RenaissanceRe has entered into a definitive agreement to acquire American International Group, Inc.’s (AIG) treaty reinsurance platform, which ratings agency Fitch sees as favourable for the Bermuda-based reinsurer.
The acquisition includes Validus Reinsurance Ltd. and its consolidated subsidiaries, AlphaCat Managers Ltd. and the renewal rights for Talbot’s assumed treaty reinsurance business (collectively Validus). Validus was purchased by AIG in 2018 and was formed in 2005.
Fitch calls the acquisition of Validus and expanding upon RenRe’s position in the property and casualty & specialty traditional and alternative reinsurance market a favourable move. The transaction will add a sizable reinsurance business during a favourable market environment, including a hard market in property catastrophe.
Near-term credit is negative for the execution and integration risk is inherent in an acquisition. Fitch says this risk should be reduced given the similar reinsurance lines of business written by RenRe and Validus. Successful execution of this acquisition could provide longer-term positive credit benefits relating to business profile and expense synergies.
Fitch Ratings has maintained the ratings of RenaissanceRe and its subsidiaries, including the Insurer Financial Strength (IFS) at ‘A+’ (Strong) and RenRe’s senior debt rating at ‘A-‘ and Issuer Default Rating (IDR) at ‘A’. The rating outlook is stable. These ratings come after the announcement of the acquisition.
The total consideration for the transaction is $2.985 billion, equal to 1.42x Validus’ tangible equity of $2.1 billion to be delivered to RenRe at closing, with any excess to be retained by AIG.
The price will be funded with $2.735 billion of cash and $250 million of RenRe’s common shares. The cash portion is expected to be financed through new issuances of debt and common equity as well as excess cash. Fitch expects RNR to successfully execute the transaction financing. The $3 billion consideration excludes any pre-close dividend distribution to AIG. The close is expected in Q4 23 and is subject to regulatory approvals.
The combination creates a larger organization, with greater size and scale. Pro forma common shareholders’ equity is expected to increase materially from $5.1 billion on March 31, 2023, due to the RenRe’s public offering of common shares and equity to be issued to AIG.
The gross premiums written are expected to increase by approximately 30% to almost $12 billion from $9.1 billion at RNR (trailing the last 12 months as of March 31, 2023). The property reinsurance business accounts for 39% of GPW, with specialty and casualty reinsurance business at 61% of GPW, which compares similarly with 41% and 59%, respectively for RenRe (trailing last 12 months as of March 31, 2023).
RNR’s financial leverage ratio (FLR) will increase from 14.5% as of March 31, 2023, as a result of expected debt issuance, although it should remain within Fitch’s expectation of 25% or lower. RenRe is not assuming Validus’ $250 million holding company debt.
AIG will retain 95% of the development on net reserves acquired at closing, while RNR will manage the claims and retain the asset yield on the float. AIG will also have the option to acquire interests of up to $500 million in joint ventures within RNR’s capital partners unit, including DaVinci Reinsurance Ltd. and Fontana Holdings L.P.
