RenaissanceRe Holdings Ltd. (RNR) Earnings Call Transcript & Summary

Good afternoon. My name is Theresa, and I will be your conference operator today. At this time, I would like to welcome everyone to the RenaissanceRe investment community conference call and webcast. After the prepared remarks, we will open the call for your questions. Introductions will be given at that time. [Operator Instructions] I will now turn the call over to Keith McCue, Senior Vice President of Finance and Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to RenaissanceRe's investor community call on the acquisition of Validus Re. Joining me today to discuss the transaction are Kevin O'Donnell, President and Chief Executive Officer; and Bob Qutub, Executive Vice President and Chief Financial Officer. First, some housekeeping matters. Our discussion today will include forward-looking statements. It's important to note that actual results may differ materially from the expectations shared today. Additional information regarding the factors shaping these outcomes can be found in our SEC filings and in our earnings release. During today's call, we will also present non-GAAP financial measures. Reconciliations to GAAP metrics and other information concerning non-GAAP measures may be found in our earnings release and financial supplement, which are available on our website at renre.com. And now I'd like to turn the call over to Kevin. Kevin?

Thanks, Keith. Good evening, and thank you for joining today's call. After the close today, we announced that RenaissanceRe has entered into a definitive agreement to acquire AIG's treaty reinsurance platform. This includes Validus Re, AlphaCat and renewal rights on Talbot's treaty reinsurance business. We will refer to these businesses as Validus Re. We are very excited to partner with AIG on this win-win transaction. For AIG, divesting their treaty reinsurance division allows them to further simplify their business model. For RenaissanceRe, this transaction advances our strategy as a leading P&C reinsurer. We are gaining access to an attractive book of business in what we feel is the perfect time in the cycle. The combined portfolio should position us as a top 5 global P&C reinsurer. We are also doing so on financial terms that we expect to be highly accretive across our financial metrics over time. Validus Re has constructed a high-quality underwriting portfolio, with a mix of property, casualty, specialty and credit lines that closely mirrors our own. Taking a closer look at the details of the transaction. For a premium over book value of $885 million, we will receive more than $3 billion of gross written premiums with upside potential, $4.5 billion of investable assets, $15 million to offset transition-related expenses and a substantial investment from AIG in our Capital Partners business. In total, we are purchasing $2.1 billion of unlevered shareholders' equity. This is $1.2 billion lower than Validus Re's year-end 2022 equity due to the capital efficiency we expect to bring to this business. As Bob will explain, we believe the benefits we receive as well as the synergies we realize will result in this transaction being immediately accretive to each of our 3 drivers of profit as well as book value per share, earnings per share and ROE, excluding PGAAP adjustments and integration costs. Of course, there are always risks in any transaction. But in this case, we believe there are several mitigants to these risks. To begin with, Validus Re's underwriting portfolio is very similar to our existing book. We have deep familiarity with the lines of business that they write in the geographies in which they write them. We also have all the tools, expertise and platforms necessary to support the business. In effect, this is the equivalent of assuming a 30% quota share on our existing underwriting portfolio. As a result, we expect we can fully deploy Validus Re into our portfolio on day 1 and fully integrate it into our risk management system soon afterwards, diminishing execution risk. In addition, by employing ceded retro in our Capital Partners businesses, we can bring strong efficiencies to the Validus Re portfolio. This is one reason we require less capital to support this business than Validus Re. In addition, while our combined portfolio will have a higher PMLs on an absolute basis, on a percentage of equity basis, they will be flat to down. Validus Re is a strong underwriting platform, and AIG should continue to benefit from the attractive risks they have already underwritten. As such, AIG will retain 95% of the benefit of any favorable development on their reserves prior to closing. They also remain responsible for 95% of any adverse development on those reserves. This means that the net loss reserves delivered to us are only subject to 5% of any development. To conclude my comments and to demonstrate my conviction that this transaction will deliver material value to our shareholders, I plan to invest $2.5 million of my own personal funds in the public equity offering we are currently conducting. Now I'll turn the call over to Bob for a discussion of the financial aspects of the transaction, and then we'll open up the call for your questions.

