After a failed deal for Voya, AIG recovers by acquiring a Bermuda-based reinsurer.
Rebuffed in its recent attempt to purchase Voya Financial, Inc., American International Group, Inc. (AIG) quickly rebounded with a deal to acquire Bermuda-based reinsurer Validus Holdings, Ltd. for $5.56 billion. AIG will pay $68 a share for Validus, a 45.5% increase from Valdius’ closing price on the day before the deal was announced.
The purchase is said to be AIG’s largest single acquisition in 17 years. When the deal closes by midyear, AIG will add Validus’s reinsurance division and crop insurance arm to its operations. Since Validus is also an underwriter for Lloyd’s of London, AIG will also reenter the Lloyd’s marketplace, where it gains a foothold in the international insurance and reinsurance sectors that offer risky but potentially more profitable ventures. Also included in the acquisition is Validus’s AlphaCat unit, which manages $3.2 billion in investments in insurance-backed securities often linked to natural disasters
A New DirectionDespite the failed deal for Voya, AIG’s recently appointed CEO Brian Duperreault remains committed to strengthening the company through strategic acquisitions. The Validus merger, Duperreault said, boosts the firm’s overall capabilities and brings it “capital, cash flow, and underwriting opportunities to deliver profitable growth.”
The deal further underscores AIG’s remarkable recovery from the financial crisis of a decade ago. At that time, AIG was declared “too big to fail” and given $182 billion from the federal government to keep it afloat. It also sold off nearly $100 billion in assets. By 2013, however, AIG had fully reimbursed the government, which made a $23 billion profit on the repayment.
AIG’s purchase of a reinsurance company mirrors other recent deals within the insurance industry in which insurers acquired specialty business lines, an increasingly popular strategy as pricing in the consumer and traditional property segments becomes more competitive. Bloomberg compares the transaction to Fairfax Financial Holdings, Ltd.’s 2016 purchase of Allied World Assurance, Co., a P&C insurer and reinsurer, for $4.9 billion, and Liberty Mutual Holding, Co.’s $3-billion acquisition of specialty insurer Ironshore, Inc. last year.
Immediately AccretiveAIG said that the deal for Validus will be “immediately” accretive to earnings and returns on equity, which is good news for shareholders who have seen the company’s stock slump in recent months. The Financial Times noted that AIG shares had dropped 7.5% over the past 12 months.
Duperreault told analysts in a conference call, however, that the firm remains “confident that Validus will thrive within AIG and strengthen our ability to deliver profitable growth for our shareholders as we strategically position AIG for the future.”
Wells Fargo & Co. Analyst Elyse Greenspan said that while AIG’s share price may initially trend downward as it assumes more reinsurance exposure, buyers should “focus on the accretion from this transaction.” “AIG will still have excess capital after this deal is done,” she added.