RenaissanceRe is intending to leverage its third-party reinsurance capital and insurance-linked securities (ILS) operations to extract greater efficiencies out of the Validus Re reinsurance book, as it assumes it after the recently announced acquisition, with more investor capital set to be raised to support these efforts.
As we reported already this morning, RenaissanceRe whill achieve greater scale and reach with the acquisition of the Validus reinsurance business and Talbot reinsurance book from AIG, while also buying the AlphaCat Managers ILS fund management unit.
As part of the agreement with AIG under the terms of the acquisition, AIG has an option to make a “substantial” investment into two of RenaissanceRe’s Capital Partners vehicles, the DaVinciRe sidecar-like structure and the casualty and specialty joint-venture Fonatana Holdings.
But that is not the only capital injection RenRe is anticipating, associated with this deal, as the company anticipates folding some of the Validus Re book into its third-party capital structures, which will require additional investor support, it seems.
Speaking during an investor call after the announcement of the acquisition yesterday, RenaissanceRe’s CEO Kevin O’Donnell explained that the company will look to leverage third-party capital and also retrocession to deliver a more efficient assumption of the Validus Re business.
“In effect, this is the equivalent of assuming a 30% quota share on our existing underwriting portfolio,” O’Donnell explained.
Continuing to say that, “As a result, we expect we can fully deploy Validus Re into our portfolio on day one, and fully integrate it into our risk management system soon afterwards, diminishing execution risk.
“In addition by employing ceded retro and 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.”
RenRe CFO Bob Qutub went into more detail on the role of third-party capital and RenRe’s Capital Partners business in acquiring Validus from AIG.
Qutub explained that the two RenRe third-party capital vehicles that AIG is set to invest in after the deal closes will take a share of the Validus Re portfolio.
But doing so means more capital may be required, presenting an opportunity for other third-party institutional investors to access the opportunity, it seems.
“We will share the Validus Re underwriting portfolio with our capital partner vehicles, primarily DaVinci, and Fontana,” Qutub said.
Adding that, “We also anticipate raising additional capital in Capital Partners to support this new risk.”
He continued, “This new capital will include a substantial investment from AIG. Together, these will be powerful accelerators for a fee income business.”
So RenaissanceRe looks set to boost its Capital Partners business considerably, at the same time as its traditional balance-sheet grows thanks to the acquisition of Validus and the AIG reinsurance businesses.
That will continue the firm’s balance between own, shareholder and partner capital, across the range of balance-sheets and joint-venture structures, while the ILS funds will expand thanks to the acquisition of AlphaCat too, it appears.
– RenRe buying AIG’s Validus reinsurance units, AlphaCat ILS manager.
– AIG to make “substantial” investment in RenRe’s DaVinciRe and Fontana.
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