
time as part of PartnerRE?
Bruno
Meyenhofer
Jay, that's
correct. They have bought quite a bit of retrocession over the past. But if you
look at the sequence in their progression, they have also reduced that
purchasing over -- particularly over the last year.
Going forward, we
will reconsider all that. There will be purchasing to the extent it makes sense
from a risk-adjusted return profile and the optimization thereof. But
potentially, of course, in the new entity, combined entity, we have the
potential to retain more than is currently the situation.
Particularly also
in the sense that PARIS RE had to navigate through the approach with the rating
agencies, which was sort of tilted towards start-up. And in fact this is a
mature organization, a question which is not on the table with
PartnerRe.
Jay
Gelb
That makes sense.
All right. And then just a technical question. It's not something we have easy
access to. Would you be able to give us the Street consensus, earnings
expectations for PARIS RE for 2009 and 2010, and just clarify whether that's on
the same basis of operating earnings as we'd expect from, say, a Bermuda
reinsurer?
Patrick
Thiele
I'm sorry. I cannot
do that. We would not be able to -- we have not obtained that in our own due
diligence in that we were looking at our own analysis. So I don't have an
analysis in my possession right now that would give it to you.
Jay
Gelb
It's not available
off of First Call or something like that?
Patrick
Thiele
I
don't have it here in front of me.
Okay. And then
finally, I just don't want people to be surprised when the deal closes if there
is a significant Purchase GAAP adjustment. Could that be material when the deal
closes, which could affect the closing book value?
Albert
Benchimol
As
I mentioned to you earlier, we feel pretty comfortable about the quality of that
balance sheet. So as of now, I'm certainly not anticipating any surprises in the
balance sheet.
I
think the real issue with the Purchase GAAP adjustment is the following. One is
we will need the fair value of the assets and liabilities of PARIS RE the date
of the close of the block trade. And the two issues there, one is the market
value of the portfolio, and the second is the time value of money in the
reserves. What happens is that we would be discounting the reserves for a time
value of money, and then there would be that benefit.
The difference on
the other side is simply where is our stock on the day of the close. To the
extent that we are trading at a high multiple of book value, then there may be a
goodwill number. To the extent that we are trading at a lower multiple of book
value, then there would be a smaller number.
But I think what
really matters is really the tangible book value. And the tangible book value
will not materially change, because that's locked in today. And so we feel
reasonably comfortable that the tangible book value, excluding any transaction
or one-time charges, is in fact accretive. And the only difference that you
would have in the book value would be the goodwill based on the price of our
stock on the day of the close (multiple speakers).
Jay
Gelb
Thank
you.
Patrick
Thiele
It's a change in
the (multiple speakers), I believe, isn't it?
Albert
Benchimol
Yes, PGAAP has been
formalized, but there's always -- in recent years, it's been that
way.
Jay
Gelb
And then finally,
can you talk about the potential for return on equity accretion? I'm talking
operating earnings on stated book.
Albert
Benchimol
Again, our targets
have not changed. What we believe this does is it facilitates our ability to
achieve our targets or to surpass our targets over time. We will continue to
manage this organization, both in terms of the growth or the reduction in the
premiums, depending on market conditions, and the capital structure of the
Company, to achieve those goals across a multitude of scenarios.
I
don't mean to press you, but if you put this together on a pro forma basis,
would PartnerRe's return on equity be higher, lower or the same on 2007, 2008,
if you included Paris?
Albert
Benchimol
I
think that we are -- let me give you from an analytical perspective. One of the
benefits of the enhanced diversification is that the amount of capital required
per unit of risk is actually lower. And therefore, on a going forward basis, if
you're getting the same revenues for that unit of risk, but your required
capital is lower, you actually get a better ROE from a risk capital model. I did
not go back to recast the '06, '07, '08 results on a GAAP basis. But certainly
from the creation of economic ROE, we will get a benefit.
Jay
Gelb
Okay, thank you
very much.
Operator
Nicolas Gourdain,
Montrica.
Nicolas
Gourdain
Good morning. Could
you comment on the condition precedence here and in particular the regulatory
conditions and the antitrust you need to waive? And sort of what worries you the
most here? Thank you.
