The leading insurance and reinsurance rating agencies have given mixed views of Bermudian reinsurer RenaissanceRe Holdings’ intention to buy Bermuda-compatriot Platinum Underwriters for $1.9 billion.
The first reinsurer merger or acquisition that has an agreement from both sides, so is more likely to succeed, the combination of RenaissanceRe and Platinum, looks like a reasonable fit, as Platinum’s book both complements RenRe’s and also provides new and deeper diversification and expansion opportunities to the firm.
But rating agencies have mixed opinions on whether the merging of the two firms is a positive for RenaissanceRe. There is clearly some uncertainty whether RenRe is taking on too much that is new to the firm, in terms of the Platinum casualty reinsurance book and whether the quest to acquire scale may result in a lower focus on its previously core competency of underwriting property catastrophe reinsurance risks.
Moody’s has given the ratings of RenaissanceRe and its subsidiaries a negative outlook, on the basis that this; “Reflects Moody’s opinion of the uncertain benefits and higher financial leverage from the combination.”
“The negative outlook reflects our circumspect view of the benefits of the proposed transaction from a credit perspective,” commented Kevin Lee, Moody’s analyst for RenaissanceRe.
Moody’s notes that while it is possible that Platinum’s U.S. casualty reinsurance business could provide profitable diversification to RenRe, a substantial amount of the underwriting profits from that business has historically come from reserve releases, which in the future may or may not be sustainable, especially since rate adequacy has declined in recent years.
“We see this transaction as a defensive move aimed at offsetting some of the pressures in RNR’s core property catastrophe reinsurance line but financed in a way that is generally credit negative,” Lee said.
A.M. Best also sees the outlook as less positive and has placed RenRe and subsidiaries, as well as the firm’s joint venture with State Farm Top Layer Re and the DaVinci Re sidecar type reinsurance vehicle, all under review with negative implications while they wait for the deal to be completed and to see how the combined entity performs.
A.M. Best’s concern is also related to the casualty reinsurance portfolio that RenaissanceRe is assuming as part of the deal.
“This transaction would give RenaissanceRe additional scale and help broaden its product offering,” notes A.M. Best in its rating announcement. “However, this transaction also represents a significant commitment on the part of RenaissanceRe to continue its move into casualty business, which is outside of the organization’s core competency of property catastrophe reinsurance.”
A.M. Best says that it is interested in understanding the tactical execution of the business plan as the combined entity starts operations as a single organisation.
Meanwhile, Standard & Poor’s is less gloomy about the prospects of casualty risks coming onboard at RenRe, maintaining a stable outlook on all its ratings.
“The integration risk of the acquisition is mitigated by the relative simplicity of Platinum’s organizational structure based on both legal entities and office locations, and the ease with which RenaissanceRe will be able to assimilate Platinum’s property catastrophe portfolio onto its platform,” said S&P
This is RenRe’s core business and the firm has already said that it intends to look at the Platinum property catastrophe portfolio and that it will make decisions as to which risks it holds on its balance-sheet, versus which could be ceded to third-party reinsurance capital.
S&P continued; “Successful execution will accelerate the progress of RenaissanceRe’s expansion into specialty and casualty reinsurance with the addition Platinum’s profitable book of diversifying business.”
In fact, S&P notes that the Platinum casualty book could be a positive for RenaissanceRe, saying; “The historically profitable casualty book would contribute meaningfully to RenaissanceRe’s profits.”
All three rating agencies will assess the business plan for the combined business, likely discuss directly with RenaissanceRe how it intends to assume the different books of business and also before lifting any rating outlooks will want to see how the combined entity performs. So it could be some time before the ratings are affirmed as a newly combined, larger and more diverse reinsurer.
RenRe’s assumption of a much larger casualty book than it has ever held before perhaps doesn’t warrant the concern it has received as undoubtedly RenRe will look to retain key Platinum employees in these areas and lines of business. For RenRe this is an opportunity to establish a larger presence in both casualty and specialty lines of business, while also growing its property catastrophe book at the same time as making it less dominant across the business.
It’s unlikely that a reinsurer as technical as RenaissanceRe will lose any of its well-known focus on its core property catastrophe reinsurance business. In fact, the added scale and the assumption of the Platinum prop-cat book, may simply provide it with even more opportunities for growth.
In fact growth may be something that stays on the agenda at RenaissanceRe, we would imagine, as the size it will achieve with Platinum may not yet be sufficient to really get it into the top-tier of reinsurers across all the lines of business it now operates in. If this merger is deemed a success it wouldn’t be surprising to see RenaissanceRe become expansive and look for another.