Good afternoon. My name is Raisa. 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. Lastly, should you need operator assistance, please press star zero. Thank you. 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. 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're gaining access to an attractive book of business in what we feel is the perfect time in the cycles. The combined portfolio should position us as a top five 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 transaction-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 three drivers of profit, as well as book value per share, earnings per share, and ROE, excluding PGAAP adjustments and integration costs. There are always risks in any transaction, but in this case, we believe there are several mitigants to these risks. 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. This is the equivalent of assuming a 30% quota share on our existing underwriting portfolio.
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. 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. While our combined portfolio will have a higher PMLs on an absolute basis, on a % of equity basis, they will be flat to down. Validus Re is a strong underwriting platform. AIG should continue to benefit from the attractive risks they have already underwritten. 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 two and a half million of my own personal funds in the public equity offering we are currently conducting. 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 three 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. Payment 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 three 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 its 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 our fee income business. 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 three 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 three 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 intangible assets. We expect the intangible value of business acquired to be fully amortized during the first two years after closing, with the dilutive impact on earnings greatly reduced after year two. That concludes my comments, 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 or more convinced that this transaction will drive shareholder value. With that, I'll open up the call for questions. Thank you.
At this time, if you would like to ask a question, please press the star and one on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing star two. We remind you to please unmute your line when introduced and if possible, pick up your handset for optimal sound quality. In the interest of time, we ask that you please limit yourself to one question and one follow-up. We'll take our first question from Elyse Greenspan with Wells Fargo. Your line is open.
Hi. Thanks. Good evening. The first question, in the slides, you guys pointed double-digit EPS accretion on a run rate basis. The first question there is just when would you expect to get to the run rate basis? I'm assuming that this includes expense saves. Can you just, you know, comment on the quantity of expense saves you're expecting to drive that double-digit EPS accretion?
Okay. Yeah, this is Bob. Good question. Thank you. Look at the fundamentals are very strong. On a cash basis, the returns are gonna be extremely high and accreted 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 accreted in year one, but dilutive overall to most of our metrics in year one because of the significant amortization that we'll have on the intangible. Year two, by the end of year two, we'll be accretive on all of our financial measures. We expect 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. We expect it to similar to our last acquisition, we, where we action most of the items within the first year, we expect that to be about the same timeframe, and then you'll start to realize those over the following years.
Run rate in the double-digit EPS run rate would be year three. Is that what you're saying, Bob?
We should be done by year two.
Okay, thanks. My follow-up, is, you know, you can talk, you know, 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, you know, typically, we don't see companies enter into transactions in pretty hard markets. Kevin, you know, what's your view to, you know, enter into such a big transaction in an environment where, you know, you obviously also probably have some, you know, pretty strong organic growth opportunities as well?
Yeah, 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 in lines of business we already have systems and technology for. 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.
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.
Thank you.
Our next question comes from Ryan Tunis with Autonomous Research. Your line is open.
Thanks. I guess, first question, it sounds like you're not gonna 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 on the combined ratio, how much that has been either favorable or adverse prior year development at Validus?
The Validus, I mean, if you're talking historically, Ryan, I think I'll take that combination. They've been strong generally. 1st quarter for them was very strong. They took advantage of the underlying market. As you heard on their call, that there was talked about the rate, the % increase that they had was very positive. It's a strong franchise. Financially, it's a strong business across all the three drivers of their profit. They'll fit nicely into ours from an underwriting fee-based business and net investment income.
Yeah. 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 owned them. You know, we have the benefit of not having the development and the flow 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, the ceded, the opportunities we have for growth. I think it is a perfect balance of each of the parties finding the right way to bring a transaction together. 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. Just, I guess on, in terms of the mix, the portion you're putting to equity, cash, debt, what was the thinking, I guess, the just winning about funding mix?
Well, what I feel really good about here is we got $2.1 billion of unlevered assets. You know, we have very favorable ratios, that gave us the opportunity to be able to balance out where we could optimize the, our own cash, equity and potentially debt. We're looking at that in terms of the mix. We feel it's a great position to be in, to be able to, you know, come up with the debt equity mix that you want. We're gonna work through that. We've got the equity raise that we're going out for, a $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.
