RenaissanceRe has entered into a definitive agreement to acquire American International Group, Inc.’s (AIG) treaty reinsurance platform, with ratings agency Fitch seen favorably for the Bermuda-based reinsurer.
The acquisition involves 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 bought by AIG in 2018 and was formed in 2005.
Fitch calls the acquisition of Validus and expansion of RenRe’s position in the property and casualty & specialty traditional and alternative reinsurance markets a favorable step. The transaction will add a large reinsurance business during a favorable market environment, including a difficult property catastrophe market.
Near-term credit is negative for enforcement and consolidation risk is inherent in an acquisition. Fitch said this risk should be mitigated due to the same lines of business reinsurance written by RenRe and Validus. The successful implementation of this acquisition may provide longer term positive credit benefits related to the business profile and cost synergies.
Fitch Ratings has maintained the ratings of RenaissanceRe and its subsidiaries, including Insurer Financial Strength (IFS) at ‘A+’ (Strong) and RenRe’s senior debt rating at ‘A-‘ and Issuer Default Rating (IDR) of ‘A’. The rating outlook is stable. These ratings come after the acquisition announcement.
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 in cash and $250 million in RenRe common shares. The cash portion is expected to be financed through new issuances of debt and common equity as well as surplus cash. Fitch expects RNR to successfully implement the transaction financing. The $3 billion consideration does not include any pre-close dividend distributions by AIG. Closing 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 at March 31, 2023, due to RenRe’s public offering of common shares and equity to be issued by AIG.
Gross premiums written are expected to increase by approximately 30% to nearly $12 billion from $9.1 billion in RNR (trading past 12 months to March 31, 2023). Property reinsurance business accounts for 39% of GPW, with specialty and casual reinsurance business accounting for 61% of GPW, which is similarly compared to 41% and 59%, respectively, for RenRe (following the last 12 month on March 31, 2023).
RNR’s financial leverage ratio (FLR) will increase from 14.5% on March 31, 2023, as a result of expected debt issuance, although it should remain within Fitch’s expectation of 25% or less. RenRe does not consider the $250 million owed by the Validus holding company.
AIG will retain 95% of the increase in net reserves obtained at closing, while RNR will manage the claims and maintain the asset yield of the float. AIG also has an option to acquire an interest of up to $500 million in joint ventures within RNR’s capital partners unit, including DaVinci Reinsurance Ltd. and Fontana Holdings LP
