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Validus acquisition expands AIG’s platform

Posted On: Jan. 22, 2018 12:52 PM CST

American International Group Inc.’s proposed purchase of Validus Holdings Ltd. for $5.56 billion will bring the U.S. insurer a reinsurance business, a Lloyd’s of London platform and a strong foothold in the third-party capital sector.

The $68-per-share deal, expected to close in mid-2018, was announced early Monday in a joint statement from the companies. AIG then also held a call for analysts.

“This acquisition is significant step forward in executing our strategy to pursue profitable growth,” AIG President and CEO Brian Duperreault said on the call early Monday, adding that Validus is “a great cultural fit,” and “we know the Validus team very well.”

Mr. Duperreault had previously signaled the company’s interest in acquisitions during its 2017 second-quarter earnings call. 

Validus comprises Validus Reinsurance Ltd., a treaty reinsurer with a focus on property catastrophe, marine and specialty; AlphaCat Managers Ltd., which manages $3.2 billion on behalf of clients by investing in insurance-linked securities products; Talbot Underwriting Ltd., a Lloyd’s of London syndicate focused on short-tail specialty lines; Western World Insurance Co., a U.S. specialty property/casualty underwriter focused on the small commercial excess and surplus lines and admitted markets; and Crop Risk Services, a North American crop insurance market.

Validus was one of the so-called Class of 2005 catastrophe reinsurers formed in Bermuda following Hurricane Katrina.

Strategically, the deal gives AIG a strong reinsurance underwriting operation; an immediate presence at Lloyd’s; additive specialty line experience; and a skill set around third-party capital with AlphaCat, “which introduces new possibilities to AIG as a risk originator,” Mr. Duperreault said on the call.

He also said Validus had successfully applied data and technology as a competitive advantage, citing proprietary catastrophe modeling as one example, and that this would fit well with AIG technology and data strategies.

AIG in October launched Blackboard, the new brand name for its technology-focused subsidiary, which previously operated under the Hamilton USA brand. 

Analysts were initially positive.

“After the transaction closes, we will likely view Validus as a strategically important entity within the AIG group because, among other things, it constitutes expansion into new business platforms and adds strong catastrophe modeling and research capabilities to the AIG enterprise,” S&P Global Ratings Inc. said in a note as the ratings agency affirmed it “BBB+” rating on Validus and revised its outlook to negative.

“We view Validus as mainly additive to AIG’s business mix, and thus it does not conflict with AIG’s goal of improving underwriting in its U.S standard commercial lines,” added Tracy Dolin-Benguigui, director and sector lead for S&P Global Ratings in New York.

Credit Suisse Equity Research said it was “net positive on the deal as the financial considerations outweigh apprehensions around valuation and strategic rationale,” adding: “Business mix has little overlap, little distraction to AIG's commercial business.” Credit Suisse noted, however, “we are certainly skeptical of the strategic rationale of adding a reinsurance business.”

Mr. Duperreault added during the conference call that there would be minimal integration, as Validus “will operate as it does today, within general insurance.”

Peter Zaffino, AIG’s CEO for general insurance, said on the call that “we expect the business unit leaders at Validus will remain in place following the completion of the transaction.”

This includes Kean Driscoll as CEO of Validus Re; Lixin Zeng, CEO of AlphaCat; Peter Bilsby, CEO of Talbot Group; Jonathan Ritz, president of Western World Insurance Group Inc.; and Brian Young, president of Crop Risk Services, Mr. Zaffino said.

Validus Chairman and CEO Ed Noonan is expected to leave the reinsurer once the deal is completed. “We understand he will help ensure a smooth transition and will leave when the deal closes,” said a spokeswoman for the company.

Mr. Zaffino echoed Mr. Duperreault, saying, “We do not anticipate a wholesale integration of the Validus operations into our own business.”

Mr. Zaffino said Validus Re, with $1.11 billion in 2017 gross written premium, and AlphaCat, with $3.4 billion under management for clients, creates a “comprehensive reinsurance offering.”

Reinsurance operations of Validus generate 53% of gross written premiums, while insurance generates 47%, Mr. Zaffino said.

Talbot syndicate 1183 is the 11th-largest syndicate in Lloyd’s with $921 million in 2017 direct written premium, Mr. Zaffino said, adding, “we are pleased that AIG will re-enter Lloyd’s.”

Western World, with $397 million in 2017 gross written premiums, “provides AIG access to small commercial clients that we typically do not serve through Lexington (Insurance Co.) or our E&S platform,” Mr. Zaffino said.

Crop Risk Services, with $549 million in 2017 gross written premiums, “provides an excellent entry point into crop insurance where we currently do not have a presence,” he said.

“We believe this deal rapidly adds significant underwriting and management talent to AIG's somewhat depleted bench,” said Baltimore-based Keefe Bruyette & Woods Inc. analyst Meyer Shields in a research note Monday, adding the deal “also confirms that there's still value in property catastrophe reinsurance.”

“The Validus purchase is representative of a strategic shift at AIG following the hiring of CEO Brian Duperreault in May 2017, which led to a move towards deployment of earnings into existing businesses and new external growth opportunities, compared with the prior strategy of returning substantial capital through share repurchases,” Fitch Ratings Inc. said in a note Monday that also affirmed AIG’s ratings, including the A (Strong) insurer financial strength rating of the property/casualty insurance subsidiaries and the A+ (Strong) IFS rating of the life insurance subsidiaries.

Asked why Validus was the choice, Mr. Duperreault said: “We have a lot of white space; there’s a lot of business we don’t do. We’re not in the reinsurance business. I know that business well, and I particularly like the reinsurance business as additive to what we do. I’ve been interested in getting a Lloyd’s platform; we don’t have one. I think it is an important strategic asset to any general insurance company. It’s got a crop business. We don’t have crop.”

“So, there are a lot of pieces to this company that fit us perfectly like a glove,” he said.