Fitch Maintains PartnerRe on Negative Watch

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has maintained PartnerRe Ltd.'s (PRE) ratings, including its 'A' IDR and the 'AA-' Insurer Financial Strength (IFS) rating for Partner Reinsurance Company Ltd., the company's principal reinsurance operating subsidiary, on Rating Watch Negative. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Today's rating action follows Fitch's periodic annual review of PRE. The ratings reflect the company's historically strong competitive position, moderate operating and financial leverage, favorable reserve adequacy and track record of earnings and capital generation. The ratings also reflect Fitch's negative sector outlook on global reinsurance. The current stressful reinsurance market conditions, with record capitalization levels of traditional reinsurers and the growing capacity provided by alternative capital providers, are promoting weaker pricing and more generous terms and conditions across a wide range of lines.

The Negative Watch reflects the uncertainty of EXOR S.p.A.'s (EXOR) overall credit quality. EXOR is expected to purchase PRE. Fitch does not rate EXOR. The agency plans to address the Rating Watch after completing a more detailed analysis of EXOR's credit quality and gaining an understanding of its operating strategy for PRE. This includes business growth expectations and capital management plans for PRE.

EXOR's purchase of PRE also presents near-term credit negatives related to execution risk of the transaction. The purchase by EXOR is not expected to close until the first quarter of 2016, which is subject to regulatory approval and PRE shareholder approval (shareholder vote is on Nov. 19, 2015). As such, PRE continues to face uncertainty tied to ultimate company ownership. The outcome of important Jan. 1, 2016 reinsurance treaty renewals will provide useful information regarding ceding company and reinsurance broker constituent perspective on the EXOR transaction. PRE renews more than 60% of its total annual non-life treaty business on January 1st.

PRE also faces downward rating pressures independent of the EXOR transaction related to the impact of adverse reinsurance market conditions. This negative view reflects the shifting reinsurance market landscape that is pressuring profitability and sparking consolidation as companies aim to enhance their relative competitive position.

Fitch considers PRE to have a large reinsurance market position and scale, writing a diverse mix of reinsurance lines. However, its overall market position trails several of its larger, more diversified (re)insurance peers that maintain 'AA' category IFS ratings. Furthermore, Fitch believes that PRE's expected change in ownership to EXOR does not immediately improve PRE's near-term competitive position, as the company would effectively maintain its current size, scale and reinsurance focused operating profile.

Fitch also views PRE's minimal presence in primary lines as a disadvantage relative to companies that have a more balanced platform of both reinsurance and insurance business. This limited business diversity outside of reinsurance results in higher overall earnings volatility and renders PRE more susceptible to current market conditions that generally favor commercial primary insurance over reinsurance.

In August 2015, EXOR, an Italian-based listed investment company, agreed to purchase PRE for $137.50 per share in cash plus a special pre-closing dividend of $3.00 per share ($6.9 billion total). This followed the termination of the amalgamation agreement to merge with AXIS, previously announced in January 2015.

PRE maintains a modest financial leverage ratio of 15.1% as of Sept. 30, 2015, up from 14.9% at year-end 2014. This slight increase reflects a 4.4% decline in common shareholders' equity attributable to PRE to $5.9 billion at Sept. 30, 2015 from $6.2 billion at year-end 2014, as the company posted a net loss attributable to common shareholders of $115 million through the first nine months of 2015. The loss was driven by a $315 million termination fee paid to AXIS and $239 million of net after tax realized and unrealized investment losses, due to widening credit spreads and equity market declines.

Underwriting results remained strong in the first nine months of 2015 with a combined ratio of 85.3%. This included 2.0 points of large losses related to the Tianjin explosion and continued sizable favorable reserve development of 21.0 points.

PRE's loss reserves have exhibited consistently favorable development. Over the most recent five-year period (2010 - 2014), the company produced prior year reserve releases totaling $3 billion, or 15% of net premiums earned, averaging 5.7% and 8.7% of beginning of year reserves and shareholders' equity, respectively. Fitch expects prior-year reserve development to remain favorable, but decline somewhat going forward, adding pressure to run-rate profitability.

RATING SENSITIVITIES

The key rating triggers that could result in a downgrade include:

--Analysis by Fitch that EXOR's credit quality is not supportive of PRE's current ratings;

--Expected changes by EXOR to PRE's operating profile or strategy that Fitch views as increasing overall risk;

--PRE experiencing a significant loss of business or an increase in risk profile prior to the closing of the purchase by EXOR;

--Continued deterioration in reinsurance sector fundamentals or consolidation in the reinsurance landscape that Fitch views as weakening PRE's competitive position or operating profile;

--Significantly worse underwriting results or overall profitability than comparably rated peers.

Key rating triggers that could lead to a ratings affirmation include:

--Analysis by Fitch that demonstrates EXOR's credit quality is supportive of PRE's current ratings and that EXOR would offer reasonable support to PRE.

FULL LIST OF RATING ACTIONS

Fitch maintains the following ratings on Rating Watch Negative:

PartnerRe Ltd.

--IDR 'A';

--$230 million 6.5% series D cumulative redeemable perpetual preferred securities 'BBB+';

--$374 million 7.25% series E cumulative redeemable perpetual preferred securities 'BBB+';

--$250 million 5.875% series F non-cumulative redeemable perpetual preferred securities 'BBB+';

--$63 million junior subordinated notes due Dec. 1, 2066 'BBB+';

--$250 million 6.875% senior unsecured notes due June 1, 2018 'A-';

--$500 million 5.5% senior unsecured notes due June 1, 2020 'A-'.

Partner Reinsurance Company Ltd.

--IFS 'AA-'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=994318

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20151118006285/en/

Fitch Ratings
Primary Analyst
Brian C. Schneider, CPA, CPCU, ARe
Senior Director
+1-312-606-2321
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Christopher A. Grimes, CFA
Director
+1-312-368-3263
or
Committee Chairperson
Douglas L. Meyer, CFA
Managing Director
+1-312-368-2061
or
Media Relations:
Hannah James, +1 646-582-4947
[email protected]

Source: Fitch Ratings

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