CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of RenaissanceRe Holdings Ltd. (NYSE: RNR) 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+'. A full list of ratings follows at the end of this press release. The Rating Outlook is Stable.
KEY RATING DRIVERS
Fitch's affirmation follows RNR's announcement yesterday that it entered into a definitive merger agreement to acquire Platinum Underwriters Holdings, Ltd. (NYSE: PTP; Fitch does not rate PTP) for total consideration of $1.9 billion (approximately 40% stock and 60% cash). The close is expected in the first six months of 2015, and is subject to regulatory approvals and approval by PTP shareholders.
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.
RNR maintains a leading position in the property catastrophe traditional and alternative reinsurance market derived from the company's ability to provide consistent capacity in the marketplace and its ability to effectively underwrite and price catastrophe-related risks. However, the current stressful reinsurance market conditions, with record capitalization levels of traditional reinsurers and the growing capacity provided by alternative capital providers, are promoting weaker pricing and more generous terms and conditions.
RNR has responded to heightened competitive conditions by reducing its risk exposure, with catastrophe reinsurance segment gross premiums written down 19% in the first nine months of 2014 as compared to the first nine months of 2013, with an even greater 31% decline in net premiums written due to opportunistic retrocessional reinsurance purchases.
Market conditions more deeply affected PTP, as a smaller reinsurer, with a shrinking book of business and more limited organic growth options. Net written premium for PTP declined by 45% from 2008-2013. The company shifted its business mix away from property and marine business and into casualty and specialty reinsurance business.
As such, Fitch favorably views the addition of PTP as marginally diversifying RNR away from its property catastrophe business that 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 50% of gross premiums written (GPW) from 60% of GPW (trailing last 12 months as of Sept. 30, 2014), with specialty and casualty reinsurance business increasing to 31% from 22% of GPW.
The combination will also create a modestly larger organization, with greater size and scale. Pro forma shareholders' equity increases to $4.5 billion from $3.7 billion (due to $761 million RNR share issue), with GPW increasing to $2 billion from $1.5 billion. Operating leverage (net premiums written to equity) increases only slightly to 0.3x from 0.2x. Financial leverage pro forma increases more significantly to 15.6% from 8.9%, due to an expected new senior debt issuance ($300 million) to partially finance the cash consideration for the acquisition, plus added PTP existing debt ($250 million), but is still considered reasonable by Fitch.
Negatively, the transaction adds some uncertainty as to the possibility of adverse loss reserve development of PTP's existing reserve liabilities and possible complications arising during the process of integrating the two companies. Fitch views these risks as partially mitigated by PTP's relatively modest size, low reserve risk profile with net reserve leverage (net loss/LAE reserves to equity) of 0.96x at year-end 2013 and history of favorable prior year reserve development. In addition, PTP is unencumbered by legacy issues as the company was formed relatively recently in 2002. Also, execution and integration risk should be somewhat reduced given the similar lines of business written by RNR and PTP.
Key rating triggers that could lead to a downgrade include failure to successfully integrate PTP, deterioration in market conditions that impair RNR's leading position in the property catastrophe reinsurance market and result in a weakening of RNR's historically strong profitability, as demonstrated by sustained combined ratios above 80% and returns on common equity below 13%, material weakening in the company's current balance sheet strength, as measured by net premiums written to shareholders' equity above 0.5x or equity-credit adjusted financial leverage above 25%, a catastrophe event loss that is 25% or more of shareholders' equity.
Key rating triggers that could lead to an upgrade over the long term include continued favorable underwriting results relative to other property catastrophe reinsurers and comparably rated property/casualty (re)insurer peers, improvement in RNR's competitive position in profitable market segments outside of property catastrophe reinsurance, including its specialty reinsurance and Lloyd's business, and material risk adjusted capital growth.
Fitch affirms the following ratings with a Stable Outlook:
RenaissanceRe Holdings Ltd.
--IDR at 'A';
--$125 million 6.08% series C preferred stock at 'BBB';
--$275 million 5.375% series E preference shares at 'BBB'.
RenRe North America Holdings, Inc.
--$250 million 5.75% senior notes due 2020 at 'A-'.
Renaissance Reinsurance Ltd.
--IFS at 'A+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (September 2014).
Applicable Criteria and Related Research:
Insurance Rating Methodology