No ‘meaningfully impact’ on PartnerRe; major diversification move for Covéa

Analysts at  Moody’s Investors Service believe that  Covéa- PartnerRe merger will have no “meaningfully impact” on  PartnerRe’s business strategy and credit profile, but will “significantly” enhance Covéa’s geographic and business diversification.

Italian investment company Exor and French mutual insurer Covéa have signed a memorandum of understanding (MoU) for the sale of Bermuda-based reinsurer PartnerRe for a cash consideration of $9 billion. The deal values PartnerRe at the same pre-pandemic price offered by Covéa in March 2020, when it was ultimately called off as Exor declined to renegotiate the price on ‘inferior’ terms.

Assuming a definitive agreement is reached following the completion of a required consultation with works councils, the transaction is expected to close in mid-2022, subject to various regulatory approvals and other customary closing conditions.

Moody’s has affirmed the A1 insurance financial strength (IFS) ratings of PartnerRe, and Aa3 IFS rating of Covéa, with stable outlook for both the companies.

The ratings reflect Moody’s expectation that a change in ownership from Exor to Covéa will “not meaningfully impact” its business strategy and credit profile. However, it noted that the Bermuda-based reinsurer will “benefit from being part of a larger insurance organisation with substantial capital resources which could be used to alleviate capital strain in the event of large catastrophe losses or to help finance profitable growth opportunities”.

PartnerRe's profits have been significantly more volatile than that of Covéa, particularly in heavy catastrophe years. That said, Moody’s expects PartnerRe’s profitability to improve in coming years as a result of rising prices for reinsurance and underwriting actions taken by PartnerRe to reduce volatility.

The affirmation of Covéa’s rating reflects the “benefits of increasing diversification in terms of product, geographic reach and earnings counterbalanced by a weakening in Covéa’s financial profile as a result of the significant reduction in capitalisation and moderate increase in leverage,” the agency said.

Moody’s also warned that Covéa’s “earnings will become more volatile” over time as a result of the natural catastrophe and long-tail liability exposure that is inherent to reinsurers. Additionally, the acquisition will cause a “significant reduction” in Covéa's Solvency II ratio, which was 394 percent at year-end. The group's adjusted financial leverage will also deteriorate on a pro-forma basis given PartnerRe’s outstanding debt (estimated as €1.9 billion as at H1 2021) will be added to Covéa's debt (€0.5 billion as at year-end 2020) on a consolidated basis.

Furthermore, it stated that the acquisition will  “give rise to significant goodwill on Covéa’s balance sheet”, while warning that reserving risk will also increase given the long tail nature of PartnerRe’s casualty reserves.

“Despite these negatives, Covéa will maintain a conservative balance sheet following the transaction. In particular the group will maintain very strong capitalisation and very good financial flexibility following the acquisition despite the purchase consideration being paid entirely in cash.” it noted.

“At the same time, the group’s risk profile will increase and profits’ volatility will rise, as PartnerRe is significantly exposed to natural catastrophes and man-made risks and covers US liability and casualty risks which continue to be subject to social inflation.”

“The group’s geographic and business diversification will be significantly enhanced,” the agency said. “The weight of French business will reduce and group will also gain exposure to life and property and casualty (P&C) reinsurance businesses (31 percent of premiums on a consolidated basis post acquisition).”

The “limited overlap” between their existing businesses will limit integration and disruption risks. Moody's will “closely monitor the ability of Covea to retain key personnel”, and thinks that an upgrade of Covéa’s rating is “unlikely” at this stage.

Factors that could exert a positive pressure are “continued profitable diversification of the business outside of France and in life reinsurance, while strengthening capital levels significantly and maintaining very low financial leverage”.

Conversely, negative pressure on the rating could arise in case of a material reduction in the group’s capital, as evidenced by a Solvency II ratio remaining below 230 percent on a sustained basis, an increase in financial leverage above 30 percent and a decrease in earnings coverage below 7x, a reduction in profitability (for example by a combined ratio sustainably above 100 percent), combined with a sustained increase in the volatility, a significant deterioration in its asset quality, or failure to develop PartnerRe's business, for example in case of inability to retain key personnel.

The factors that could result in an upgrade of PartnerRe’s ratings include enhancements to the company's scale and competitive position in the global reinsurance sector, improved balance of premium volume between non-life reinsurance and life & health reinsurance, successful integration with Covéa, and a sustained reduction in the company's overall risk profile and volatility.

At the same time, factors such as significant business disruption following the acquisition resulting from weakening client or broker support or loss of key management and underwriting employees, decline in shareholders' equity by more than 10 percent, and sustained weak profitability could result in a downgrade of the reinsurer's ratings.

Covea is a P&C insurance group and ranks number four in the overall French insurance market. PartnerRe, based in Bermuda, is the 12th largest global reinsurer.

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