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Covea-PartnerRe – Wider implications and unanswered questions

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There is no doubt that last week’s announcement of Covea and Exor’s revived deal for PartnerRe was surprising.

As we have already detailed here, the resurrection of the deal that the parties abandoned last spring, at the same price, was not something many had on their radar.

But putting aside the peculiarity of the deal, there are further points to note about its impact on PartnerRe’s operations in future as well as the broader reinsurance segment – most notably, the unanswered question over how this will impact the pace of what has been stop-start growth at PartnerRe.

Growth and capacity

PartnerRe’s top-line growth accelerated after its acquisition by Exor, which closed in March 2016. Between 2011 and 2015, it grew gross written premium (GWP) in non-life business to $4.3bn, a compound annual growth rate (CAGR) of 2.3%.

For the five years between 2016 and 2020, GWP increased to $5.4bn, a CAGR of 5.1%.

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With that being said, PartnerRe noticeably reduced GWP during 2020 as the carrier attempted to get a handle on poor underwriting results – PartnerRe's non-life segment reported a full-year underwriting loss of $20mn in 2019, and $47mn the year before that. The underwriting loss deepened in 2020 to $304mn, during which year PartnerRe cut non-life GWP by 7.2% and undertook heavy remediation work.

This year, as carriers look to capitalise on the hardening market, PartnerRe has restarted its growth in non-life premium, writing $3.7bn during the first half – almost 30% more than during the same period last year and broadly in line with Bermudian peers.

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Covea has not yet outlined its bullishness or otherwise on the current P&C reinsurance market. With, however, billions in excess capital not deployed in the PartnerRe deal still burning a hole in its pocket, it is not difficult to imagine significant investment into its newest subsidiary. How this is deployed will remain to be seen.

An aggressive approach to growth – aided by Covea’s comparatively low cost of capital given its status as a mutual – could be incrementally damaging for the broader market, which this year has maintained a relatively high degree of pricing discipline.

PartnerRe’s sidecars – future growth ahead?

Ahead of the acquisition, Covea’s provision of underwriting capital to PartnerRe formed part of an increased level of quota share support that has helped fuel its growth.

When their initial attempt at a deal fell through last year, Exor and Covea signed a deal in which the latter committed to invest EUR1.5bn ($1.76bn) with the former, of which EUR750mn was to support reinsurance underwriting risk and the other half allocated to investments alongside Exor.

The fact that Covea proceeded to the acquisition this year after taking its share of underwriting results in what has been a tempestuous year for cat volatility suggests that it will support ongoing growth ambitions.

As a future owner of the firm, it is likely to commit enough capital to show skin in the game alongside other third-party investors, but Covea is not known as a manager of ILS capital, leaving the onus for future development on PartnerRe.

Like many other reinsurance ILS franchises that are attempting to gain scale, PartnerRe has spent the past few years building out its use of sidecars, as these quota-share vehicles are typically seen as an easier starting point when working with third-party capital than actively managed funds.

After a quiet period following the launch of its first sidecar Lorenz in March 2013, PartnerRe has since set up Torricelli, a $57mn vehicle that shares in its net catastrophe book.

Early this year, it emerged that PartnerRe had launched Laplace-C, with investment from US private equity firm Olympus Partners.

The firm recently brought in former Hiscox ILS principal Andrew Hughes as head of third-party capital, although it remains to be seen if he will look to take the ILS business in a broader direction beyond the sidecar vehicles.

The M&A scene

Should the transaction complete, Covea’s purchase of PartnerRe may signal the dying days of a long period of reinsurance M&A and a transition to more subdued activity.

The mutual was perhaps the last viable cash buyer in the market for a reinsurance business.

As a result, the only other significant reinsurer for sale, Axa XL Re, is now faced with a near-total scarcity of willing buyers. Thus, parent group Axa may now be forced to sit with its volatile reinsurance business, acquired through the purchase of XL.

Alternatively, Covea’s removal from the pool of eligible suitors could raise the likelihood of an IPO for Axa XL Re, the other obvious route to exit its ownership. To make this viable, however, Axa must first complete the massive organisational restructure of the business into a single, more sellable unit, which is not expected to be completed before next year.

There is also a lack of investor enthusiasm for listed reinsurance carriers at present. Listed peers RenaissanceRe and Everest Re, for instance, trade at price to book multiples of 1.17x and 1.08x respectively and have stronger records than Axa XL Re (and a rapidly growing insurance franchise in the latter case).

SiriusPoint, meanwhile, trades at 0.63x – although as a much smaller player that is pivoting from a total return reinsurer it is not clear that this is a good peer comparison.

In addition, IPOs traditionally attract a discount given the overhang in the shares, pointing to scope for a painful haircut versus the 1.5x it paid for XL as a whole if Axa does choose to list the reinsurer.

The outcome of PartnerRe’s sale may not have as much of an immediate impact on the broader reinsurance market as consolidation deals such as Tokio Millennium-RenRe or Endurance-Montpelier Re. Consolidation deals such as these may bolster discipline if capacity is reduced but ultimately drive more upheaval for cedants, as well as staff dislocation.

But the looming acquisition and uncertainties over how it may change PartnerRe’s appetite and approach will nonetheless be a factor shaping the dynamic for 2022 reinsurance renewals, at a time of already heightened uncertainty and opacity thanks to cat activity, the post-pandemic environment and ILS capacity woes.

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