Moody’s backs RenRe-Validus deal but warns on volatility
Rating agency Moody's has affirmed the A1 insurance financial strength (IFS) rating of RenaissanceRe following its agreement with American International Group (AIG) to acquire its treaty reinsurance business, including Validus Reinsurance, AlphaCat Managers and its managed funds, and the renewal rights to Talbot syndicate's assumed treaty reinsurance business. The rating outlook for RenaissanceRe is stable.
RenaissanceRe has agreed to acquire Validus Re for some $3 billion in cash. The company plans to fund the acquisition with a combination of equity, including $250 million of common shares issued to AIG, debt as well as cash on hand. The parties expect to complete the transaction in the fourth quarter of 2023, pending regulatory approvals and other customary closing conditions.
Moody's said the ratings reflect the company's market leadership position in property-catastrophe reinsurance, strong analytic and modelling capabilities, and good capitalization. The company's well-diversified reinsurance portfolio also supports the rating, it said.
It added that the acquisition of Validus Re enhances RenaissanceRe's position in the global P&C reinsurance sector, making it one of the top five reinsurers based on premium volume and increases its relevance to clients and brokers. RenaissanceRe also owns RenaissanceRe Capital Partners, a third-party capital platform that gives institutional investors access to the company's underwriting expertise while providing RenaissanceRe with fee income and expanded underwriting capacity. AIG intends to make substantial investments in RenaissanceRe's joint venture vehicles following the closing of the transaction.
It added, however, that offsetting these benefits are a number of challenges, including the potential for earnings and capital volatility arising from the company's substantial property catastrophe reinsurance exposures, as well as the firm's exposure to reserve risk from claims inflation in long-tail casualty reinsurance lines. RenaissanceRe's plan to issue debt to help fund the transaction is likely to increase the company's consolidated adjusted financial leverage, and will increase the company's financial leverage relative to tangible capital significantly given the goodwill resulting from the acquisition. Moody's expects RenaissanceRe to reduce its leverage toward historical levels over the next several years through growth in retained earnings.