Agnellis Shun Hedge Fund Approach With $6.4 Billion Plan

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John Elkann
John Elkann, Turin-based Exor’s chairman and chief executive officer. Photographer: Scott Eells/Bloomberg

The Agnelli family’s Exor SpA, known for investments in cars and soccer, is dismissing the prevailing reinsurance strategies as it seeks to push into the industry with a $6.4 billion takeover.

Exor is shunning the idea that it should take on more risk in PartnerRe Ltd.’s investment portfolio after making an unsolicited buyout offer for the Bermuda-based company. That contrasts with the approach of money managers like David Einhorn, Dan Loeb and John Paulson who moved into reinsurance to gain access to assets that can be invested using their hedge-fund strategies.

Those ventures seek stable returns from insurance underwriting, because of the volatility in their investment strategies. John Elkann, Turin-based Exor’s chairman and chief executive officer, told analysts Wednesday that PartnerRe can profit over the long run by getting paid to guard clients against agricultural losses or natural catastrophes.

“We think you can make good money without taking risk assets” in the investment portfolio, Elkann said. “We like the fact that PartnerRe is a very strong company with a strong balance sheet. And we won’t touch that.”

Exor is seeking to break up PartnerRe’s planned merger with Axis Capital Holdings Ltd. by making an all-cash offer. Elkann has challenged the premise that medium-sized reinsurers need to combine to build scale, diversify risks or save money through cost-cutting.

Axis CEO Albert Benchimol told investors in January that joining with PartnerRe would create the fifth-largest property-casualty reinsurer in the world and save at least $200 million a year. Reinsurers provide backup coverage for primary carriers.

Breakup Fee

Axis is unlikely to top Exor’s offer, Charles Sebaski, an analyst at BMO Capital Markets, said in a note. A higher bid would dilute shareholders, and Axis could collect a breakup fee of as much as $250 million if Exor prevails, he wrote. Bermuda-based Axis declined through a spokesman to comment on Elkann’s remarks.

Dealmaking has been accelerating among reinsurers and specialty insurers as smaller companies seek partners to keep up with rivals that expanded their product offerings and balance sheets through mergers.

Endurance Specialty Holdings Ltd. announced a deal in March to buy Montpelier Re Holdings Ltd. for more than $1.7 billion in cash and stock. In February, Brit Plc said it was selling itself to Fairfax Financial Holdings Ltd. A month earlier, XL Group Plc agreed to acquire Catlin Group Ltd.

‘Different Tomorrow’

The industry has been pressured by low interest rates that limit income from investment portfolios. Also, hedge funds are seeking results that aren’t correlated to financial markets and have increased weather-related bets, pushing down rates for catastrophe insurance.

For Axis, “the industry is going to shift down the road, completely, with the advent of third-party capital, so we need to get something done today just to prepare for a different tomorrow,” Amit Kumar, an analyst at Macquarie Group Ltd., said in a phone interview.

At Exor, the rationale is different, he said. “They’re looking for an established player, which does have a good track record of returning capital over time.”

Many industry newcomers seek to distinguish themselves through investment portfolios. Hamilton Insurance Group Ltd. has been expanding after being formed with backing from hedge fund firm Two Sigma Investments. Fidelis Insurance Holdings Ltd., backed by firms including Oaktree Capital Group LLC, has been seeking to draw investors with a pitching document that cites the “ability to dynamically adjust hedge fund allocations.”

‘Double Hit’

Executives at PartnerRe probably want to avoid adding volatility through an aggressive investing strategy as they focus on insurance-underwriting risks, Kumar said.

“The worst-case scenario is there are lots of hurricanes, and also the markets bottom out at the same time, so now you’re facing a double hit,” he said. “If the wind does not blow, it’s a very high-return business.”

Buying PartnerRe would be the Agnelli family’s largest single transaction and give Exor a company with about $22 billion of assets. That includes a $15.9 billion investment portfolio where 88 percent of the holdings are in fixed income or cash, according to a presentation Wednesday.

An acquisition would diversity Exor, which has holdings including investments in truckmaker CNH Industrial NV; Juventus Football Club SpA, one of Italy’s most successful soccer teams; and Fiat Chrysler Automobiles NV, which traces its roots to a company co-founded by Elkann’s great-great-grandfather.

‘Out of Favor’

Elkann said his company has experience in reinsurance, having invested in PartnerRe when it was formed in 1993. He said he is aware of the recent challenges in the industry.

“Now, why do we want to invest in the reinsurance sector, a sector which is today out of favor, a sector where pricing is, and has been, bad?” he asked. “We think that being long-term oriented provides a great advantage for PartnerRe, especially thinking of it as a private business. It will allow us to have flexibility and the right discipline across market cycles, and the financial resources to grow opportunistically when needed.”

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