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PartnerRe appears oversold in wake of sale cancellation
admin | June 26, 2020
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Completion of the sale by parent Exor to Covea would have been a credit positive for PartnerRe (PRE), but the deal has been called off, and a weak 1Q20 due to investment losses seems to have spooked investors as to how bad operating performance could be for the remainder of the year. Investment performance should snap back a bit in 2Q20 even if they have some Covid-19 related operating losses. Most importantly, PRE’s capital and liquidity picture remains solid enough to weather the short-term, and EXOR remains a strong, supportive parent despite their willingness to sell at a substantial gain on their initial investment back in 2016.
PRE 3.70% 07/02/29 @ +165/10-year; G+171; 2.33%; $110.83
Issuer: PartnerRe Finance B LLC (PRE)
CUSIP: 70213BAB7
Amount outstanding: $500 million (Index-Eligible)
Rating: A3/A-/BBB+
Global Issue
Exhibit 1. PRE 29s vs P&C Peers – Bonds offer good value for A3/A- ratings in the 10-year part of the curve; trading in-line with Baa1/BBB+ rated AIG and wide to Loews (L: A3/A-) 3.2% ‘30s. We consider PRE a more stable standalone credit due to parent support and L’s exposure to the Energy segment via holdings in Boardwalk Pipelines (BWP: Baa3/BBB-) and Diamond Offshore (DOFSQ: Ca/D). See Exhibit 2 for previous trading comps.
Source: Amherst Pierpont, Bloomberg/TRACE Indications
- PartnerRe Ltd (PRE: A3/A-/BBB+) is a Bermuda-based reinsurance company that is owned by European diversified finance holding company EXOR NV (EXOR: BBB+). EXOR is majority owned by the Agnelli family – one of the wealthiest families in Europe (“The Kennedys of Italy”), and among the original founders of Fiat motors. The EXOR ownership relationship lends tremendous financial support from the parent’s base net asset value of roughly $20 billion, offering a deep well of support available during times of extraordinary stress at the reinsurer. PRE was purchased in 2016 for $6.9 bn after a lengthy bidding war, when expansion into Reinsurance was nearing a peak within the industry.
- Recently, EXOR had agreed to sell PRE to the AA-rated Covea group in a $9 billion all-cash transaction that was subsequently canceled due to the Covid-19 outbreak. S&P assigned an outlook of Positive in March on announcement of the deal, but revised it back to Stable last month when the deal was called off.
- Covea’s decision to cancel the deal, though not unfounded, seems to be very focused in the short-term impacts of Covid-19. PRE’s exposure is material, but appears very manageable given the Company’s extremely high levels of capitalization. As of year-end, PRE boasted capital and surplus of $1.1 billion versus total assets of $5.6 billion.
- As per S&P: “COVID-19 related reinsurance losses and investment losses from capital markets volatility will make it a challenging year for PartnerRe. For the first quarter, the company reported a net loss of $422 million, driven by $602 million of investment losses and a combined ratio of 106.9% (including corporate expenses), which includes a small charge for COVID-19 losses. Additional losses could be recognized depending on how long the shelter-in-place policies remain in effect and the depth and shape of economic recovery. We believe the COVID-19 related exposure is manageable, including the company’s mortality exposure. However, we acknowledge the conditions are still fluid as the industry losses develop over the next few quarters.”
- PRE has a solid liquidity position with no debt maturities until 2026 ($839 million) versus $674 million in cash on the balance sheet as of 1Q20, plus $3.6 billion in investment holdings.
Exhibit 2. P&C Intermediate Curve just prior to the Covea/PRE deal termination. Note that PRE ‘29s trading ~10 bp inside of Loews (L: A3/A-) 3.2% ‘30s
Source: Amherst Pierpont Securities, Bloomberg/TRACE Indications
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