PartnerRe’s agreement to be acquired by Italian investment firm EXOR for $6.9 billion rather than merge with AXIS Capital Holdings drew a swift rebuke from A.M. Best, which downgraded its financial strength ratings on Aug. 4. Standard & Poor’s also reacted with caution, revising its outlook for the Bermuda reinsurer to negative from stable.

A.M. Best downgraded the financial strength rating for PartnerRe and its subsidiaries to “A” from “A+”, and the issue credit ratings to “a+” from “aa-.” Additionally, PartnerRe’s parent, PartnerRe Ltd., got hit with an issuer credit ratings downgrade to “bbb+” from a-.”

The ratings remain under review, with negative implications.

A.M. Best explained that it took action in response to PartnerRe’s decision to be acquired by EXOR rather than merge with AXIS, citing the uncertainty that the new acquisition arrangement causes.

“The rating action is based on existing A.M. Best concerns regarding PartnerRe’s concentration in reinsurance and lack of a diversified product platform, in particular, the ability to provide both primary and reinsurance solutions,” A.M. Best wrote in its decision.

A.M. Best said that PartnerRe would have started addressing those concerns by merging with AXIS. As well, A.M. Best said it is worried “that any such diversification initiatives at PartnerRe have been delayed because of the now-terminated agreement with AXIS,” a point of caution magnified by “current challenging reinsurance market conditions.”

In addition, A.M. Best said the reinsurer remains under review because of uncertainty’s about PartnerRe’s leadership, and the lack of information at this point “regarding EXOR’s plans for PartnerRe.” Plans call for lifting the “under review status” once EXOR’s acquisition of PartnerRe closes, a transaction expected in early 2016.

Standard & Poor’s was a little more nuanced in expressing its concerns about EXOR’s planned purchase of PartnerRe. It revised its outlook on PartnerRe and its operating companies to “negative” from “stable.” But it affirmed all of its ratings on PartnerRe, including its “A-” long-term counterparty credit rating.

Standard & Poor’s said its negative outlook reflects uncertainty about how PartnerRe will operate under its new ownership. Also, S&P said, questions remain regarding PartnerRe’s potential managerial changes, prospective capital management, investment strategy, growth strategies, upstreaming of dividends, composition of the board of directors, and the direction of the enterprise risk management framework.

S&P, in its announcement, said it believes PartnerRe’s management “has been distracted” since the initial announcement of its plan to merge with AXIS back in January 2015. And the months-long drama involving its original merger plans and EXOR’s unsolicited bid took its toll, S&P argued.
The back and forth between the two outstanding offers during the past several months in a challenging, soft reinsurance market has also been a distraction,” Standard & Poor’s said.

S&P added it will continue to assess its ratings for PartnerRe based on its “stand-alone credit characteristics.”

While S&P noted PartnerRe’s positives such as a strong competitive position, brand name, reputation and capital adequacy, it said that uncertainty remains about whether the reinsurer will stay the course with its overall strategy.

“The change in ownership could weaken PartnerRe’s business or financial risk profiles during the next 12 months,” Standard & Poor’s said.

Sources: A.M. Best, Standard & Poor’s