Albert
Benchimol
I'm not troubled by
the regulatory conditions for a number of reasons -- the typical
Hart-Scott-Rodino anti-monopoly competitive things. You've got to deal with the
insurance regulators in a number of key countries, obviously -- the United
States, Europe, France, a couple of the branch areas. But in all of these cases,
PartnerRe and PARIS RE are not significant market share leaders. And so there's
certainly no anti-competitive results from this transaction.
Likewise, I think
from a regulatory perspective, what we are talking about here is the ability to
better serve the local clients because of the larger amount of capital and the
expanded capabilities of the two companies. So we have no concern on the
regulatory side.
In terms of the
shareholder votes, as I mentioned earlier, we've essentially locked in the
majority shareholder votes and the delivery of the shares, so we don't have a
concern over that.
We believe that the
path to the closing of the block trade is complex from filings and so on that we
need to do, but not troubling to us in terms of certainty.
Nicolas
Gourdain
And wasn't that --
do you have any -- do you see any sort of risk of any other bidders stepping in
here and -- I don't how much you can comment on this, but was the process more
of a true safe process where you emerged as the favorite buyer? Or was it a more
bilateral [field] where no other potential (inaudible)? And also, (multiple
speakers) -- sorry.
I'm sorry. Could
you repeat the second part of your question? I got the first part about a
potential bidder. I did not get the second part.
Nicolas
Gourdain
It's (inaudible).
It's was the process a true sales process whereby PARIS RE was sort of selling
itself and you emerged as the favorite buyer? Or was it a more bilateral
[field], where no one else was involved at all? And is there a break fee if
someone comes?
Albert
Benchimol
Okay, three
questions. I think with regards to an external bidder, I don't see how, since
we've already guaranteed the delivery of essentially 70% of the shares. I mean,
if you take the 6% we own, the 57% that we already have locked in with this
agreement and the 6% commitment to tender, we already have 70% of the shares
locked in. I don't see how another bidder could do anything to take that away
from us. That would be number one.
I
think PARIS RE was a company that felt that it could pursue its strategic
objectives on its own, and we certainly agree with that. It's just that we felt,
as Patrick noted earlier, that the combined entities would do very well for all
of the key stakeholders. And so we approached PARIS RE and we were able to
convince them of the value of combining the two operations.
Nicolas
Gourdain
Okay, and (multiple
speakers) --
Albert
Benchimol
With regard to the
breakup fee, there is a breakup fee for us. If our shareholders vote down this
transaction, we would pay a breakup fee of $75 million. There is no breakup fee
on their side because they cannot get out of this transaction.
Nicolas
Gourdain
Okay. Thank you
very much.
Operator
Paul Tucker,
Egerton Capital.
Paul
Tucker
Most of my
questions were answered. I just had two, if I may. And one of those, I guess,
clearly you've come down here on the side of acquiring rather than doing a
capital raising and just seeking opportunities that way, and I think we can
probably understand rationale for that.
And then secondly,
just a technical question on the asset side of the balance sheet. You said
you're quite comfortable, but is there anything in there that either a
standalone basis or when combined with what you have on PartnerRe's balance
sheet would not fit within your risk appetite?
Patrick
Thiele
I'll try the first
and augment it by Bruno's view. There is not a lot of new lines of business and
new technical skills existent in the world of reinsurance. We are a multi-lined
reinsurer with offices and presence around the world. So no, there wasn't
anything particularly unique or different here.
It's probably more
of a question of emphasis. They are stronger in some areas than we were in a few
selected areas -- nothing that we couldn't have gotten through hard work and
additional investment on our part. I'd point to the facultative book, perhaps,
as a good example where there are actually larger than us on a facultative
basis.
But it's not so
much around incremental business; it really is around building a larger, better
reinsurer. And I think the combined organization, in fact, will be larger and
stronger than either one of the two.
Bruno, do you have
anything to add?
Bruno
Meyenhofer
I
fully agree with Patrick. I would not underestimate the value of professional
experience, well-trained teams, particularly when it's a matter of the
nonproportional book of business and the facultative book of business, which has
a high unit count and where you need people, and good people. So from that
perspective, there is -- it's great value to have them.
