Moody’s takes negative view of Covea’s PartnerRe purchase

Rating agency Moody’s has said it views  Covea's agreement with EXOR to acquire PartnerRe for $9 billion negatively because it lowers capitalisation significantly, increases goodwill and increases earnings volatility.

Moody’s said the acquisition will significantly reduce Covea's Solvency II ratio, from above 400 percent at year-end 2019 to around 240 percent on a pro forma basis. Nonetheless, this ratio will remain above that of many Aa3 rated peers. The sensitivity of the group's Solvency II ratio to a decrease in equity markets and to a decrease in interest rates will also remain limited, Moody’s said.

In addition, Moody’s noted that because Covea is a mutualist group, all future earnings will be retained and will strengthen the group's solvency ratio. Moody's expects the group to generate profits representing more than 10 percentage points of Solvency II ratio every year on a normalised basis, based on yearly net income averaging €900 million in the last five years for Covea and an additional average net income of €300 million for PartnerRe in the same period, although PartnerRe's net income has been significantly more volatile, particularly in heavy catastrophe years.

Moody’s said the group's adjusted financial leverage will deteriorate on a pro forma basis given PartnerRe's outstanding debt (€2.4 billion as at year-end 2018) will be added to Covea's debt (€0.6 billion as at year-end 2018) on a consolidated basis.

“Nonetheless, Covea will maintain conservative financial leverage metrics, below many other highly rated insurers, keeping some capacity to issue subordinated debt and strengthen its solvency,” said Moody’s.

Moody's said that the acquisition of PartnerRe will give rise to significant goodwill on Covea's balance sheet. Nonetheless, the ratio of goodwill and intangibles assets over shareholders' equity will remain consistent with Moody's expectations for Aa-rated insurers. “Reserving risk will also increase given the long tail nature of PartnerRe's casualty reserves, although reserves have consistently developed favourably across the majority of its lines of business,” said Moody’s. “The significant excess in Covea's retail business reserves will also ensure a very strong level of reserve adequacy overall.

Despite the negatives, Moody’s has affirmed Covea’s Aa3 insurance financial strength rating, with a stable outlook. Moody’s said Covea will maintain a conservative balance sheet following the transaction. In particular, the affirmation of Covea's rating reflects Moody's view that, despite the transaction being paid entirely in cash, the group will maintain a very strong capitalisation and very good financial flexibility following the acquisition.