Yeah. Just lastly, thinking about the pro forma of 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. Also, how we should think about the type of net to gross that you might be running on that Validus book.
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 two 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 and assume that going forward, the ratios are not dissimilar to what we have on our, on the existing book.
Thanks, guys.
Yep, thank you.
Our next question comes from Jimmy Bhullar with JP Morgan. Your line is open.
Hi. Just had a couple of questions. First, should we assume that the transaction's gonna impact your outlook for premium growth for the rest of the year since it's not closing in 4Q, and you're gonna preserve some cash to do the deal? Or is there a major change in your outlook for premium growth?
As Kevin said, I'll start off. As Kevin said, we have excess capital, and we look forward to the market. Nothing's changed since our last call three weeks ago about our outlook for the market, our capacity to deploy capital into any demand that's out there and on into 2024.
Our underwriters executing it to the sixth one and seven ones weren't even aware of the transaction, and we didn't change our strategy.
Okay. Have you seen any change in sort of the market dynamics, in the property cat market? Obviously, Everest Re raised 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. 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. The reason it's orderly is because there's been better expectation setting with regard to what margin expectations are for reinsurers. You know, 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. 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. Just lastly, I don't think you've quantified how much AIG is investing in your third-party platforms. What's that gonna depend on, and are you able to quantify what that number is?
It'll be a significant investment that they are going to make in a combination of Fontana and DaVinci. That amount will 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.
That's prior to the deal, or is it gonna happen once the deal closes in next year? It'll happen next year or this year?
It is to support this book of business. It'll be at the time, approximately the time of closing.
Okay. Thank you.
Our next question comes from Yaron Kinar with Jefferies. Your line is open.
Hi, good afternoon. Just curious, you know, given the fact that a lot of the business that you have, as you said, already exists at under your platform, I'm trying to better understand the strategic rationale for this acquisition or is it more of a financial acquisition?
It's an acceleration of our strategy. You know, we've always said before, if we find something that strategically advances us and is economically viable, we'll take a look at it. Portfolios like this and don't come up very often. Validus has been a very capable, very strong competitor of ours. We have a lot of respect about the portfolios that they've built. Our ability to take that portfolio, run it through our infrastructure, our third-party capital vehicles, put it on our platform, and then provides enormous efficiency and is accretive to the overall portfolio. A good example of that is, you know, the portfolio for Validus Re, when it was under AIG at year-end, needed $3.3 billion. We're buying it at $2.1 billion and integrating it into our platform.
We're a better owner of this business, because of the flexibility we have from our platform. With that, we can generate excess returns compared to what it was as an independent Validus. For us, it's an acceleration of our strategy. It's not change. We continue to have the same organic growth objectives, and it's one in which we feel really good about the financial balance that we struck with AIG and the protections that are embedded within the transaction.
Got it. In a way, does this deal actually extend the potential for a hard market, given that you are essentially taking out one of the bigger competitors in the space, property cat, specifically?
I think this market has legs. It's one of the, you know, comments I made is that we think it's a really constructive market. From our perspective, this is an efficiency that we can bring to our capital partners. It's an efficiency we can bring to our shareholders and our clients, and we will continue to leverage into the market. I think it's all systems go, and this just gives us a bigger platform to trade off.
Thank you.
Yep, thank you.
As a reminder, if you would like to ask a question, please press star and one on your telephone keypad. If you wish to remove yourself from the queue, you may do so by pressing star two. We'll take our next question from Joshua Shanker with Bank of America. Your line is open.
Yeah, thank you. I apologize, that I just stepped off a plane. What you're buying, are you getting the crop reinsurance business at Validus Re also?
They have a crop quota share portfolio, which is part of the transaction. I think you're asking about the crop services company, which is not part of the transaction.
No. Okay, and Western World is not part of the transaction as well, of course.
That is correct. The only piece of Talbot that is part of this is the renewal rights that we are doing for the Talbot Treaty business.
Okay.
And it-
Yep, yep. Go ahead.
It includes AlphaCat as well.
Alpha. Personnel, I mean, when you've done Platinum transaction or the TMR, it also there were some cost savings associated. Are you picking up a number of personnel or is the personnel you're picking up pretty thin to begin with?
