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Reinsurance merger of equals

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The news that French reinsurer SCOR S.A. has bought almost a third of the stock of rival Zug, Switzerland-based Converium Holding Ltd.—and that it wants to snap up the rest—came as a bit of a shock to the insurance community in Europe.

It was not long ago that both companies found themselves staring into the runoff abyss after incurring horrible losses on mainly U.S. casualty business that led to massive reserving additions and subsequent downgrades into the dreaded B credit rating range.

Once the two companies had fallen over the rating cliff they were forced to effectively exit broker driven markets in the United States and London and focus on more relationship driven markets in Europe and Asia.

SCOR is, however, further down the recovery track.

It managed to win its cherished upgrade back into the A range in 2005 and crucially in time for the renewal. As a result it reported a healthy increase in gross written premiums of some 10% up to about e1.8 billion.

Converium did not manage to persuade the rating agencies it deserved an upgrade before year-end and so reported a much smaller increase in volume, by 3% up to $1.27 billion (€965.75 million).

In very simple terms this is arguably why SCOR is after Converium and not the other way around.

Both companies are roughly half the size they were before the rot set in and carrying still relatively high cost bases for their reduced scale.

The timing makes sense because the market is now softening and Solvency II, Europe's new capital adequacy regime, looms ominously on the horizon. If either company were to play with the big boys it had to happen sooner rather than later. This is another "defensible" and sensible deal of the sort described in the viewpoint on page 16, rather like Swiss Reinsurance Co.'s acquisition of General Electric Co.'s commercial insurance and reinsurance business last year.

The deal also makes sense for buyers, of both reinsurance and primary business, who will welcome the re-emergence of another serious global player that will, as one equity, analyst suggested, have to reduce prices to secure the increased shares of the two companies.

Buyers would therefore receive improved security, presuming the combined operation would maintain an A rating, and probably better value for their reinsurance spend.

So why the shock at SCOR's bid? Well, quite simply the way in which it was carried out.

According to analysts SCOR only decided to talk to Converium's management after paying a decent price of just over 21 Swiss francs (€12.90) for almost a third of the Swiss company's stock. Surely the sensible thing would have been to talk to Converium's management first, agree an acceptable price and announce a neat deal.

Converium's management and two thirds of remaining shareholders now surely simply have to sit back and wait for SCOR—or a rival bidder—to come up with an improved offer, for retreat at this stage is simply not an option for SCOR chief executive and chairman Denis Kessler.

This would be great news for Converium shareholders but would surely effectively reduce the appeal of the deal for everybody else, including the ultimate customer who effectively sees value exit the market and into the pockets of Converium stockholders and SCOR's advisers.