AM Best has suggested the strategic rationale for RenaissanceRe’s acquisition of Validus Re from AIG appears sound, as it will immediately enhance the firm’s already strong market position in many business lines in which it already successfully participates.
As we wrote previously, RenRe has agreed to acquire Validus and all its subsidiaries from AIG for around $2.99 billion in total considerations, including $2.74 billion of cash and $250 million of RenaissanceRe common shares.
The cash portion of the transaction is expected to be funded through a combination of current balance sheet resources supplemented by equity and senior debt issuances.
According to AM Best, assuming that the acquisition is completed as currently contemplated, it does not expect its execution to result in any immediate changes to RenaissanceRe’s credit ratings.
The rating agency writes, “While the incremental debt issued will result in a temporary elevation in RenaissanceRe’s financial leverage ratios, AM Best expects that the company’s financial leverage will remain within tolerance levels for its current rating levels.
“AM Best also projects that RenaissanceRe’s financial leverage will return to previous levels within a reasonable time frame due to earnings-based capital retention.
“If financial leverage is sustained at elevated levels for longer than currently contemplated, or if the terms of the financing differ materially from current expectations, then AM Best could revisit the transaction’s impact on RenaissanceRe’s overall credit profile.”
AM Best notes that the strategic rationale for the transaction “appears sound” as it immediately will enhance RenaissanceRe’s already strong market position in many business lines in which the company already successfully participates.
The rating agency views the associated integration risk as mitigated by Validus Re’s relatively lean operating platform and notes that under the terms of the transaction, RenaissanceRe assumes just a small share of any future unfavourable (or favourable) reserve development on the business being acquired.
AM Best concludes that it may contemplate rating action if the terms and conditions of the proposed deal change materially, or if there is a significant deterioration in risk-adjusted capitalisation or operating performance that is not expected at this time.