Moody's Lowers Outlook on RenaissanceRe (RNR) to Negative Following Platinum Underwriters (PTP) Deal

Moody's Investors Service has affirmed the ratings of RenaissanceRe Holdings Ltd. (NYSE: RNR) and its subsidiaries (see complete list below), and changed the rating outlook to negative (from stable), after the company entered into an agreement to acquire Platinum Underwriters Holdings Ltd. (NYSE: PTP)(not rated). The negative outlook reflects Moody's opinion of the uncertain benefits and higher financial leverage from the combination. As part of its review, Moody's will evaluate PTP's reserve adequacy, track softening rate adequacy, and monitor customer receptivity to the combined entity.

RNR has agreed to acquire PTP for $76.00 per PTP common share, or approximately $1.9 billion. This is 1.13 times PTP's book value per share at 09/30/2014 and a 24% premium to PTP's closing share price at 11/21/2014. The consideration will consist of (a) $253 million special dividend from PTP at closing, (b) $611 million cash from RNR's available funds, (c) proceeds from a $300 million future senior debt issuance, and (d) $761 million of RNR stock. The transaction has been approved by the Boards of both companies, and is expected to close in the first half of 2015, subject to approvals from regulators and PTP's shareholders.

RATING RATIONALE

"The negative outlook reflects our circumspect view of the benefits of the proposed transaction from a credit perspective," said Kevin Lee, Moody's analyst for RenaissanceRe. While it is possible that PTP's US casualty reinsurance business could provide profitable diversification to RNR, a substantial amount of the underwriting profits from that business has come from reserve releases -- which may or may not be sustainable especially since rate adequacy has been in decline. "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," added Lee.

Moody's added that the significant cash component of the consideration, including financing from a future debt issuance, puts more pressure on RNR's capital structure and leaves less room for returning capital to shareholders at a time when there may be few opportunities to deploy such capital at attractive returns. Moody's estimates that RNR's adjusted debt-to-capital ratio would go from 9% to approximately 16% pro forma at 9/30/2014 -- which would inch closer to Moody's rating driver of 18%. The additional interest expense will also offset about half of the $30 million in cost synergies that the company expects.

Assuming the transaction closes, Moody's plans to use the review period (which could last up to 12-18 months but could be considerably shorter) to study PTP's reserve adequacy more closely, evaluate levels of rate adequacy, and monitor customer receptivity to the combined entity. The following factors could return the outlook to stable: (a) realization of expected revenue synergies; (b) continued evidence of PTP reserve adequacy; (c) adjusted debt-to-capital below 18%. Conversely the following factors could lead to a downgrade: (a) failure to achieve expected revenue synergies; (b) concerns about reserve adequacy of PTP's business; (c) continuation of sharp declines in industry rate adequacy; (d) returns on capital significantly below 10% (across a multiple year outlook); (e) EBIT fixed charge coverage below 9x (across a multiple year outlook); (f) adjusted debt-to-capital ratio above 18%.

The following ratings have been affirmed with a negative outlook:

RenaissanceRe Holdings Ltd. -- preferred stock at Baa2(hyb); provisional senior unsecured debt at (P)A3, provisional subordinated debt at (P)Baa1, provisional junior subordinated debt at (P)Baa1, provisional preferred stock at (P)Baa2.

RenRe North America Holdings Inc. -- guaranteed senior unsecured debt at A3; provisional guaranteed senior unsecured debt at (P)A3, provisional guaranteed subordinated debt at (P)Baa1, provisional guaranteed junior subordinated debt at (P)Baa1.

RenaissanceRe Finance Inc. -- provisional guaranteed senior unsecured debt at (P)A3, provisional guaranteed subordinated debt at (P)Baa1, provisional guaranteed junior subordinated debt at (P)Baa1.

RenaissanceRe Capital Trust II -- provisional guaranteed trust preferred securities at (P)Baa1.

Renaissance Reinsurance Ltd. -- insurance financial strength at A1.

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