Duperreault starts to reshape AIG

The $5.56 billion acquisition of Bermuda-based Validus shows that Duperreault’s strategy involves diversifying AIG’s risk exposure, adding reinsurance and a Lloyd’s player to the portfolio.

In May 2017, Brian Duperreault was appointed AIG CEO, resigning from his post as head of Bermuda-based Hamilton Insurance Group.

Duperreault succeeded Peter Hancock, who announced his resignation in March 2017, after the AIG's poor financial performance frustrated shareholders and the board of directors. AIG reported a net loss of $3.04 billion for the fourth quarter of 2016, up from a negative $1.84 billion in the same period of 2015.

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.

AIG entered into an adverse development reinsurance agreement with National Indemnity Company, a Berkshire Hathaway subsidiary, in the first quarter of 2017. The agreement retroactively covers the majority of US long tail lines reserves for accident years 2015 and prior.

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.

As part of a two-year turnaround plan, AIG had embarked on a strategy of share buybacks, under former CEO Peter Hancock. It planned to return $25 billion of capital to investors by year-end.

But Duperreault said he would like to slow the pace of share buybacks and instead spend on acquisitions. And now he is starting to deliver on this strategy.

AIG has entered into a definitive agreement to acquire all outstanding common shares of Bermuda-based Validus Holdings.

Validus offers reinsurance, primary insurance, and asset management services.

The transaction enhances AIG’s general insurance business, adding a reinsurance platform, an insurance-linked securities (ILS) asset manager, a presence at Lloyd’s and complementary capabilities in the US crop and excess and surplus (E&S) markets, according to the press release. The aggregate transaction value is $5.56 billion, funded by cash on hand.

“Validus is an excellent strategic fit for AIG, bringing new businesses and capabilities to our General Insurance operation, expanding the bench of our management team and deepening our underwriting expertise,” Duperreault explained.

Through the deal, AIG is entering new business lines.

“There are a lot of businesses that we don’t do and therefore concentrated in too few for my liking,” Duperreault explained during a Jan. 22 conference call discussing the Validus deal.

Before the deal, AIG was neither operating in the reinsurance business nor in the Lloyd’s market.

The planned transaction includes Validus Re, a treaty reinsurer with a focus on property catastrophe, marine and specialty with gross premium written of $1.11 billion in the last twelve months as of September 30, 2017. After the transaction, Validus Re will represent 3 percent of AIG’s total general insurance franchise, according to the presentation.

In addition, AlphaCat manages $3.2 billion on behalf of clients by investing in ILS products. This business will represent 1 percent of AIG’s total general insurance franchise after the deal.

Duperreault noted that he knows the reinsurance business well as he has been involved in running reinsurance companies or advising them in the past. “I particularly like the reinsurance business as additive to what we do,” he said. While noting that retrocession rates have increased more than property catastrophe after the third quarter 2017 cat losses, Duperreault said that he sees “great growth potential” especially the AlphaCat capabilities.

When asked if clients won’t be wary of doing reinsurance operations with a competitor, Duperreault said that if that was the case it ended a long time ago. “We are an industry where we will compete in one day and partner the next and reinsure each other,” Duperreault explained.

AIG will also be entering the Lloyd’s market through the Validus deal by acquiring Talbot, a syndicate focused on short-tail specialty lines. The addition will broaden AIG’s technical underwriting expertise and provide access to distribution in the largest specialty insurance market in the world, according to the company.

“I’ve been interested in getting a Lloyd’s platform. We don’t have one and I think it is an important strategic asset to any general insurance company,” Duperreault said.

Talbot had $921 million of gross premium written as of September 2017.Talbot’s brokers and clients will benefit from AIG’s suite of capabilities, according to the press release.

Also part of the deal is Western World, a US specialty property/casualty underwriter focused on the small commercial excess and surplus (E&S) and admitted markets, which will add technical expertise in binding authority. In addition, AIG gains Crop Risk Services, which provides access to the North American crop insurance market.

“We don’t have crop,” Duperreault said. “It’s a terrific business,” he noted.

The operations of Validus show very little overlap with AIG’s business, management noted.

Credit Suisse analysts commented in a research note that “the deal shows that AIG has no intention of sitting on capital and that the company feels comfortable that it has on balance sheet capital to deploy following third quarter 2017 hurricanes and in front of a fourth-quarter reserve review”.

When asked how the deal came about, Duperreault said that he initiated it, while suggesting that it won’t be the last one.

“There are still things that I would like to add to the company to balance it out that would be great strategic fits, and over time, I hope that I can do that,” Duperreault said.