In
terms of franchise, as Patrick mentioned, there are not so many new, new things
in the reinsurance, so that's really hard to come by.
Patrick
Thiele
Asset
side?
Albert
Benchimol
And we go back to
the asset side, it is in fact a very high-quality portfolio. Two or three things
I would say. They got out of their equities in the beginning of '08; they
essentially don't have junk bonds. And they probably have about -- I want to say
$70 million worth of some ABS that we don't own, but these are fairly valued and
we're comfortable with that. They have a small amount of -- less than $50
million or so of real estate investments and we don't have a lot of large real
estate investment.
But what we're
talking here is literally less than $100 million in the overall portfolio, and
we're comfortable that they are, in fact, fairly stated. So no, we do not have a
problem with the portfolio and there are no aggregation or risk issues
there.
I'd make one other
comment on your first question, as well. It's hard to divorce price from value.
And I think in this transaction, we're paying approximately economic value for
the organization. So in a way, you can look at getting the $1.4 billion worth of
gross written premium and the 400 well-trained, competent people for basically
little incremental cost, certainly from a balance sheet
perspective.
The nice thing
about it as opposed to going out and raising capital on our own and issuing $1.7
billion worth of common stock, I would invest the $1.7 billion in basically
low-return fixed-income securities. And in this case, I have every belief that
the book of business that they're bringing over will in fact service that
incremental $1.7 billion without any kind of penalty toward the existing
shareholders of PartnerRe.
Paul
Tucker
That's great
points. Thank you both very much.
Operator
Thomas Fossard,
HSBC.
Thomas
Fossard
Good morning. A
quick question regarding on how PARIS RE compared to your prime business from
PartnerRe. I mean, especially when you're looking at how the business is coming
on your books, what is the side of business you will get from brokers and what
is the side you will get from a more direct approach? And is the PARIS RE
(technical difficulty) likely to change slightly this mix of business also?
Thanks.
Bruno
Meyenhofer
Thomas, on our
side, the relationship is a little bit different. We have a somewhat higher
proportion of direct business as opposed to broker business, and that's
essentially driven by the dominance of excess-of-loss and facultative in PARIS
RE's book. Because those types of treaty, nonproportional and facultative tend
to be distributed through brokers rather than by (inaudible).
Patrick
Thiele
Next
question.
Operator
William Hawkins,
KBW.
William
Hawkins
I
just wanted to clarify briefly, if I may -- you've made a number of comments
about how there's nothing the existing shareholders can do to walk away from
this transaction. But when you talked about the unconditional delivery of
shares, you did say that one of the conditions was a vote in favor of the
capital repayment.
Patrick
Thiele
I
guess I would focus on the words of the contract that said that they will vote.
It does not say that they will vote if there is no other alternative. It says
that they will vote in favor. And so we believe that they will live by the terms
of the contract and vote in favor of the capital distribution.
William
Hawkins
Okay, that's clear.
Thank you.
Operator
Jean d'Herbecourt,
Chevreux.
Jean
d'Herbecourt
Actually, I have a
couple of other questions. The most important is with regard to the price you
pay, because you say that you pay one times tangible book. And I just wanted to
know how did you evaluate this tangible book? When is it from? Is it beginning
of the year or is it taking into account the second-quarter
figures?
And especially on
the top of my mind, PARIS RE increased its exposure to corporate bonds at a very
significant proportion at the beginning of the year, so i.e. in good condition.
So there might be some unrealized gains which could be significant here. So
that's my first question.
The other point is
you were discussing about the line of business that you would continue or not.
And I just wanted your view on the credit insurance, because there is a bit of a
-- there is a concern within the reinsurance industry on this point. So are you
satisfied with the exposure that PARIS RE has? I understand also -- so that's my
second question.
My
third question -- I understand from what has been said that basically you were
the only acquirer, you didn't have any competitors. So is it fair to say and can
we write this?
