The Long and Short

A big owner adds value for PartnerRe

| June 23, 2023

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.

PartnerRe debt still offers good value relative to the rest of the P&C and reinsurance peer group and good overall risk compensation for a solid ‘A’ operator in the segment. Ownership by a larger, diversified global P&C operator adds both implicit and explicit support, which should prove valuable during periods of heightened catastrophe losses across the sector. Meanwhile, near-term earnings prospects look favorable with good overall pricing for the global P&C and reinsurance industries. There are also limited alternatives in the intermediate P&C curve outside of the major, household name underwriters that are serial issuers of ‘A’ paper such as PGR, ALL and TRV.

Exhibit 1. P&C and Reinsurance credits – IG Comps (A3 or higher)

Source: SanCap, Bloomberg Barclays Corporate Bond indices

10MM+ PRE 3.70% 07/02/29 @ 120/5-year, G+126, 5.15%, $92.58
Issuer: PartnerRe Finance B LLC (PRE)
CUSIP: 25466AAR2
Ratings: A3/A-/A-
Insurance Financial Strength Ratings: A1/A+/AA-
Amount Outstanding: $500 million
Global Deal

PartnerRe Ltd was purchased by France-based mutual P&C insurance company, Covea Group (AA-), in a $9 billion all-cash transaction that was announced on 10/29/21 and was completed on 07/12/2022. The Bermuda-based reinsurance company was previously owned by EXOR NV— a diversified holding company that purchased PRE back in 2016 for $6 billion. Ownership by the new larger, diversified parent company lends support to the ratings, although PRE continues to operate independently.

Following the acquisition by Covea Group, PRE had its A- rating affirmed by S&P and the outlook revised to Stable from Negative, reflecting the rating agency’s expectation that PRE will be held as strategically important to the new, higher-rated parent (S&P rates Covea AA-). Fitch, which does not rate Covea, raised PRE’s rating to A- from BBB+, reflecting the ownership by a larger, diversified insurance operator. The decision to upgrade the rating was based on Fitch’s view of the strategic importance to the new parent after the deal was consummated. Moody’s also affirmed their A3 rating of PRE, as well as the A1 IFS rating, noting that PRE “…will benefit from being part of a larger insurance organization with substantial capital resources which could be used to alleviate capital strain in the event of large catastrophe losses or to help finance profitable growth opportunities.”

Based in Bermuda, PRE is a mostly pure-play reinsurance company, unlike some of its more hybrid peers that operate as both reinsurers and P&C underwriters. The company is a top-10 global operator, and is well-diversified by both geography and product, offering nearly every class of reinsurance across its broad, global footprint. Exposure to catastrophe losses leads to both earnings and capital volatility on a year-to-year basis and was visible throughout much of the 2022 operating period. PRE also has modest exposure to additional potential losses stemming from the Russia-Ukraine conflict.

Total assets as of fiscal year-end 2022 were $27.3 billion, with $18.0 billion in total policy reserves. The investment portfolio was at $17.9 billion plus an additional $1.25 billion in cash and equivalents. Total revenue has been consistently in the range of $7 to 8 billion over the past several years but dipped to $5.7 billion in fiscal 2022 due to a $1.57 billion decrease in investment income from securities given the rapid increase in rates throughout the year leading to heightened realized and unrealized investment losses. PRE appears to have a solid liquidity profile and debt maturity schedule relative to the 2029. Of the $1.9 billion in total debt outstanding for the company there is only one other maturity ahead of the 2029s, with $750 million due in 2026 (EUR denominated).

PRE experienced some earnings volatility in recent years due to Covid-related losses in 2020 and elevated catastrophe losses in more recent quarters. We anticipate that both of these factors will continue to moderate significantly in the current operating year. PRE’s combined ratio (metric for all-in underwriting costs versus revenue) peaked at 106.0% in fiscal 2020 but improved back to 90.5% in fiscal 2021 and 86.6% in fiscal 2022 and is projected to remain in the low-90s range moving forward barring the impact of substantial unforeseen catastrophe losses.

Dan Bruzzo, CFA
dan.bruzzo@santander.us
1 (646) 776-7749

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