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M&A climate, Q3 cat results may shape possible sale prospects for RenaissanceRe

In a season in which powerful storms have battered coasts across the globe, RenaissanceRe Holdings Ltd. could find it difficult to avoid strong headwinds regardless of whether it remains independent or seeks a sale.

Long-time RenaissanceRe shareholder TimesSquare Capital Management LLC recently assumed a rare activist posture in a September letter urging the reinsurer's board to explore a sale as part of a review of strategic alternatives. The investor Oct. 2 made that letter public in what it said was an effort to make its views clear to other shareholders. In response, RenaissanceRe said it would hold fast to the business plan it has in place.

RenaissanceRe is wise to not look like it is chasing a buyout, according to CFRA insurance analyst Cathy Seifert. However, the backdrop of recent reinsurance M&A could make offers hard to resist, she said in an interview.

Comparing the buyout premiums offered to Validus Holdings Ltd. and XL Group Ltd. on the one hand, and even factoring in the considerably smaller premium proposed for Aspen Insurance Holdings Ltd. on the other hand, RenaissanceRe could expect a takeout in the area of 1.65x tangible book value, Seifert said. The company's shares opened at $133 on Oct. 1 before TimesSquare Capital's letter was made public and jumped to $139.22 by the close of trading Oct. 4. Management might have to drive performance to push its share price north of $158 to justify going it alone, Seifert said.

"If not, they really need to explain to shareholders why it makes sense to remain independent," she said.

If RenaissanceRe decides to sell, the environment could either work for or against it, depending on timing. A potential negative from moving fast on a deal might be Aspen's most recent experience, which resulted in a transaction with a relatively small premium, Keefe Bruyette & Woods analyst Meyer Shields said in an Oct. 2 research note to clients.

"Aspen's recent sales process may negatively impact reinsurance multiples that could reduce [RenaissanceRe's] near-term potential takeout multiples in a forced sale process," he wrote.

That said, holding off on a deal could expose the company's valuation to what is shaping up to be a third quarter of elevated catastrophe losses, which follows a record-breaking year for natural disasters in 2017, said Buckingham Research analyst Amit Kumar. If losses from the quarter come in above expectations, potential buyers could hold off in the near term, he wrote in an Oct. 3 research note.

"Substantially higher losses could put downward pressure on valuation in a sale," Kumar said.

But if third-quarter losses are considered manageable and deal conditions are favorable, RenaissanceRe would be an attractive property to potential buyers, given its quality operation, strong track record and the scarcity of reinsurance targets, Kumar said. He estimated a value of up to $170 per share, while KBW's Shields projected a premium higher than Validus' 1.77x price-to-tangible book multiple.

Private equity would be attracted to "a well-developed franchise which allows for capital redeployment and rates which might be difficult to achieve in fixed income or equity markets," Kumar wrote. Traditional buyers in Europe or Japan could seek out RenaissanceRe for geographic diversification, he added.

Other factors that could attract acquirers are RenaissanceRe's Lloyd's of London business and a growth trajectory that exceeds the industry average, CFRA's Seifert said.

"A large P&C insurer looking to broaden their exposure to other classes of risk and potentially amp up their topline growth would likely view [RenaissanceRe] as an attractive candidate," Seifert said.