French reinsurer Scor will pay a bargain price for German life reinsurer Revios, according to analysts. Scor announced on July 5 that it will acquire Revios and merge it with its existing life unit, Scor Vie, to form Scor Global Life. The new company will be the fourth-largest life reinsurer in the world, with an estimated 8% share of the global market.
Scor will pay €605m ($771 million) for all the equity capital of Revios, formerly the life reinsurance business of German reinsurer Gerling Global Re – now called Global Re.
It intends to finance the purchase through a rights issue worth about €300 million (US$383.4 million) and a debt issue of up to €350 million (US$447.3 million). Scor has also agreed to pay €50 million (US$63.9 million) of Revios’s outstanding debt to Global Re. The acquisition will be backdated to January 2006.
Scor believes the buy will have a positive impact on earnings per share and return on equity from 2007 onwards and result in cost savings of €12 million (US$15.3 million) before tax by 2008. Integration costs are expected to be around €15 million (US$19.2 million) before tax.
The company said the €605 million (US$773.1 million) price represents 1.02 times the embedded value of Revios in 2004. But Thomas Fossard, equity analyst at BNP Paribas, estimates that today’s figure is different.
“In our view Scor is getting a 15% discount on the 2006 embedded value of Revios,” he says. This is equivalent to 11 times the estimated earnings for 2006, according to Fossard. “It seems very cheap, and has been causing a lot of questions in the market, but in our view Scor just benefited from a window of opportunity, where other potential buyers were less keen because they had their own problems and the seller was keen to finalise the process quickly.”
The French reinsurer further justified the purchase by saying the two companies had complementary strategies and that the deal would give the firm an improved risk profile, and reinforced solvency and financial strength. Fossard agrees with the company’s assessment. “The acquisition is good for improving Scor’s risk profile. It shifts the balance from 60% property/casualty to 60% life business, and the company is acquiring a strong European life franchise,” he says.
In a report, Fossard said that the acquisition fitted well with Scor’s strategy of reducing its exposure to U.S. catastrophe risk by increasing its exposure to life reinsurance, which has historically provided more stable earnings. Fossard said the deal is also important because it demonstrates that Scor has taken back some control over its future.
Neil Manser, equity analyst at investment bank Fox-Pitt, Kelton, also welcomed the acquisition in a report. “We believe the deal is enhancing both strategically and financially, and further distances the group from any deterioration in the U.S. reserve position,” he said. “For Scor we see a clear benefit from the desire to build a less volatile platform and we are surprised by the complementarity of two businesses that are both European in history.” Manser believes the cost savings are the icing on the cake rather than the main reason for the deal. According to him, the only risks in the deal relate to the accuracy of the embedded value calculations for Revios, the possible deterioration of old portfolios and a negative response from rating agencies. But he believes the positives of the deal outweigh the negatives.
Rating agency A.M. Best placed Scor’s B-double-plus financial strength rating under review with positive implications following the announcement. Moody’s placed its B-double-A-one rating of the reinsurer on review for a possible upgrade, and Standard & Poor’s affirmed its A-minus rating of Scor.
