The definitive agreement to sell its treaty reinsurance business to RenaissanceRe Holdings Ltd in a deal valued at nearly $3 billion is strategically significant for both American International Group and Validus Re, the chairman and chief executive of AIG said.

The transaction, announced after market close on Monday, will see RenaissanceRe acquire Validus Re, including AlphaCat and the Talbot Treaty reinsurance business, for $2.985 billion, consisting of $2.735 billion in cash and $250 million in RenaissanceRe common shares.

In addition, AIG will receive all capital in excess of $2.1 billion of shareholders’ equity of Validus Re and achieve future capital synergies of approximately $400 million from the recapture of reserves as a result of transferring the Validus Re balance sheet to RenaissanceRe, which together, as of December 31, was more than $1.5 billion.

The total estimated transaction value is expected to exceed $4.5 billion, AIG said.

AIG will retain Talbot Underwriting and Western World, which were purchased as part of its 2018 acquisition of Validus Holdings Ltd and which represent approximately $1.6 billion of AIG’s total gross premiums written.

After the closing, AIG expects to make significant investments in RenaissanceRe’s DaVinci Reinsurance and Fontana Re managed funds through AIG’s investment portfolio.

Peter Zaffino, the chairman and CEO of AIG, said the announcement of the deal “represents another key milestone for AIG and is strategically significant for both AIG and Validus Re.

“For AIG, it further simplifies our business model and reduces volatility in our portfolio, while generating significant cash liquidity and capital efficiencies that enable us to accelerate our capital management strategy.”

He added: “We have spent the last several years transforming Validus Re by re-underwriting the portfolio and driving operating leverage leading to improved outcomes.

“As part of RenaissanceRe, Validus Re will benefit from global scale that will allow the business to continue to grow, expand its capabilities and drive value for clients and other stakeholders.

“At the same time, our investment in RenaissanceRe’s common shares demonstrates our commitment to the strong relationship we have with RenaissanceRe and, coupled with our investment in DaVinci Reinsurance and Fontana Re, will allow us to continue to participate in the growth of the reinsurance market with less risk and capital requirements.

“I have enormous respect for Kevin [O’Donnell] and RenaissanceRe and look forward to continuing our longstanding and successful partnership.”

The sale of Validus Re is expected to close in the fourth quarter of 2023, subject to regulatory approvals and other customary closing conditions.

Meanwhile, RenaissanceRe has commenced an underwritten public offering of 6.3 million of its common shares.

The company said it intends to use the net proceeds from this offering to fund a portion of the cash consideration for the deal with AIG, to pay related costs and expenses and for general corporate purposes.

Morgan Stanley is acting as lead active book runner and Goldman Sachs & Co LLC is acting as active book runner in the proposed offering.

The underwriters will have the option to purchase up to an aggregate of 945,000 additional common shares from the company.

AM Best said the credit ratings of RenaissanceRe and its various affiliated entities are unchanged after the announcement of the deal.

The ratings agency added that it may contemplate rating action if the terms and conditions of the proposed deal change materially, or if there is a significant deterioration in risk-adjusted capitalisation or operating performance that is not expected at this time.