AIG Returns to Expansion Mode -- WSJ

By FeaturesDow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 23, 2018).

Eight months ago, new American International Group Inc. Chief Executive Brian Duperreault promised that the age of a shrinking AIG was over. The poster child for the excesses of the 2008 financial crisis would strive once again to expand.

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On Monday, he made his first big move to make that happen.

AIG said it is acquiring Bermuda-based insurer and reinsurer Validus Holdings Ltd. in an all-cash deal for $5.56 billion. At $68 a share, the deal represents a 46% premium to Validus's closing share price Friday and a 16% premium to its 52-week high.

On Monday, Validus's shares soared 44%, to close at $67.29, while AIG's stock fell 0.9%, to $61.

Before landing at the center of the global financial crisis of 2008, AIG was one of the world's biggest financial-services companies with about $1 trillion in assets. It is about half that size now after divesting many businesses and assets to repay a U.S. government bailout that reached nearly $185 billion.

Taxpayers got their money in full by the end of 2012, but AIG's retrenchment continued as management then sought to improve weak profit margins by shedding poorly performing parts.

Last September, U.S. officials rescinded AIG's status as a "systemically important financial institution," giving AIG flexibility to do large acquisitions.

Mr. Duperreault, who became the company's CEO last May, made clear from the start that he would look for deals to expand AIG, probably by sharply reducing a stock-buyback program that was helping to boost earnings per share. He turned to an island he knows well. He was born in Bermuda, and two of his previous CEO roles were there.

Mr. Duperreault said in an interview that he has known the management of Validus for years, both as a competitor and as a client of brokerage and consulting firm Marsh & McLennan Cos., where Mr. Duperreault was CEO from 2008-2012. He said a key question he asks of potential targets is whether its management is "going to make us better or not," while of Validus's business mix, he said, "I love the fit of this company" with AIG.

"That's why I put the call in" to get deal talks rolling, he said.

Bermuda is a well-established hub for property-catastrophe reinsurance. The deal Mr. Duperreault has struck is the latest example of consolidation in this corner of the industry. In recent years, many reinsurers have suffered erosion of profit margins, making mergers and acquisitions a preferred course of action. Some analysts have had Validus on a list of potential acquirers.

Another factor in favor of deal making, said Cathy Seifert of CFRA Research, is a recent change to U.S. tax law that reduces tax advantages long held by Bermuda-based insurers.

Profit margins have eroded in large part because of an influx of capital from pension plans and other big investors into catastrophe bonds and other reinsurance vehicles that serve as alternatives to conventional reinsurance.

Reinsurance is an arrangement in which insurers take on the risk of policies that primary insurers sell to businesses and individuals. A big product line for Validus is property-catastrophe reinsurance for hurricanes and other disasters.

The company also has other operations, including a Lloyd's syndicate, crop insurance, and a unit that insures small U.S. companies. They overlap minimally with existing businesses at AIG, a leader in insuring multinational corporations and other large businesses and a large U.S. life insurer.

As hurricanes Harvey, Irma and Maria unfolded last year, Bermuda reinsurers looked poised to benefit from sharply rising premium rates. But, in general, rates renewing as of Jan. 1 have fallen short of those expectations and are up more modestly, according to industry brokers and analysts.

While reinsurance premium rates have gone up less than people initially speculated, Mr. Duperreault believes they are at a reasonable level. He also noted that Validus has been adept at innovating. He praised its $3.4 billion asset-management arm called AlphaCat, which specializes in insurance-linked securities such as catastrophe bonds. Mr. Duperreault said the unit has "great growth potential."

Ed Noonan, Validus's chairman and chief executive officer, said the deal makes sense for Validus because "becoming part of a larger, more diversified organization immediately opens new opportunities for our people and our franchise."

Other reinsurers gained sharply in trading Monday as investors factored in an "M&A premium," said Wells Fargo Securities anlayst Elyse Greenspan. "It's a tough reinsurance market," she said.

Validus was launched in 2005 in the wake of Hurricane Katrina, whose approximately $50 billion in insured damage (in today's dollars) caused havoc in insurance markets and created a need for new, well-capitalized companies. Validus was founded by Aquiline Capital Partners LLC, headed by Jeff Greenberg, who recruited Mr. Noonan . Aquiline raised $1 billion of equity from institutional investors and was able to get the company up and running in time for Validus to participate in renewals as of Jan. 1, 2006. Its initial public offering of stock was in 2007.

On Monday's call, some analysts asked about other possible transactions. Mr. Duperreault said his team would "continue to see what's out there." He said AIG had "a lot of white space" as he thought about this initial deal, and one appealing aspect was Validus's minimal overlap with AIG's existing operations. That means that AIG's managers in the core business-insurance unit will be able to continue their focus on improving results, rather than diverting to integration matters.

Mr. Duperreault has previously said areas of interest would be expansion of AIG's life-insurance and retirement-services business, especially overseas; its auto- and homeowners-insurance business, which is known for insuring the well-to-do; and the core business-insurance unit, by adding a focus on small and midsize companies.

AIG's market capitalization was $55 billion as of Friday, far off a peak of more than $200 billion in 2000.

Write to Leslie Scism at leslie.scism@wsj.com

(END) Dow Jones Newswires

January 23, 2018 02:47 ET (07:47 GMT)

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