Fitch Ratings has maintained PartnerRe’s ratings on Rating Watch Positive, including its ‘A-‘ Issuer Default Rating and the ‘A+’ (Strong) Insurer Financial Strength rating of the company’s principal reinsurance operating subsidiary.
Fitch’s ratings are based on its current assessment on the impact of the coronavirus pandemic, including its economic impact, under a set of ratings assumptions.
These assumptions were used by Fitch to develop pro forma financial metrics for PartnerRe that it compared to both ratings guidelines defined in its criteria, and relative to previously established Rating Sensitivities for PartnerRe.
The Rating Watch Positive reflects the pending acquisition of PartnerRe by Covea for total cash consideration of $9 billion. Fitch believes this could potentially benefit PartnerRe’s ratings under a group credit approach.
PartnerRe’s pro forma results fall outside some rating sensitivities and guidelines. In particular, the reinsurer’s pro forma score on Fitch’s Prism factor-based capital model declines to high in the ‘Strong’ category from an actual 2019 score of ‘Very Strong’ and breaches the rating sensitivity of failing to maintain at least a ‘Very Strong’ Prism score.
The pro forma financial leverage ratio (FLR) of 21.6% is only modestly higher than the 19.1% actual at Dec. 31, 2019 and remains below the 25.0% downgrade rating sensitivity and continues to be in line with an ‘aa-‘ credit factor score.
Fitch says these pro forma results reflect a 14% decline in shareholders’ equity that was primarily driven by Fitch’s assumptions regarding a decline in stock indices and an increase in two-year cumulative high yield bond default rates.
PartnerRe maintains a manageable exposure in equities at 7% of the total investment portfolio and 18% of shareholders’ equity at Dec. 31, 2019.
Other invested assets comprise 18% of the total portfolio and 46% of shareholders’ equity at Dec. 31, 2019, with the largest asset being corporate loans at 11% of the total portfolio and 26% of shareholders’ equity.
These loans are largely U.S. bank loans with a weighted average credit rating of ‘BB-‘/’B+’. The fixed maturity portfolio is high quality with an average rating of ‘AA’, 8% rated ‘BBB’ and 3% below investment grade/unrated at YE 2019.
Fitch also has concerns that PartnerRe’s underwriting performance could be adversely impacted by the coronavirus through increased reinsurance claims, although Fitch views the pro forma exposure as manageable.
PartnerRe’s operating results have been pressured recently with the non-life segment posting a three-year average (2017-2019) combined ratio and operating ratio of 101.5% and 93.5%, respectively, driven by increased catastrophe losses and a declining benefit from favorable reserve development.
