Fitch downgrades PartnerRe’s IFS after EXOR merger

Fitch Ratings has downgraded PartnerRe’s insurer financial strength (IFS) rating to A+ from AA-.

The rating action by the US firm follows an updated analysis by Fitch, following the firm’s merger with investment company EXOR, which was completed on March 18.

The rating has been removed from rating watch negative and the rating outlook is stable.

Fitch said the downgrade primarily reflects its view that PartnerRe’s position in the challenging reinsurance market environment, which is expected to result in ongoing pressure on earnings, no longer supports the former ratings.

Further, while Fitch does not view EXOR's credit quality as unsupportive of PartnerRe’s ratings, Fitch does not view the change in ownership to EXOR as improving PartnerRe’s near-term competitive position.

It said PartnerRe will effectively maintain its current size, scale and reinsurance focused operating profile. Fitch expects EXOR to offer reasonable support to PartnerRe as needed and to conservatively manage the reinsurers' capitalisation with PartnerRe continuing to manage its operations generally independent of EXOR.

Favourably, the ratings continue to reflect the company's very strong capitalisation with moderate operating and financial leverage and favourable reserve adequacy, according to Fitch.

The shifting market landscape in reinsurance is pressuring profitability and sparking consolidation as companies aim to enhance their relative competitive position, according to Fitch. It believes PartnerRe has a large reinsurance market position and scale, writing a diverse mix of reinsurance lines. However, its overall market position trails several of its' larger, higher rated, more diversified re/insurance peers.

Fitch also views PartnerRe’s minimal presence in primary lines as a disadvantage relative to companies that have a more balanced platform of both reinsurance and insurance businesses. This limited business diversity outside of reinsurance results in higher overall earnings volatility and renders PartnerRe especially susceptible to the current market conditions that generally favour commercial primary insurance over reinsurance.

The downgrade also reflects Fitch's expectation that PartnerRe’s profitability will continue to be pressured and reduced from historical favourable levels. PartnerRe’s most recent five-year average (2011 - 2015) combined ratio and return on average common equity of 94.1 percent and 7.3 percent, respectively, and aligns with Fitch's median 'AA-' and 'BBB+' IFS reinsurance sector credit factors.

Fitch anticipates that the softening pricing environment will continue across a wide range of lines as the industry contends with record capitalisation levels of traditional reinsurers and growing capacity provided by alternative capital providers. PartnerRe’s reinsurance concentration leaves the company vulnerable to a continuation in unfavourable reinsurance market pricing trends and sluggish demand.