Analysts positive on AIG-Validus deal

American International Group’s (AIG’s) plan to take over Bermuda-based Validus Holdings has triggered positive comments from market observers.

AIG has entered into a definitive agreement to acquire all outstanding common shares of Validus Holdings for $5.56 billion.

AIG is in need of alternative sources of earnings accretion and credible drivers towards loss ratio improvement and it will get both of these with this deal, Credit Suisse analysts wrote in a Jan. 22 research note.

With Validus, AIG gets a well-run company with a good book of business and well-below average execution risk on the deal, the analysts added. With little to do from an integration standpoint, Credit Suisse expects AIG management to maintain most of its focus on improving AIG’s organic commercial business, which will still be 84 percent of the Commercial Insurance segment after the deal.

AIG’s US casualty business had performed significantly worse than expected by the firm in recent years. The company reacted by striking a reinsurance deal and significantly increasing claims loss reserves. But in the third quarter of 2017 AIG took an $836m pre-tax reserve charge in commercial lines in that also resulted in the company increasing the full-year loss estimates, surprising analysts who thought the casualty issues at the company had been addressed.

Assuming a 50 percent underlying loss ratio on the Validus book, the deal also creates a good P&C margin tailwind for AIG in 2018 and 2019, an additional source of operating momentum, according to the Credit Suisse note.

At the same time, analysts at Credit Suisse are skeptical of the strategic rationale of adding a reinsurance business through the addition of Validus Re and AlphaCat.

AM Best noted that the transaction affords AIG the benefits of business diversification and a seasoned management team, while being immediately accretive to earnings and maintaining AIG’s financial leverage within acceptable levels for its ratings.

Given the lack of business overlap and general modest size of Validus, this transaction should not result in material execution risk or distraction to AIG as it works to improve the performance of its property/casualty business, according to an AM Best Jan. 22 press release.

Fitch Ratings said that the acquisition provides AIG with profitable underwriting platforms in several segments that are distinct from existing operations. Apart from adding reinsurance business, AIG is also re-entering the Lloyd’s market through the deal by adding Talbot after shedding Ascot in 2016.

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 said in a Jan. 22 press release.

AIG's Rating Outlook has been Negative since February 2017, and is reflective of financial performance that is below ratings expectations, driven largely by large loss reserve development charges in the Commercial Insurance segment that contributed to a full year 2016 GAAP net loss of $849 million.

Measures to improve underwriting performance and reduce reserve risk within commercial insurance include sharp reductions in casualty business volume that significantly changes product mix, and the purchase of retroactive reinsurance from National Indemnity Company (NICO) on US longer tail business for accident years 2015 and prior that currently has approximately $6.9 billion of coverage remaining for future development in covered segments.

Management efforts to improve commercial insurance performance were affected in 2017 by substantial catastrophe related losses, including approximately $3 billion of incurred losses from third quarter hurricane events, as well as additional loss reserve development primarily in the 2016 accident year. The overall property casualty GAAP combined ratio was 118.8 percent for the first nine months of 2017.

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