Now that the sparring is over, Nick Thorpe takes a look at SCOR’s bid to create the fifth largest multi-line reinsurer in the world via its takeover of Converium

“Converium is focusing on remaining a standalone reinsurer, no matter what happens with our ratings. We have made the decision not to be a big US player and that, coupled with our strong client support means our future as an independent reinsurer looks bright.” It’s been just three months since Inga Beale spoke to Global Reinsurance about the prospect of Converium becoming a takeover target and what a difference three months has made. No sooner had the February issue of GR gone to press than on the 19 February it emerged that French-based reinsurer SCOR had made an unsolicited bid for Converium, triggering a pugilistic war of words between the two companies.

SCOR was established in 1970 in France and quickly established itself as an ambitious reinsurer with subsequent offices opening up around the world almost immediately. The company began its acquisitive journey 18 years later with the purchase of La Vittoria Riassicurazioni, which consolidated the group’s life and non-life activities in Italy. Further acquisitions followed with Deutsche Kontinentale Rück in Germany and Allstate’s reinsurance portfolio in the US, along with the renewal rights relating to the Alea Europe’s property and casualty treaty portfolio. It culminated with last year’s merger with Revios Re to create SCOR Global Life, which catapulted the company from eighth biggest life reinsurer to fourth.

Battle of the middleweights

However, SCOR took on its biggest challenge yet with the unsolicited approach for Converium. The move prompted an immediate rebuttal from the Swiss reinsurer’s board, which claimed that the “unsolicited proposal fundamentally fails to recognise the value of Converium’s franchise and growth prospects, and is, therefore, not in the interest of Converium, its shareholders, and its customers”. SCOR then purchased 32.94% of Converium’s share capital, saying that it “strongly believed that the combination of Converium and SCOR was a unique strategic opportunity to create a top five global multi-line reinsurer in this time of market consolidation.”

Undaunted by continued resistance from the Zurich-based company, SCOR made a formal offer for Converium one week later, offering CHF4 in cash and 0.5 new SCOR shares per Converium share, a total consideration of ?1.9bn. “This is a very attractive offer,” said Denis Kessler, SCOR chairman and chief executive. “It is also a very fair offer, with all shareholders being offered equivalent terms and conditions.”

SCOR says its proposed merger with Converium will create the fifth largest multi-line reinsurance company in the world (based on 2005 written premiums), up from Converium’s current 13th position and SCOR’s eighth. And SCOR could not have picked a better time to make its offer. Converium enjoyed a profitable year in 2006 with a net income of $57.1m and a combined ratio of 96.3%, marking a return to form after being downgraded to “BBB” in 2004 after a massive shortfall in reserving. And sure enough, Standard & Poor’s subsequently upgraded the company to “A-”, citing the group’s strengthened management team and sound infrastructure, strong competitive position, and strong capitalisation.

SCOR, which was also downgraded to “BBB” in 2003, had already regained its “A” rating in 2005 and Peter Grant, director at S&P, points out that the timing of the eventual upgrades was significant. “SCOR only spent two renewal seasons as a “BBB”-rated company (2004 and 2005), while Converium spent three (2005, 2006, and 2007). When SCOR’s upgrade came, its timing happened to coincide with the improved pricing environment that followed hurricanes Katrina, Rita, and Wilma. Consequently, SCOR was looking to recapture its lost business at a relatively favourable point in the cycle. In contrast, Converium’s first major renewal post its upgrade will be the forthcoming January 2008 renewal, so it will be looking to recapture market share at a less favourable point in the cycle.”

Tit for tat

Converium’s upgrade triggered another bout of sniping between the two reinsurers, with the organisations’ press teams in overdrive. On 5 April Converium accused SCOR of presenting “factually incorrect or incomplete” information about the company in its annual results, urging shareholders to reject the deal. It then brought a lawsuit against the French reinsurer, alleging that SCOR had excluded Converium’s US shareholders from the hostile tender offer, a claim SCOR vigorously denied. At an extraordinary general meeting the following week, SCOR’s shareholders gave their approval of the planned merger, although Markus Dennler, chairman of Converium’s board of directors, was quick to reiterate that it “in no way alters our opposition to the hostile bid, which fundamentally undervalues the company.”

