Actuaries are famously risk averse. Not the ones over at Covea. The mutually owned French insurer is paying a dear price for geographic diversification with the purchase of reinsurer PartnerRe. Given how the value of rivals has slumped of late, it looks like Italy’s Agnelli family got the better of the French.
Exor, the Agnelli’s investment vehicle which also controls Fiat Chrysler Automobiles, Ferrari and soccer club Juventus, confirmed it had inked a memorandum of understanding under which Covea will pay $9 billion in cash plus another $50 million in dividends. That’s about the same amount as when deal talks first leaked almost four weeks ago.
Based on PartnerRe’s book value of 6.57 billion euros, that represents a premium of 38%. By contrast, Exor paid 10% above PartnerRe’s book value four years ago. Global pandemic fears notwithstanding, there’s little wonder Exor Chief Executive John Elkann has decided to take the money and run, in the process crystallising a juicy 45% cash return.
The question for Covea is why they didn’t get a better price. Firstly, they are hardly buying a stellar performer: PartnerRe blamed California wildfires for a 105 million euro loss in 2018, although it has since returned to profitability. Coronavirus fears add additional impetus for a price cut. Uncertainty over insurers’ financial exposure to virus aftershocks has hit rivals’ valuations. Shares in Swiss Re and Munich Re have declined by 16% and 13%, respectively, since the PartnerRe talks emerged.
Covea’s peculiarly French structure, which builds up mounds of surplus capital, may explain its generosity. Covea’s members, which include farmers and small business owners, have helped the company amass nearly 18 billion euros in excess of its regulatory requirements, according to its last solvency report. The mutual structure means that distributing this cash to members can be hard to do without regulatory approval. That gives Covea a perverse incentive to spend its war chest.
PartnerRe will diversify earnings away from Covea’s core French market. And given a shortage of available reinsurers, any buyer would have to bake in some scarcity value. Still, given the premium paid and investors’ present risk-off sentiment, the Agnellis appear to have extracted a hefty price.