Bermuda-based PartnerRe Ltd. has agreed to buy Paris Re Holdings Ltd. in a $2 billion deal that will make it the fourth largest reinsurer in the world.

PartnerRe chief executive officer Patrick Thiele said PartnerRe would become a larger and stronger company as a result of the all-share deal that is expected to be closed by the first quarter of next year.

The first phase of the transaction involves PartnerRe buying the 57 percent stake owned by private equity investors, offering them 0.3 of its own shares for each Paris Re share. That is 13 percent more than Paris Re's July 3 closing price of 12.30 euros.

PartnerRe expects to acquire the balance of the shares during the first three months of 2010. The company said it has already acquired six percent of Paris Re's shares.

Paris Re will hold an extraordinary shareholder meeting in August to seek approval for the appointment of new directors and for a cash distribution of $310 million, or $3.85 a share, to existing investors, before PartnerRe buys out the private equity investors' interests.

PartnerRe said the acquisition of Zug, Switzerland-based Paris Re, which provides reinsurance mainly to insurers of property, casualty and health risks, will bolster its balance sheet.

"We're doing this for two reasons," Mr. Thiele told The Royal Gazette yesterday. "To increase our shareholder's equity capital by $1.7 billion and to improve the diversification in our book."

Both companies are global, multi-line reinsurers and Mr. Thiele said there was "a fair amount of overlap". But the combined entity would have a better balanced mix of business, he said, in terms of risk relative to available capital.

PartnerRe employs around 1,000 staff and Paris Re has some 400. It is too early to say whether the combination will lead to job cuts, Mr. Thiele said.

"We'll need an extended period of time to make those decisions," Mr. Thiele said. "As we get to know them better, as the reinsurance market plays out and as the market responds to our offerings, we will find out how much business is available to the combined entity."

The CEO said there would "not really be an impact" on PartnerRe's Bermuda operations, which serve as the group headquarters and where some North American catastrophe business is written. There were no plans for the company to change domicile, he added.

Credit rating agencies had a broadly positive view of the deal.

"The proposed acquisition will significantly enhance PartnerRe's competitive position in the global reinsurance sector," Standard & Poor's said in a statement yesterday. The outlook on the Bermuda-based reinsurer was cut to negative from stable because of "potential integration risk", S&P added.

AM Best did not change its A+ financial strength rating for PartnerRe. "This transaction will further deepen PartnerRe's geographic scope and operating scale," the agency said yesterday in a statement. "There is integration, operational and treaty overlap risks associated with this transaction; however, given the relative size of Paris Re, these risks should be manageable."

Fitch Ratings expects to revise its outlook for PartnerRe to negative from stable upon completion of the acquisition because of "uncertainty over whether the combined entity will generate returns and stability of returns that are commensurate with those required at PartnerRe's current AA rating level," the agency said.

Mr. Thiele said work had started out on the Paris Re takeover back in the fourth quarter of last year, amid the market chaos of the months following the collapse of US investment bank Lehman Brothers.

"It was a scary time," Mr. Thiele said. "In circumstances like that, reinsurers want to find ways to reduce risk, ways to get more capital and to diversify your business mix."

ParisRe had the right business mix and size — 35 to 40 percent of PartnerRe's size — to be a good fit with PartnerRe, Mr. Thiele added.

Paris Re was formed in 2006 when a group of investors led by buyout firm Stone Point Capital LLC acquired most of the reinsurance operations of Axa SA, Europe's second-biggest insurer. The company sold shares on the Paris Euronext exchange in an initial public offering in 2007.

It had a unit in Bermuda for a short period, but relocated the operation to Switzerland in April last year.

PartnerRe was one of the reinsurers founded to respond to the need for extra market capacity in the wake of Hurricane Andrew in 1992. Its previous major acquisitions were Paris reinsurer SAFR in 1997, and Winterthur Re, the reinsurance operations of Winterthur Insurance Group, in 1998.

Only Munich Re, Swiss Re, and the reinsurance operations of Warren Buffett's Berkshire Hathaway are bigger than PartnerRe, when the imminent acquisition of Paris Re is taken into account.

The acquisition agreement was an historic development for a company that "has always been run for the longer term", Mr. Thiele said.

"It also reflects well on Bermuda that Bermuda companies are doing the acquiring rather than being the acquisitions," he added. "It shows the maturity of the Bermuda market."

Apart from Stone Point, other Paris Re investors that agreed to sell their shares to PartnerRe are buyout firms Hellman & Friedman LLC, Vestar Capital Partners, Crestview Partners, New Mountain Capital and Caisse de Depot et Placement du Quebec, Paris Re said in a statement on its website.

PartnerRe shares fell 73 cents, or 1.1 percent, to $63.87 in New York trading yesterday.