“On the 19 February it emerged that... SCOR had made an unsolicited bid for Converium, triggering a pugilistic war of words between the two companies

A merger of this size would undoubtedly benefit both companies, particularly SCOR’s non-life business in Europe, bringing it up-to-speed with the recently formed SCOR Global Life. However Grant explains that the increased scope of the business comes with certain caveats. “SCOR and Converium have a similar profile and complementary strengths, especially from a geographical standpoint. While the enhanced scale of the combined entity isn’t a positive feature of this transaction in and of itself, if well executed, this could enhance SCOR’s competitive credentials as a more meaningful alternative – particularly in Europe – to the ‘big four’ global reinsurers.”

SCOR’s pursuit of its Swiss rival reached its zenith on the 10 May when the companies announced, somewhat out of the blue, that they had reached a “friendly agreement” after a revised offer. SCOR increased its offer to CHF5.5 per share from CHF4, a 37.5% increase. It also agreed to certain stipulations such as not to serve notice to any Swiss employees for one year after the deal and to maintain a strong presence in Zurich. The deal also included the proviso that Converium withdraw its US litigation. Kessler said at the time that he was “very pleased to have reached a friendly agreement with the Converium board” and “by combining SCOR and Converium we will be in a position to be among the top five global multi-line reinsurance groups”. However, after concerns from the Swiss Takeover Board, SCOR?have now postponed the acquisition until early June.

Important year

Whichever way you look at it, SCOR’s acquisition of Converium seems to make good business sense. The Swiss reinsurer’s return to form continued this year with a tripling of its Q1 income to $150.9m from $49.9m for the same period in 2006. Meanwhile SCOR doubled its net income for 2006 to ?306m ($411m) after goodwill related to the Revios acquisition. Gross written premiums were up 22% to ?2,935m, with non-life accounting for ?1,754m, a 27% increase on 2005. The non-life side of the business also recorded a combined ratio of 96.4% compared to 106.5% the previous year. Life gross written premiums, after taking into account Revios’ pro rata business, saw an increase of 15% on 2005 to ?1,181m. SCOR also revealed plans to de-list its American shares from the New York Stock Exchange and seek a secondary listing on the Swiss Exchange once the Converium deal was completed.

The merger with Converium will form part of SCOR’s “Dynamic Lift” plan, aimed at propelling the company back into the “A+” leagues by 2010, largely through the Converium acquisition, which Kessler says forms part of his diversification strategy: “Diversification is key. The diversification effect has been underestimated by the regulators, certainly by the rating agencies, and certainly by the public and the financial community in general in my opinion.”

Kessler is aiming for an overall growth rate of the premium income of 7% per annum, leading to a gross premium increase of 7% on average, once the merger is in full swing. He has also stated he wants to achieve a combined ratio of 97% on the non-life side and an operating margin of 6.8% on the life side. Underlying all of this is the company’s desire to focus on capital management, affirming SCOR’s current focus on profitability. “We are a capital driven group, and the combined group will be a capital driven group,” confirmed Kessler. “We will be able to increase the capital mobility across the group because we have very proactive cycle management, state-of-the-art enterprise risk management and, of course, we will leverage the use of retrocession and other instruments of coverage to protect the shareholders of the combined group.”

The suggestion that one of SCOR’s motivating factors in its Converium bid was the potential to move its board out to Zurich and benefit from a more forgiving tax environment was quickly shot down. “The less you talk openly about tax optimisation, the better it is,” was Kessler’s reply. What is clear is that the successful integration of Converium and SCOR will create a new reinsurer capable of taking on Berkshire Hathaway and Hannover Re in third and fourth spot respectively. And Kessler makes no bones about the company’s preparedness: “We know where we write, where we want to write; we know with whom we want to write; we know business clients that we want to develop. Everything is integrated.”

Nick Thorpe is senior reporter at Global Reinsurance.

SCOR: Denis Kessler

Denis Kessler is a graduate of HEC business school, with a PhD in economics, a qualified professorship in economics and a qualified professorship in social sciences. He is also chairman of the Federation of French Insurance Companies, and subsequently senior executive vice president and member of the executive committee of AXA. He joined SCOR on 4 November 2002 as chairman and chief executive officer.