RenRe buying AIG’s Validus reinsurance units, AlphaCat ILS manager

RenaissanceRe, the Bermuda based reinsurer and third-party capital manager, is seeking further scale in all its endeavours, with the acquisition of the Validus reinsurance business and Talbot reinsurance book from global player AIG, while the deal includes buying the AlphaCat Managers ILS fund management unit as well.

RenaissanceRe (RenRe) is aiming to become a top-5 global P&C reinsurance firm with this deal, which will be the third time the company has acquired and integrated a Bermuda based competitor, after the Platinum and Tokio Millennium deals.

The arrangement will provide significant additional scale to RenRe at a time when the global reinsurance market is looking particularly attractive and the company is raising new capital to complete the acquisition and also set to benefit from capital injected by AIG as well.

RenRe is set to acquire the treaty reinsurance business of AIG, which includes Validus Reinsurance Ltd. and its consolidated subsidiaries, AlphaCat Managers Ltd. and its managed insurance-linked securities (ILS) funds, and all renewal rights to the assumed reinsurance treaty unit of Talbot.

The company is set to pay close to $3 billion for the deal, with a price tag of $2.985 billion cited.

But other benefits that flow to RenRe as part of this arrangement are set to make the cost of acquisition seem perhaps lower, as AIG will deliver $2.1 billion in unlevered shareholder’s equity to RenRe at the closing, further boosting its firepower at just the right time.

RenRe is targeting growth in its underwriting firepower, while also benefiting from additional fee and investment income, while for AIG the rationalisation of its overall business continues with the divestment of the reinsurance units in Bermuda.

RenRe will have an integration process to undergo, but the fit of the Validus Re reinsurance operations, the Talbot treaty reinsurance book and of course the AlphaCat ILS operation to RenRe appears clear and additional synergies that can be realised may mean the assumption of the whole can be done efficiently and deliver even more value.

Kevin O’Donnell, President and Chief Executive Officer of RenaissanceRe, commented on the news, “This acquisition advances our strategy as a leading global property and casualty reinsurer, providing additional scale, and increasing our importance to customers. Furthermore, by gaining access to a large, attractive book of reinsurance business in a favorable market environment, we expect to accelerate our three drivers of profit – underwriting, fee, and investment income.

“Additionally, we are enhancing our relationship with AIG and demonstrating how our consistent, highly differentiated strategy provides us with unique access to large, one-of-a-kind opportunities that create shareholder value.

“I have deep respect for Peter and AIG and look forward to extending our partnership.”

The AlphaCat Managers ILS unit had around $3.3 billion of capital under management at the end of 2022, according to Artemis’ data on ILS investment managers.

Interestingly, AIG did not disclose any AUM update for AlphaCat at the end of Q1, telling us that it was deemed immaterial and so wouldn’t be reported going forwards, so we don’t have a more up to date figure unfortunately.

The RenaissanceRe Capital Partners business had $6.6 billion of third-party capital AUM at the end of the first-quarter of this year, so the AlphaCat managed funds make quite an addition for this unit and will boost the fee income earned by RenRe from its ILS and third-party capital management business.

How these ILS focused businesses integrate will be interesting to see, with some cross-over between strategies though, which may mean that one plus one does not quite add up to two.

If it did, then RenRe would be nearing $10 billion of third-party ILS capital under management, which would be a significant leap forward for the companies Capital Partners business.

RenRe has significant optionality in ILS strategies, given the range of vehicles it offers, meaning third-party investors allocated to AlphaCat strategies will certainly be able to find a home there, should they elect to stay invested.

The acquisition is slated to close in the fourth-quarter of 2023, meaning RenRe could be heading into an important January renewals in 2024 with a significantly enhanced platform, firepower and enlarged third-party capital pot.

AIG said that the total estimated transaction value of this arrangement with RenaissanceRe is around $4.5 billion, but the main benefit is a continuation of its portfolio repositioning, as it offloads a most of its reinsurance underwriting activity, sheds a Bermuda operation, but builds an even deeper relationship with a growing global reinsurance leader, in RenRe.

Peter Zaffino, Chairman and Chief Executive Officer of AIG, stated, “Today’s announcement represents another key milestone for AIG and is strategically significant for both AIG and Validus Re. For AIG, it further simplifies our business model and reduces volatility in our portfolio, while generating significant cash liquidity and capital efficiencies that enable us to accelerate our capital management strategy.

“We have spent the last several years transforming Validus Re by re-underwriting the portfolio and driving operating leverage leading to improved outcomes. As part of RenaissanceRe, Validus Re will benefit from global scale that will allow the business to continue to grow, expand its capabilities and drive value for clients and other stakeholders.

“At the same time, our investment in RenaissanceRe’s common shares demonstrates our commitment to the strong relationship we have with RenaissanceRe and, coupled with our investment in DaVinci Reinsurance and Fontana Re, will allow us to continue to participate in the growth of the reinsurance market with less risk and capital requirements. I have enormous respect for Kevin and RenaissanceRe and look forward to continuing our longstanding and successful partnership.”