RenaissanceRe’s planned $1.5 billion purchase of Tokio Millennium Re (TMR) reinforces its strategy of being an independent reinsurer, according to Kevin O’Donnell, president and CEO of RenRe.
“The TMR transaction will accelerate our strategy by providing us greater penetration into the reinsurance market at a time when desirable risks remain scarce,” O’Donnell said, during an analysts’ call to discuss the company’s results and its announced acquisition of TMR.
Bermuda-based RenaissanceRe announced this week it had agreed to acquire, for $1.5 billion in cash and RenRe shares, Tokio Marine’s reinsurance platform (TMR), which includes Tokio Millennium Re AG and Tokio Millennium Re (UK).
He repeated an assertion that he made to analysts last quarter — that the company maintains a value proposition as a standalone reinsurer with a growing recognition of the company’s leadership in casualty and specialty lines.
This position affords RenRe with “frequent, large, one-of-a-kind opportunities to provide comprehensive solutions for important customers. I believe this transaction does that and provides beneficial outcomes for both sides,” O’Donnell continued.
“For us, we were able to accelerate our strategy through access to [TMR’s] well-protected pool of reserves and an attractive book of business that will enhance our portfolio,” he said. “The attractive multiple on this deal as well as the fact that Tokio Marine will receive $250 million of RenRe shares makes this transaction immediately accretive to shareholders and augments our financial strength and financial flexibility.”
With the TMR acquisition, RenaissanceRe will increase its “pro forma capital to over $6 billion, while our gross premiums written should approach $4 billion,” said O’Donnell. “This growth in scale will increase our access to risk which should allow us to apply our core strengths to a broader client and broker base.”
The agreement has been approved by the boards of directors of both companies and is expected to close in the first half of 2019, subject to regulatory approvals. No shareholder approval is required.
TMR will also benefit from RenRe’s “superior risk selection capabilities,” said O’Donnell.
“[W]e will have the opportunity to re-underwrite their reinsurance portfolio and refocus the business on its most profitable areas,” he noted.
“As a result of our efforts we hope to improve TMR’s combined ratio by improving both its loss and expense ratios,” O’Donnell continued. (The company reported a 116.2 percent combined ratio for the full-year 2017).
“We expect to bring significant underwriting acumen to TMR’s existing book which we anticipate will result in a smaller portfolio of higher quality risks,” said Bob Qutub, RenRe’s executive vice president and chief financial officer.
“Given the significant overlap between our reinsurance books, we expect that there will be substantial synergies between us and TMR,” he added. (Investopedia describes “synergies” achieved through a merger as coming from factors, such as increased revenues, combined talent and technology, or cost reduction.)
Qutub emphasized that realizing these synergies must be done responsibly over the next couple of years. “We will manage expenses intelligently and with an eye towards maximizing shareholder value.”
Further, O’Donnell said, the transaction benefits Tokio Marine Group by providing the company with “a comprehensive exit from the reinsurance business”
Although RenRe is obtaining TMR’s business in an attractive price, O’Donnell said the transaction includes several structures designed to reduce any downside. Most importantly, Tokio Marine will provide RenRe with an adverse development cover with $500 million of limit, which “substantially removes the risk from the specific reserves we are adding to our balance sheet…”
RenRe only will be on risk for the business it chooses to renew going forward, he confirmed.
Concurrent with the TMR announcement, RenRe also revealed that State Farm Mutual Automobile Insurance Co., which has current investments in two RenaissanceRe subsidiaries, has agreed to invest $250 million in RenaissanceRe.
O’Donnell explained that RenRe’s association with State Farm stretches back decades when the company invested in Top Layer Reinsurance and DaVinciRe Holdings, which are both managed by RenRe.
Following the completion of its investment, State Farm will own approximately 4.8 percent of RenaissanceRe’s total common shares outstanding.
RenRe’s 3rd Quarter Results
During the analysts’ call, Qutub went through the third quarter results, when the company reported net income of $32.7 million for the quarter.
It reported an underwriting loss for the quarter of $29 million with an overall combined ratio of 105.5 percent, compared to an underwriting loss of $793.2 million and a combined ratio of 244.8 percent in the third quarter of 2017
Gross premiums written were down in the quarter to $626 million from $640 million in the comparable quarter of 2017, Qutub said, noting that the decrease is largely due to $170 million of reinstatement premiums booked in the third quarter last year versus $17 million of reinstatement premiums in the current quarter.
RenRe reported a net negative impact on the company’s net income of $152 million from Typhoons Jebi, Mangkut and Trami, Hurricane Florence and the wildfires in California during the third quarter of 2018.
Qutub said preliminary estimates from Hurricane Michael reveal a net negative impact of $100 million on the company’s fourth quarter financial results.
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