Scor needs scale. Internal discussions led to the obvious conclusion that Partner Re (100% owned by Exor) would be an ideal short-cut to size. This information was made public after Covéa dropped its bid on Scor, as we were expecting. By joining forces with Partner Re, Scor would have a better business mix with a profitable P&C operations. For Exor, this deal would allow its dividend income to stabilise, as the French reinsurer is largely a dividend annuity.

The Scor–Covéa and now Partner Re saga began in September 2018. The mutual insurer, which is the largest shareholder with an 8.22% stake, proposed to take over Scor, bidding at €43 when Scor traded at €35.45. Scor rejected this offer, regarding it ipso facto as hostile. Covéa confirmed its intent but only in a friendly mode. Its motives were largely unclear but could have drawn some inspiration from the TalanxHannover Re set-up. Scor would continue to be listed and managed by the same team.

Scor and Covéa’s CEOs have been at loggerheads since. Denis Kessler at Scor (nearly 17 years at the helm) was always a staunch defender of the independence of Scor. He denied market rumours that suggested a possible deal with Partner Re. He relied on his strong personal network and its ally BNP Paribas, where he had been an administrator since 2000, to fend off Covea. Thierry Derez, the CEO of Covéa and a Board member of the reinsurer introduced a weird concept of “temporarily” stepping down from the board, up to the next shareholders general meeting. This was unheard of. It also happens that the AGM due in April 2019 is the deadline for a standstill agreement between Scor and Covéa. Beyond, Covéa is free to increase its stake beyond 10%.

But, to everyone’s surprise, Covéa dropped its bid on 29 January. The same day Scor initiated a criminal action against Thierry Derez, Covéa, Barclays (Covéa’s financial advisor and financing bank) and Rothschild. In its complaint, Scor indicated that its strategic committee discussed, on 25 July 2018, a possible industrial project involving Partner Re. It looks as if Covéa’s CEO used that information as well as valuation work prepared by BNP Paribas to pre-empt Scor by launching a bid. If confirmed in the courts, such a conflict of interest would be unprecedented.

Covéa can’t afford Scor

We made clear on 13/11 (Is Covéa the only Scor driver) that Covéa was not able to go for Scor. It just does not have the financial might. It looks big with shareholders’ funds at €14bn and c. €16bn in premiums (say €120bn for Axa for a sense of perspective) and €0.8bn 2017 net earnings (about the operating earnings of Scor). Still, the small print will quickly highlight that these figures are not equivalent to the consolidated earnings of a fully-integrated insurer operating as a limited company with true equity. These figures are those of a “combined” company with brings under one roof separate mutual insurance companies. The combined accounts do not mean control of cash from one entity to the other. To raise equity-type capital, policy holders would have to stump up. It would be better to ask for the moon. So, in the event of a cash bid on Scor, it had to be debt-financed. Paying back that debt would then become a subject worth exploring as it supposes that the complex governance of Covea Cooperations (the coordination body between the mutuals that uses…re-insurance to raise funds) finds a way to apportion risks to the separate mutual companies. Buying Scor is not an easy task; solving the Covéa internal power games may be even more of a challenge.

Why Partner Re?

All reinsurers have suffered from fierce competition, soft price conditions and regulatory changes, as many catalysts to more M&A operations. But why did Scor reject Covéa while thinking about Partner Re?

Partner Re is accustomed to French affairs. It acquired Société Anonyme Francaise de Reassurances in 1997 and Paris Re in 2009. The profile of the Bermudian company is a neat fit for Scor. Partner Re’s main offices are located in Hamilton, Dublin, Stamford, Toronto, Paris, Singapore and Zurich. This geographical footprint complements Scor’s with its three hubs: New York-Charlotte-Kansas City for the Americas, Paris-London-Cologne-Zurich for Europe and Singapore for Asia. Cost synergies look possible.

The top line of Partner Re is dominated by the P&C segment (c. 50% of gross premiums). This matters for Scor which shifted its business mix towards more P&C affairs (currently c. 40% of gross premiums). The French reinsurer, which combines reinsurance and insurance (Scor Business Solutions and Lloyd’s & Partnerships), is targeting a 3-8% growth rate for 2016-19 for its P&C segment. This implies a larger presence in emerging markets, which currently account for around 30% of premiums. The value of Partner Re could be there indeed. At the same time, the Bermudian company is looking to reinforce its presence in North America. One of its recent acquisitions was Aurigen, a North American Life reinsurance company. Scor has a solid competitive positioning in this zone.

Combining the two P&C business cannot hurt profitability. This segment continues to experience soft prices. According to its earlier strategic plan, Scor’s priority is to consolidate its positions in international markets and to develop its own agents network. Its Global P&C operations are being reorganised into three key business areas: reinsurance, speciality insurance and P&C partners with a transverse function that is supposed to help the company reach its targets. This presentation matches Partner Re’s.

A fresh focus on P&C is warranted as Scor cannot rely indefinitely on its leading positions in the US Life reinsurance market and its long-term relationships established with cedants to generate earnings, since the industry is deeply changing. The Life business is facing challenges and the company is struggling to keep its 7% technical margin.

It goes without saying that putting together the two balance sheets can only help leverage the business where the signature is nothing but the size of shareholders’ funds.

A third global player

Concretely, a Scor – Partner Re entity would be a convincing proposition. Together, and based on 9M 18 figures, they would record gross premiums of €15,723m. This means that we are speaking of a third global player, as its sales would be higher than Hannover Re’s. Concerning investment income, the new entity would record €700m of investment income during the same period, thanks to total investments of more than €41bn.

Partner Re is currently suffering from a high combined ratio for its P&C business (114.7% in 9M 18) while Scor posted a 93.6% ratio last September. Scor would help improve the management and the quality of Partner Re’s portfolio and turn it into a more profitable one. A combined ratio within the 95-97% range would be a reasonable target. However, this process would take at least two years so that, in between, the merged entity’s earnings could well disappoint. Partner Re posted a loss of $100m in 9M 18. Reaching the threshold of €1bn of net income is not possible in the short term. In other words, joint operations would most likely be dilutive to Scor’s EPS.

Next?

For Exor, Partner Re is extremely important as it is providing a significant part of its dividend income. Stabilising the dividend stream from the reinsurer unit is a priority for Exor. Partner Re’s dividend decreased dramatically from €245m in 2016 to €145m in 2017 and €41.3m in 2018. By contrast, Scor can be regarded as a dividend annuity as it distributed €2.1bn to its shareholders over the last 10 years. As a reminder, Exor otherwise depends on FCA dividends which are bound to be volatile.

The perfect scenario would bring Partner Re and Scor together with Exor selling Partner Re to Scor against new Scor shares. Many issues are mechanically solved:

  • Scor finds a new reference shareholder in Exor
  • Scor and Partner Re do address their lack of size
  • Exor swaps an unlisted assets for a listed one

The magic wand is unlikely to be waved overnight. Exor is unlikely to want to launch a full bid on an enlarged Scor if it garners more than 33% of Scor’s shares. Some elegant financial engineering has to be deployed.

The merged Scor would be a completely revamped investment proposition, competing with industry leaders with a similarly solid capital position (a Solvency II ratio >200%) and generous dividend policy. However, the integration of Partner Re would take two years at the very least.

Partner Re denied having had discussions with Scor. That may not be the full story but the point remains the same: both firms lack size as stand-alone companies.