Thanks, Kevin. To begin with, I'm as excited as Kevin about the acquisition of Validus Re and its potential to drive shareholder value. You'll see that we highlighted several key features of the transaction on Page 3 of the presentation. The purchase price will be $2.985 billion and is predicated upon Validus Re delivering $2.1 billion of unlevered shareholder equity at close. AIG will retain any excess of that amount, which again reflects our ability to bring meaningful capital efficiencies to this business. Payments to AIG will consist of $250 million in RenaissanceRe shares and the remainder in cash. The cash component is expected to be financed through a combination of excess capital as well as the proceeds from the public equity offering we are currently conducting and a planned debt issuance. The shares delivered to AIG will be priced at the lower of our public equity offering for today's closing price and will be issued upon the closing of the transaction. As highlighted on Page 14 of the presentation, upon closing, this transaction should favorably impact each of our 3 drivers of profit. As a reminder, these are underwriting income, fee income and investment income. Beginning with underwriting income, Kevin discussed the more than $3 billion of gross premiums written we will acquire, of which we expect to keep approximately $2.7 billion. As a result, we expect our combined underwriting ratio will be about 30% larger, with potential for upside given the favorable underwriting environment. The Validus Re portfolio is similar to ours in its composition. We expect that prior to any synergies, Validus Re's casualty and specialty book will have similar return characteristics to ours, which has been running around the mid-90s combined ratio. Over time, as we realize expected synergies, we should be able to reduce the combined ratio of our entire casualty and specialty portfolio. Validus Re's $900 million property portfolio is also similarly constructed to ours, and we expect this performance will mirror our own as we incorporate it into our flexible platform. As we have discussed, given the step change in reinsurance pricing the property market is currently experiencing, we expect this performance to be attractive. Now moving to fee income. We will share the Validus Re underwriting portfolio with our capital partner vehicles, primarily DaVinci and Fontana. We also anticipate raising additional capital and capital partners to support this new risk. This new capital will include a substantial investment from AIG. Together, these will be powerful accelerators for fee income business. And finally, the driver of profit of net investment income. Our retained net investment portfolio is expected to grow by $4.5 billion, representing about a 1/3 increase relative to its current size. We plan to invest these assets at yields consistent with our own portfolio. In addition to the enhancements to our 3 drivers of profit, we expect to realize significant synergies, which will be actioned in the first year and realized over the following years. These synergies as well as the cumulative impact on each of our 3 drivers of profit should be highly accretive to our returns. Before concluding my remarks, I want to address the impact of accounting treatment on this transaction. We are paying a premium of $885 million over shareholder equity. Due to its highly accretive nature, however, we do not expect much of this premium to be classified as goodwill. Rather, it is likely to be accounted for as the value of business acquired and certain other intangibles. We expect the intangible value of business acquired to be fully amortized during the first 2 years after closing, with the dilutive impact on earnings greatly reduced after year 2. That concludes my comments, and I'll turn it back over to Kevin. Thank you.

Thanks, Bob. In conclusion, the acquisition of Validus Re advances our strategy at financial terms that should be immediately accretive. In addition, it deepens our relationship with AIG, a key partner. For these reasons, I couldn't be more excited about our future, but we're more convinced that this transaction will drive shareholder value. With that, I'll open up the call for questions. Thank you.

[Operator Instructions] We'll take our first question from Elyse Greenspan with Wells Fargo.

The first question, in the slides, you guys pointed double-digit EPS accretion on a run rate basis. So the first question there is just when would you expect to get to the run rate basis? And I'm assuming that this includes expense saves, can you just comment on the quantity of expense saves you're expecting to drive that double-digit EPS accretion?

Okay. This is Bob. Good question. Thank you. Look, the fundamentals are very strong. On a cash basis, the returns are going to be extremely high and accretive before you factor in the PGAAP adjustments that will come through on all of our measures. As I talked about on book value per share and ROE, they will be accretive in the year 1 but dilutive overall to most of our metrics in year 1 because of the significant amortization that we'll have on the intangible. Year 2, by the end of year 2, they'll be accretive on all of our financial measures. We'll have a strong performance as a result of it. Regarding synergies, we expect them to be significant. The overlap that we have with the footprint of Validus Re is almost the same. We're in the same businesses, the same operations and generally in the same locations. And effectively, we know this risk. So we expect that to -- similar to our last acquisition, where we actioned most of the items within the first year, we expect that to be about the same time frame, and then you'll start to realize those over the following years.

So run rate in the double-digit, EPS mainly would be year 3. Is that what you're saying, Bob?

We should have that -- we should be done by year 2.

Okay. And then my follow-up is -- I see some of the slides where you provided details right on the prices we're seeing in the property cat market, right? We're in a really hard market. And typically, we don't see companies enter into transactions in a pretty hard market. So Kevin, what's your view as you enter into such a big transaction in an environment where you obviously also probably have some pretty strong organic growth opportunities as well?

Yes. Thanks for the question. This acquisition is a unique opportunity for us because of the construct of the portfolio, where the capital that we're raising will be 100% deployed the day of closing. It's a portfolio that we know. It's a portfolio that we have expertise in underwriting. It's in geographies we're familiar and lines of business we already have systems and technology for. So I think -- when I think about this as an opportunity to put it on our platform, it is actually quite unique. We also have excess capital, and we will continue our organic growth opportunities. So when I think about this as execution into this market, I think there's very few opportunities that look like this that allow us to be fully deployed in this market and continue to be completely focused on underwriting the same lines of business in the same geographies and have excess capital to deploy organically.

And our next question comes from Ryan Tunis with Autonomous Research.

