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ID Comment: A Covéa/PartnerRe tie-up was always going to be a challenge

A merger with Scor could be back on the cards as its chief executive, Denis Kessler, nears retirement

Covéa’s decision to pull out of a $9bn acquisition of PartnerRe because of uncertainties resulting from the coronavirus pandemic might have spared the French mutual’s blushes, as making a success of the merger was always going to be a challenge.

The French mutual said “in light of the current unprecedented conditions and significant uncertainties threatening the global economic outlook”, it could not go ahead with the acquisition on the terms initially envisaged.

The deal, when it was announced in early March for 1.4 times book value, was considered expensive by some analysts, while others thought it was in line with other deals in the sector.

The real difficulty was in seeing what Covéa, a French mutual with no real experience in reinsurance, could have brought to PartnerRe.

Combinations of primary and reinsurance businesses have, historically, had relatively little success: witness the struggles Munich Re has faced in achieving profitability for Ergo, its primary business, or Swiss Re’s similar difficulties with its Corporate Solutions business.

And, as the merger of JLT and Marsh & McLennan Companies made clear, keeping talent on board when ownership changes can be difficult and expensive.

There were also doubts as to the extent of broker and client support for PartnerRe after the transaction.

The Covid-19 crisis made the logic of the deal completely untenable. Since the pandemic began its rapid spread in February, the valuations of PartnerRe’s peers in the top tier of the European reinsurance sector have plunged by about one-third on average.

Since then, PartnerRe has booked losses of $433m for the first quarter, driven by $610m in unrealised losses on investments. Although, as its owner, Exor, points out, its underwriting exposures to Covid-19 are limited, it will not be immune from the turmoil engulfing the global economy.

One investment banker close to the sector told Insurance Day at this stage the deal would have represented a “monumental waste of policyholders’ money”.

He suggested, however this could open the door to a potential tie-up of Covéa and Scor.

Scor had been Covéa’s first target in 2018 but, much to the chagrin of some shareholders, the French reinsurer’s chief executive, Denis Kessler, sharply rejected Covéa’s initial offer of €43 ($46.76) a share and refused to entertain further negotiations.

Scor’s stock then traded shy of €40 for most of 2019, before the Covid-19 crisis sent it plunging. This morning, it ticked up about 3% to reach €23.42.

As the banker pointed out, Kessler is, at 68 years old, nearing the exit, since Scor’s bylaws require the chief executive and chairman to resign at the annual general meeting that follows their 70th birthday.

It may be Kessler’s successor – whoever it may be – is more amenable to a tie-up with Covéa, assuming the French mutual is still keen after all the troubles it has suffered so far in its quest to buy a seat at the top table in the world of reinsurance.

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