We're expecting significant synergies, and we expect to action those, as I said in my prepared comments, relatively soon, just like we have done in past acquisitions within the first year. There are some really quality, there is quality talent over there that we will look at. We will look at for the roles. We have open positions here, but we will be driving first the synergies, but also the talent that sits over there, we think is there's a lot of opportunity there.
All right. And if you'll indulge me, one more question. There's obviously technically no coordination until the deal closes, but what can you talk about with the target in terms of strategy for upcoming renewal season?
That's something that, you know, we'll work with the lawyers on and make sure that we are disciplined and well-governed. I will say that the strategy that they have produces a high-quality reinsurance book. I have a lot of confidence that as they run the business to close, it'll do nothing but continue to accrete value to AIG and then ultimately to us.
Okay. Well, thank you for taking my questions and congratulations on a very interesting deal.
Oh, thanks, Josh.
Our next question comes from Tracy Dolin-Benguigui with Barclays. Your line is open.
Thank you. Just a very basic question. I'm sorry, I joined the call a little bit late. The $3.3 billion of unlevered tangible equity, and that compares to the $2.1 billion of tangible equity. I don't remember Validus having $1.2 billion of debt. Is Validus Holdings in scope of the transaction? If you could just talk about those differences.
Okay. Thank you for the question, Tracy. We are buying the subsidiaries as well as the holding company, so we're picking up unlevered assets, so we will require no debt. The differential, you know, which is what Kevin said, we're more efficient at being able to manage this at $2.1 billion. There's a pre-close dividend that, you know, this is not conditioned to close. We're going to actively work with them to get approval from the regulators and work with them to get that done. We expect it to be done prior to close.
Okay. I know you guys don't share PML information, but just conceptually, would it be fair to assume that there will be some overlap in your peak zones that you would have to reduce exposure?
It's actually a really good story there, where our PMLs will grow with the acquisition of Validus. However, we expect to be flat to down on a percent of shareholders' equity throughout the tail of the distribution in our peak zone.
Thank you.
Thank you.
Our next question comes from Brian Meredith with UBS. Your line is open.
Hey. Yeah. Just quickly here. I know you said that you expect some, I guess, loss of business just due to some overlap here, kind of just curious, you know, two very, very substantial cat reinsurance companies. I understand we're in a, in a marketplace where supply is limited, so, you know, clients are looking for anything they can get. You know, how big are you on client programs now going forward? If the market all softens up, is there a risk that you could lose a reasonable amount of business as supply comes in just 'cause of the size you're gonna be on a lot of clients' portfolios?
Yeah, I, it's a great question. It's something that, of course, you look at in your diligence. When we built the pro forma portfolios, building a $2.7 billion addition to our portfolio, we think is actually conservative, and we have upside. They have a diversified portfolio, as do we, so the coverages are often across many lines and many geographies for the largest clients. You're absolutely right. There is more demand coming to the market. A lot of that demand starts with where they're going to place the property cat. That puts us in a very strong position. I feel really confident that we are not market share constrained on this transaction and that we will be able to build a portfolio in.
I think, you know, with any time you bring two books together, it's just prudent to put something in for some reduction along the way.
Got you.
Number one thing.
I appreciate that. Just geographically, was Validus any kind of larger in certain areas that maybe you would like to have been and were not?
They, on a net basis, they probably are even underweight southeast wind or Atlantic hurricane compared to where we were. Across the specialty classes, and the casualty classes, there's no place that I would point to where they were materially different than what we were. No, the book fits quite nicely. If anything, probably creates a little bit more headroom for us than our own book on a straightforward share basis.
Terrific. Thanks. Congrats.
Okay, thank you. Appreciate it.
It appears we have no further questions at this time. I'll turn the floor back to Kevin O'Donnell for any additional or closing remarks.
Thank you. Thanks, everybody for joining the call. We are absolutely excited about this transaction. We think it is one that advances our strategies right in our wheelhouse, sets us up for success into a really, accretive market. We know the risk. We know the portfolio. It has strong accretion. We think it's a well-structured and well-protected transaction. It's an integration that we feel very comfortable and that we can execute on expeditiously. Look forward to speaking to you all over the next few days. Again, thanks for joining and appreciate your time.
This concludes the RenaissanceRe Investment Community Conference Call and Webcast. Please disconnect your line at this time and have a wonderful day.