An acquisition of Bermuda-based PartnerRe Ltd. by French mutual insurer SGAM Covéa would be unlikely to trigger a raft of similar deals, but although improving market conditions could shift reinsurers' focus away from acquisitive growth, many of the pressures to merge remain as strong as ever, according to analysts.
Following press reports, PartnerRe's Milan-listed private equity owner, Exor NV, confirmed Feb. 9 that it is in exclusive talks to sell the reinsurer to Covéa, although it stressed that there was no certainty the discussions would result in a deal.
News reports put the potential acquisition price at $9 billion, which Covéa would pay in cash, and a report from the Insurance Insider suggested it could reach $10 billion. A $9 billion price tag would be almost 1.2x PartnerRe's valuation at June 30, 2019 and would make the deal the fifth-biggest property and casualty acquisition in the past five years, according to S&P Global Market Intelligence data.
The deal would fulfill Covéa's desire to own a reinsurer, following its ill-fated attempt to take over France's Scor SE in 2018, and would free up capital for Exor. S&P Global Ratings said in a Feb. 10 report that selling PartnerRe would strengthen Exor's financial flexibility, although it would also leave the investment firm with greater exposure to the "volatile" automotive and capital goods sectors.
Even if the deal goes ahead, the market should not expect similar transactions to follow, according to Brian Schneider, senior director in the insurance team at Fitch Ratings. He said in an interview that the potential Covéa-PartnerRe tie-up is driven more by the specific situations of the companies involved than by market conditions.
"This is more of a one-off in my mind, if this deal were to go through," he said.
He noted that in addition to wanting to diversify into reinsurance, Covéa has enough cash to do such a deal and, as a mutual, does not have to worry about any issues with shareholders. And because PartnerRe is also a private company, "it should be potentially a quicker deal."
He is also not expecting rival bids from reinsurers given the better trading conditions in the reinsurance market. Prices rose further at the Jan. 1 , 2020, renewals after increasing at the various 2019 renewals dates.
"Reinsurers are really focused on the improved market environment," Schneider said. "At this point they are more focused, I would say, on organic growth opportunities and not really as concerned about M&A."
He added that he did not see the impetus for larger transactions, but that "we might see some smaller deals, maybe more bolt-on-type deals, coming through."
Christian Reber, managing director and partner at management consultancy Boston Consulting Group, noted that there are few possibilities for large transactions in a market dominated by a relatively small number of large companies. There aren't very many possible combinations of Tier 1 and Tier 2 reinsurers, he said, "and many of them have already been looked at and dismissed."
Even so, he added, "it could be envisaged" that another reinsurance powerhouse could be built to sit alongside market leaders Munich Re Co. and Swiss Re AG.
Impetus for deals
Reber also said he does not believe that improving market conditions will dampen enthusiasm for deals more generally. He agreed with several senior reinsurance executives that better reinsurance pricing has not been seen across the board.
"Although there has been a slight uptick in some parts of the market, it's not a general trend," he said.
Reber contended that companies have other priorities than pricing when making strategic acquisitions, such as access to new risk pools, knowledge and capabilities. In addition, he said, many other deal-making pressures remain.
Boston Consulting Group said in an October 2018 report, co-written by Reber, that in addition to low reinsurance prices and competition from third-party capital, the fragmented nature of the market; the growing power of brokers; regulation; and the need to innovate and embrace technology were all pushing the reinsurance industry toward consolidation.
"If anything, the pressure points we looked at in 2018 are even stronger today than they were then," Reber said.
Other analysis supports the view that the reinsurance industry is facing M&A pressure. S&P Global Ratings said in an August report that tough conditions and the availability of cheap debt would drive deals, particularly among reinsurers with narrow business or geographic focuses.
A string of large reinsurance mergers might not be imminent, but Reber suggested that there could be a few big deals in the medium term.
"The top 10 list in five or six years will probably look different than it looks today," he said.