And my last point
is really about the excess of capital left within PARIS RE under A.M. Best's
model. Because this is something also that you've been discussing, the amount of
required capital is going to reduce significantly under your structure. So how
much do you have left after the distribution of dividend? Thank
you.
Albert
Benchimol
I'll address the
valuation issues and I'll defer to Bruno on the credit issue. All of the
multiples that I have given you are based on the 3/31 balance sheet. So if you
defer to the 3/31 balance sheet, that's how we gave you the
multiples.
I
understand that PARIS RE has invested in corporate bonds. PartnerRe also has a
component of corporate bonds of its portfolio, and with a share-for-share
exchange, this is hopefully captured in that both companies' book values should
move up and down in relatively the same way, since we tend to have a similar
approach to the investment and a similar approach to the book of business. So
that is how it's covered.
With regard to the
excess capital, with regard to the rating agencies, I can say that after
modeling the dividend and we look at the combined entities with the book of
business and the risk that the companies have assumed, in both cases, there is
an improvement of our percentages versus where we were before. And we are
comfortable that in all cases, no matter what kind of modeling you use, whether
it's rating agency modeling or our own modeling or regulatory modeling, we are
well supportive of the business and the risks on our balance sheets.
Bruno?
Bruno
Meyenhofer
John, you raised
the question of lines we would emphasize or deemphasize, and I would just
caution let's not get ahead of ourselves, because whatever we're going to do,
we're going to do after due (inaudible) caution review with our future
colleagues of PARIS RE.
Now on the credit
side, there I can be, I think, quite affirmative. This business and the context,
we like in the long term. Obviously, it's going through a more difficult period.
And here, I'd like to point out to you that there is a limited number of
meaningful -- of major reinsurers for the credit business. It so happens that
PARIS RE and PartnerRe are amongst that group, the only ones, reducing their
commitment to the credit sector at last renewal.
So
we are quite comfortable with the exposure we carry. It still goes through a
difficult period, as we all know, but in the long run this is business which has
produced very nice returns and we expect it will do so going
forward.
Jean
d'Herbecourt
Thank you very
much.
Operator
Jay Cohen, Merrill
Lynch.
Jay
Cohen
Thank you. On the
AXA guarantee, just a question -- is there any potential for a dispute? In other
words, you think losses are X and they think they are 50% of X related to some
older years, how does that get resolved?
Patrick
Thiele
Well, there are two
issues. Since the guarantee goes on through the passage of time, you will know
what gets paid and what doesn't get paid, Jay. But there are also some
mechanisms for external advisers to come in and opine if there is a dispute. But
I would focus on the passage of time proving the result.
Jay
Cohen
So
there is no, like, a three-year time limit, as an example, on the
guarantee?
No, there is a very
long term to the guarantee.
Jay
Cohen
Okay, that's
helpful. Thank you.
Operator
We
have no other questions at this time.
Patrick
Thiele
Thank you. Thank
you for your attention during all of this. As you might expect, and from
PartnerRe perhaps this is a little different than any of the acquisition
discussions that you've heard in the past, because in fact we're not talking
about increased growth, we're not talk about increased profitability, accretion
to earnings per share to --.
What we're talking
about is improving the risk-adjusted rates of return of this organization. And
we think that, in fact, will be done through this acquisition. We manage to the
risk as well as to the return in any kind of transaction, and we think this
transaction is well structured for the benefit of the PARIS RE shareholders, for
the PartnerRe shareholders and for the clients of both firms.
So
I think what we will have at the end of all this is, again, a larger, stronger
PartnerRe with the same attributes in the same franchise that you've come to
know us for. So thank you very much for your attention and we're
done.
Operator
That concludes
today's conference. Thank you all for your participation.
* * * *
THE INFORMATION
CONTAINED HEREIN IS A TEXTUAL REPRESENTATION OF PARTNERRE'S
CONFERENCE CALL AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE
TRANSCRIPTION, THERE MAY BE ERRORS, OMISSIONS, OR INACCURACIES IN THE
REPORTING OF THE SUBSTANCE OF THE CONFERENCE CALL. USERS ARE ADVISED
TO REVIEW THE CONFERENCE CALL ITSELF.