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HAMILTON, Bermuda-In an apparent about face, Partner Re Ltd., which has championed the need for Bermuda property catastrophe reinsurers to focus exclusively on that business, is about to become one of Bermuda's most diverse reinsurers through the purchase of Paris-based Societe Anonyme Francaise de Reassurances.
While the two companies will maintain separate operations, Partner Re's $950 million acquisition will expose it to risks outside property catastrophe lines for the first time.
Previously, Partner Re President and Chief Executive Officer Herbert N. Haag has forcefully argued that reinsurers should stick to their areas of expertise.
However, SAFR management has the expertise necessary to justify the diversification, Mr. Haag said. Conversely, the non-proportional reinsurance expertise at Partner Re will help SAFR grow, he said.
But any post-acquisition growth by Partner Re or SAFR will likely not match the stellar growth Partner Re managed to attain in its first few years, analysts say.
The deal has an unusual structure and centers around the minority shareholding Swiss Reinsurance Co. in Zurich has in both Partner Re and SAFR.
Swiss Re had previously announced it would increase its stake in SAFR to 78.4% from 21.56% by buying up the 46.8% owned by Paris-based Assurances Generales de France and the 10.04% owned by Athena Assurances, an affiliate of Paris-based bank Worms et Cie (BI, March 3, 1997).
Once the purchase is completed, Swiss Re will make an offer for the remaining publicly held shares of SAFR. Partner Re will then buy all of the SAFR stock from Swiss Re for about $800 million in cash and 6.45 million in Partner Re common shares. The value of the Partner Re shares, some of which are being sold at a previously agreed option price, is about $150 million.
As a result of the transaction, Swiss Re will increase its stake in Partner Re to 21.8% from 11.1%. As part of the deal, Swiss Re has agreed to own no more than 30% of Partner Re.
Swiss Re will make a capital gain of about 100 million Swiss francs ($69.3 million) on the deal.
Circumstances dictated the structure of the deal, Mr. Haag said.
AGF and Athena had indicated they wanted to sell their shares in SAFR, so Swiss Re offered to buy them rather than let SAFR fall into the hands of a rival, such as Munich Reinsurance Co., he said.
Swiss Re considered keeping SAFR and integrating it with its existing operations, a Swiss Re spokesman said.
"But we already have a presence in France, and we share many of the same clients with SAFR, so there was not much synergy. For Partner Re it represents a real diversification," he said.
The SAFR book of business includes property, casualty, marine and aviation, life, and credit and surety business (see chart, page 1).
SAFR also will bring geographic diversification to Partner Re. More than 70% of SAFR's premiums are derived from Europe and only 12% from North America. More than half of Partner Re's premiums are derived from North America and less than 20% are derived from Europe.
The SAFR purchase will allow Partner Re to diversify without adding new capacity to an already competitive reinsurance market, Mr. Haag said. By retaining the management of SAFR, Partner Re will gain the expertise necessary for diversification, he said. And Partner Re has the expertise necessary to help SAFR develop its non-proportional reinsurance business.
"It was a unique opportunity that we were able to take advantage of through our relationship with Swiss Re," Mr. Haag said.
The need to diversify has been acknowledged by all the Bermuda catastrophe reinsurers who enjoyed huge rates when they set up in 1992 and 1993 but have watched the rates, and premiums, fall in the past two years.
For example, Partner Re wrote gross premiums of $206 million in 1996, down 10.8% from $230.9 million in 1995.
Several of the Bermuda companies entered new areas, such as marine and aviation and property excess insurance.
SAFR will significantly boost Partner Re's premium volume. SAFR wrote $700 million in gross premiums in 1996. Net premiums were about $610 million because SAFR bought substantial retrocessional reinsurance. Much of that retrocessional business will now remain in the group, Mr. Haag said.
Partner Re/SAFR will have a combined equity of about $1.8 billion, Mr. Haag said.
Partner Re is paying a reasonable price for SAFR, compared with some of the high-priced reinsurance acquisitions last year, but SAFR will not bring huge return-on-equity growth potential to the new group, said Weston Hicks, senior research analyst at Sanford C. Bernstein & Co. Inc. in New York.
"In its core business of property catastrophe reinsurance, Partner Re was a very high return company, and now it is taking a substantial part of its capital and investing it in a mainstream reinsurer, which is unlikely to generate anything like the returns of its core business," Mr. Hicks said.
But with the falling rates in the property catastrophe market, Partner Re was left with little alternative to diversifying other than returning capital to shareholders, he said.
The deal also illustrates the growing strength of Bermuda companies in the worldwide reinsurance market, said Susan Spivak, vp in the insurance group research department at Donaldson, Lufkin & Jenrette Securities Corp. in New York.
"It's further evidence of the Bermuda reinsurance companies increasing their presence in the global marketplace," she said.