By Jonathan Kent

Standard & Poor’s Rating Services has removed both Axis Capital Holdings Ltd and PartnerRe Ltd from CreditWatch with negative implications after concluding that their proposed merger will create a combined company with a stronger competitive position.

The New York-based rating agency affirmed the A+ financial strength rating on both firms, with a stable outlook.

The Bermuda-based insurers announced their $11 billion, all-stock “merger of equals” on January 26 this year, after which S&P put them on CreditWatch while it evaluated their plans.

Job losses are likely to result from the merger, which is expected to close in the third quarter of this year, as both companies seek to cut operational expenses.

PartnerRe is a pure reinsurer, while Axis has a mix of primary insurance and reinsurance business.

In its commentary, S&P said: “We believe the combination of the two companies will likely result in business overlap within their reinsurance business, which we think is limited with virtually no business overlap in the global specialty insurance business and minimal within the life, and accident and health business.”

It added: “We also expect the merger to achieve at least $200 million in annual pre-tax cost synergies in the first two years of operations.”

S&P said the combination would “ultimately create a stronger global competitive position in the next two years, with 2014 pro forma gross premiums written in excess of $10 billion, total capital of more than $14 billion, and cash and invested assets of more than $31 billion”.

The ratings agency noted that Axis and PartnerRe had each generated strong underwriting performance in the past five years.

“Excluding 2011, which was heavily affected by industry-wide natural catastrophe losses, both companies operated at combined ratios of less than 100 per cent,” S&P stated. “Their five-year (2010-2014) average combined ratio was 96 per cent.”

Combined ratio reflects the proportion of premium dollars spent on claims and expenses and anything under 100 per cent shows underwriting profitability.

“We expect the consolidated entity to continue to generate strong underwriting results with a combined ratio of 90 per cent-95 per cent if the management teams can integrate the two complex companies and effectively manage and optimise the consolidated exposures,” S&P added.

S&P believes the two management teams have a good chance of pulling off the difficult task of an effective and successful integration.

“Given the transformational merger, there are many challenges that management will face in integrating two complex entities and effectively execute the new strategy within the next 24 months,” S&P stated.

“The execution and integration risks inherent in this type of transaction are partially mitigated by a shared philosophy of underwriting and reserving conservatism, and familiarity between both companies’ executive teams with deep knowledge of both organisations.”

Axis chief executive officer Albert Benchimol was previously chief financial officer of PartnerRe. He is one of a several executives working for one of the companies having previously worked for the other.

The stable outlook reflects S&P’s expectation that it is unlikely to change its ratings on Axis or PartnerRe in the next 12-24 months.