Rating agencies react after $9bn PartnerRe-Covéa deal breaks up

Fitch has removed PartnerRe from "rating watch positive" and turned a "negative" outlook, while AM Best has removed the reinsurer from "under review" status after its  $9 billion all-cash deal fell through earlier this week.

The Bermuda-based reinsurer's parent Exor announced May 12 that French mutual insurer Covéa is no longer buying PartnerRe.

Covéa's sudden "refusal to honour its commitments under the MoU" came just a month after Exor confirmed that the "difficult" but "competitively advantageous" deal will go forward despite the ongoing COVID-19 pandemic.

The two companies entered into " exclusive discussions" earlier in February 2020. Ratings agencies also gave a thumbs-up to the sale with Standard & Poor’s and Fitch improving PartnerRe's rating outlook to positive.

Fitch stated that its previously awarded "rating watch positive" reflected the potential for ownership by Covéa, a larger property/casualty, health and life insurance organisation, to "benefit PartnerRe's ratings under a group credit approach".

The agency's "negative outlook" reflects PartnerRe's pro forma results that fall outside some of its rating sensitivities and guidelines.

Meanwhile, AM Best has removed PartnerRe from "under review with developing implications" and affirmed the financial strength rating (FSR) of A+, while maintaining a stable outlook.

It stated that PartnerRe’s ratings will be further assessed in the coming months as part of its annual review process, which will incorporate an evaluation of ownership structure, evolving reinsurance market conditions and the economic implications caused by the COVID-19 pandemic.

PartnerRe's operating results have been pressured recently with the non-life segment posting a three-year average (2017-2019) combined ratio and operating ratio of 101.5 percent and 93.5 percent, respectively, driven by increased catastrophe losses and a declining benefit from favorable reserve development.

The re/insurer reported a Q1 2020 combined ratio of 103.8 percent, up from 97.7 percent in Q1 2019, primarily due to the $69 million of adverse prior year reserve development, compared to $11 million favorable in Q1 2019. The results also included $18 million of pre-tax losses from event cancellation claims associated with coronavirus that reflect estimates on claims incurred as of March 31, 2020, with potentially more sizable losses to be incurred in future quarters.

Fitch's pro forma analysis also reflects exposure to somewhat higher potential mortality losses in its life reinsurance business due to the coronavirus.