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Opinion: Encore une fois – Covea-PartnerRe and the lack of eligible buyers

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Reports in the Italian press this week that Exor and Covea have reignited talks over a PartnerRe sale will raise a few eyebrows.

The pair first attempted a transaction in 2020 and even got as far as signing a memorandum of understanding that would have seen Covea pay $9bn for the Bermudian carrier.

But in an about-face that scandalised (re)insurance M&A sources, Covea reneged on the deal, attempting to negotiate down the consideration due to the impact of Covid-19, despite the pandemic being well underway when the agreement was signed.

The two later made peace through a deal struck last year in which Covea invested EUR1.5bn ($1.74bn), of which EUR750mn would be used to support reinsurance underwriting risk and the other half allocated to investments alongside Exor.

To renew those talks a year and a half later, after such a torrid end to the first attempt, is a high-risk strategy for Exor to say the least.

Covea’s erratic deal history

The French mutual has demonstrated its desire to make serious inroads into reinsurance multiple times in the past few years – but also, unfortunately, illuminated its inability to actually close a deal.

Its first attempt was the doomed takeover of Scor, which saw Covea CEO Thierry Derez – despite being armed with lashings of capital – out-manoeuvred by then-Scor CEO Denis Kessler.

In fact, the attempt on Scor sparked a long-running legal battle, settled only four months ago, that if taken to court would have seen Derez face criminal proceedings over alleged breaches of fiduciary duty.

Next, Covea looked to PartnerRe in a deal that, as discussed above, collapsed due to Covea’s attempt to renegotiate – a tactic that further damaged Derez’s reputation as a credible deal-maker.

After that deal collapsed, Covea turned its attention to Axa XL Re. On the surface of it, that potential match made sense on paper, bringing together a keen buyer with deep pockets and a willing seller looking to offload a volatile reinsurance business.

The French mutual has demonstrated its desire to make serious inroads into reinsurance multiple times in the past few years – but also, unfortunately, illuminated its inability to actually close a deal

But as this publication has explored at length, the Axa XL Re deal would have come with its own challenges. Aside from the obvious execution risk, Axa would also have needed to achieve a significant premium for XL Re, having paid a high implied premium for the business when it bought XL.

A further impediment to the Covea-Axa XL deal was the need for the latter to complete a massive corporate reorganisation to transform Axa XL Re from a segment into an entity that could be sold, a project that is not expected to complete until 2022.

It was not a surprise, then, that earlier this month Axa XL and Covea walked away from talks.

PartnerRe: Between a rock and a hard place?

Engaging with a potential buyer with such a thoroughly blotted copy book is a difficult move to understand from PartnerRe-owner Exor.

Returning to talks with a counterparty that has behaved so erratically in the past, and with whom a positive outcome is not especially likely, runs the risk of creating uncertainty for both Exor’s investors, staff and even clients. That uncertainty could destroy Exor’s share value as well as spark talent flight from PartnerRe.

Granted, one way to at least partially mitigate against those effects is to demand a higher consideration from Covea than the $9bn consideration – a book value multiple of 1.37x – on the table last time, to compensate for the greater risk involved. But that is of little help if the deal fails a second time.

Further, it is difficult to see what has changed between spring 2020 and now that would make a deal easier to complete. Covea had baulked at the $9bn price tag, while Exor clearly would not accept less.

It is unclear as to whether Exor is willing to climb down on price because of a lack of options, or if Covea now believes, thanks to strengthening industry valuations, that the $9bn price tag previously discussed is acceptable.

So, given all of these issues: why do it?

After the collapse of the first round of talks with Covea, PartnerRe parted ways with CEO Emmanuel Clarke and installed board member Jacques Bonneau at the helm, who pledged to make PartnerRe “great” again.

Exor, through its chairman and CEO John Elkann, also said in a memo to staff after the failure of the Covea deal that PartnerRe “was not for sale” and stated the investor’s desire to continue its relationship with the Bermudian carrier.

Repeated discussions over a sale of the asset, however, tell a different story. Not only has Exor engaged with Covea on a sale twice, it also considered selling PartnerRe to Scor, in a deal revealed in legal documents – and denied strenuously at the time – dubbed “Project Perfume”.

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Exor clearly is open to offers for PartnerRe, as its behaviour in recent years has shown. But the fact that it is re-engaging with Covea demonstrates the paucity of options available to it to exit the investment.

As this publication has explored at length, climate change and its impact on both the frequency and severity of significant cat events is posing existential questions about the sustainability of cat reinsurance at current pricing levels, which are constrained by broadly stable capacity.

This, along with a decline in interest in reinsurance assets from Japanese and Chinese buyers, has the potential to reverse the shift towards consolidation seen in recent years in which composite carriers have bought up standalone reinsurers. Axa’s difficulties with XL Re and AIG’s troubles with Validus also serve as warnings to other large composite carriers of the challenges of owning a reinsurer.

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Covea is broadly the only buyer in town.

The only other option available to Exor to dispense with PartnerRe would be an IPO, which, given the current investor concerns over cat business and a track record of underwriting losses in recent years, would be unlikely to yield an attractive multiple.

The carrier’s two closest listed peers – RenaissanceRe and Everest Re – both currently trade at a price to book multiples of 1.08x, and given typical IPO discounts Exor would likely secure a multiple of less than that if it were to float PartnerRe.

It is of course possible that Exor and Covea, which after all is armed with around EUR12bn in excess capital, could manage to complete a deal this time around.

But given Covea’s track record and the pair’s earlier failed attempt, negotiations will be tense, and failure potentially damaging for both parties.

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