Fitch Affirms RenRe Following TMR Acquisition

November 1, 2018

Following the news they will acquire Tokio Millennium Re, Fitch Ratings has affirmed the ratings of Bermuda-based RenaissanceRe Holdings and its subsidiaries, including the Issuer Default Rating [IDR] for RNR at ‘A’, and the Insurer Financial Strength [IFS] rating of Renaissance Reinsurance Ltd. at ‘A+’. The Rating Outlook is Stable.

A statement from the ratings agency said, “Fitch’s affirmation follows RNR’s announcement yesterday that it entered into a definitive agreement to acquire Tokio Marine Holdings, Inc.’s reinsurance platform, which includes Tokio Millennium Re AG and Tokio Millennium Re [UK] Limited, collectively Tokio Millennium Re [TMR; Fitch does not rate TMR].

“Total consideration for the transaction is 1.02x tangible book value [TBV] of TMR at closing. Based on TMR’s $1.44 billion TBV at June 30, 2018, the price is approximately $1.5 billion, which will be funded with $1.22 billion cash [$250 million from a potential pre-closing dividend from TMR and $969 million from available cash] and $250 million of RNR common shares.

“The close is expected in the first six months of 2019, and is subject to regulatory approvals. In addition, State Farm Mutual Automobile Insurance Company [State Farm] has agreed to invest $250 million in RNR common shares through a private placement in four-quarter 2018, resulting in State Farm owning approximately 4.8% of RNR’s total common shares outstanding.

“Fitch views the transaction as a slight credit negative to RNR in the near term given the execution and integration risk inherent in an acquisition. Successful execution of this acquisition could provide longer term positive credit benefits relating to diversification of earnings and business profile. Also, execution and integration risk should be somewhat reduced given the similar reinsurance lines of business written by RNR and TMR.

“RNR has a leading position in the property and catastrophe traditional and alternative reinsurance market, derived largely from the company’s ability to provide consistent capacity in the marketplace and its ability to effectively underwrite and price catastrophe-related risks. RNR managed the challenging property reinsurance market environment through increased diversification away from its core property catastrophe focus.

“Fitch favorably views the addition of TMR as marginally diversifying RNR away from its property catastrophe business, which should help the company to reduce earnings and cash flow exposure to cyclical conditions in the property catastrophe market. Pro forma for the acquisition, property catastrophe reinsurance business declines to 37% of gross premiums written [GPW] from 41% of GPW [trailing last 12 months as of Sept. 30, 2018], with specialty and casualty reinsurance business increasing to 49% from 47% of GPW.

“The combination will also create a modestly larger organization, with greater size and scale. Pro forma common shareholders’ equity increases to $4.7 billion from $4.2 billion [due to $500 million of RNR shares issued] at Sept. 30, 2018, with GPW expected to increase to nearly $4.0 billion from $3.2 billion at RNR. The pro-forma financial leverage ratio [FLR] declines slightly to 14.6% from 15.8%, with debt plus preferred equity to total capital declining to 24.0% from 26.1%, as the transaction is not debt-financed and TMR does not have any debt.

“Tokio Marine has agreed to provide RNR a $500 million adverse development cover to protect TMR’s stated reserves at closing, including unearned premium reserves. Furthermore, Tokio Marine and RNR will enter into a business cooperation agreement on a portion of the non-Japanese international reinsurance purchases of Tokio Marine and its affiliates.

“Key rating sensitivities that could lead to a downgrade include failure to successfully integrate TMR, a weakening of RNR’s historically strong profitability, with five-year average combined ratios above 85% or operating ratios above 73%, based on the current business mix. Deterioration in RNR’s very strong capitalization, as measured by a failure to maintain an ‘Extremely Strong’ score on Fitch’s Prism factor-based capital model; net premiums written to shareholders’ equity above 0.5x; FLR above 25%; or a catastrophe event loss that is 25% or more of shareholders’ equity could also result in a ratings downgrade.

“If more than 30% of RNR’s earnings [15% of net loss in 2017] or capital [20% at year-end 2017] is sourced from foreign entities outside of the Bermuda group solvency environment, RNR’s holding company ratings could be lowered by one notch, reflecting a ring-fencing environment classification. RNR’s hybrid securities ratings could also be lowered by one notch to reflect non-performance risk should Fitch view Bermuda’s regulatory environment as becoming more controlling in its supervision of [re]insurers.

“Key rating sensitivities that could lead to an upgrade include significant improvement in RNR’s competitive position in profitable market segments outside of property catastrophe reinsurance [including in its casualty and specialty business], a meaningful reduction in the volatility of financial results, and material risk-adjusted capital growth.”

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