Yes. I guess first question, it sounds like you're not going to be getting any benefit from any prior-year reserve development on the Validus book. Could you give us some idea whether it's underwriting earnings or points in the combined ratio, how much of that has been either favorable or adverse prior-year development at Validus?

The Validus -- and in fact, historically, Ryan, I think I'll take that combination. They've been strong. January 1st quarter for them was very strong. They took advantage of the underlying market. As you heard on their call that there was talk about the rate -- the percentage increase that they had was very positive. So it's a strong franchise. Financially, it's a strong business across all the 3 drivers of their profit. They'll fit nicely into ours from an underwriting fee-based business and net investment income.

Yes. We're delighted with the structure because with AIG as being a partner, they're able to enjoy the efforts of Validus' strong underwriting while they own them. We have the benefit of not having the development and the float of the reserves. This is a forward-looking transaction. So I look at the quality of the portfolio and what it does to us, the efficiency that we can bring to it with the third-party capital vehicles they ceded, the opportunities we have for growth. So I think it is a perfect balance of each of the parties finding the right way to bring a transaction together. So I'm delighted about the protections we have on the reserves, and super excited about the opportunity we have to integrate the portfolio and use it for a foundation for future growth.

Got it. And then just I guess on -- in terms of the mix, the portion of funding to equity, cash debt, what was the thinking, I guess, that just went into that funding mix?

Well, what I feel really good about here is we got $2.1 billion of unlevered assets. We have a very favorable ratio. So that gave us the opportunity to be able to balance out what we could optimize our own cash equity and potentially debt. So we're looking at that in terms of the mix. So we feel it's a great position to be in to be able to come up with the debt equity mix that you want. So we're going to work through that. We've got the equity raise that we're going out for $1.15 billion raise. And then with the $250 million that we're going to be issuing to AIG puts us in a very strong equity position.

Got it. And then just lastly, thinking about the pro forma gross written premiums. I think it was over $3 billion last year. You're citing a $2.7 billion number. Wondering what some of the areas of reduction might be or if I'm thinking about that right at all. And then also, how we should think about the type of net to gross that you might be running on that Validus book.

So let me take the first part. The reductions are just being cautious about where the opportunities are with the portfolio. The portfolio looks a lot like ours. There's always some attrition in bringing 2 portfolios together. So we were somewhat cautious in thinking about that. We like the book very much and we're excited to integrate it into ours. With regard to the ceded and the third-party capital sharing, being that this book is so similar to ours, I would just look back and continue. I assume that going forward, the ratios are not dissimilar to what we have on the existing book..

Our next question comes from Jimmy Bhullar with JPMorgan.

I just had a couple of questions. First, should we assume that the transaction is going to impact your outlook for premium growth for the rest of the year since it's not closing in 4Q and you're going to preserve some cash to do the deal? Or is there a major change in your outlook for premium growth?

As Kevin said -- and I'll start out here. As Kevin said, we have excess capital and we look forward to the market. Nothing has changed since our last call 3 weeks ago about our outlook for the market, our capacity to deploy capital into any demand that's out there and on into 2024.

There are underwriters executing it to the [ 6 1s ] and [ 7 1s ] who aren't even aware of the transaction and we didn't change our strategy.

Okay. And then have you seen any change in sort of the market dynamics in the property cat market? Obviously, Everest Re with equity. Berkshire sort of indicated that they might be a little bit more aggressive or proactive in trying to grow than they were at [ 1 1 ]. But have you seen any changes in pricing or terms and conditions as you're looking at [ 6 1 ] and beyond?

No, I think some of the market commentary for [ 6 1 ] and [ 7 1 ] is exactly what we expected, which is it's a more orderly renewal. And the reason it's orderly is because there has been better expectation setting with regard to what margin expectations are for reinsurers. This is a dynamic market. There's always new capital coming in. Right now, we are still seeing strong demand. We expect strong demand to continue into 2024. So I think having new capital in is a sign of a healthy market. We feel extremely confident about this transaction and our ability to continue to achieve the organic growth objectives that we have.

Okay. And then just lastly, I don't think you've quantified how much AIG is investing in your third-party platforms. What's sort of the -- what's that going to depend on? And are you able to quantify what that number is?

It will be a significant investment that they are going to make in the combination of Fontana and DaVinci. That amount is still have to depend on demand, but it's a firm commitment that we'll get. We haven't disclosed it. We tend not to disclose the amounts that our partners invest in the vehicles.

And that's prior to the deal? Or is it going to happen once the deal closes next year? Or it will happen next year or this year?

It is to support this book of business, so it will be at the time -- approximately at the time of closing.

Our next question comes from Yaron Kinar with Jefferies.

Just curious, given the fact that a lot of the business that you have, as you said, already exist at -- under your platform. I'm trying to better understand the strategic rationale for this acquisition. Or is it more of a financial acquisition?