American International Group, Inc. (AIG), one of the world’s largest insurers, will now also benefit from a specialist reinsurance arm and its own insurance-linked securities (ILS) fund manager, as it closes on the Validus acquisition so adds the AlphaCat Managers ILS unit to its operations.
Access to reinsurance capital in all its diverse forms has become a key strategic goal for the world’s largest insurance and reinsurance firms and AIG showed its appetite for broadening its operational platform to include access to efficient risk capital with the agreement to acquire Validus and its various subsidiaries.
Now the acquisition, which saw AIG buying Validus for $5.56 billion, has closed, following the receipt of all necessary regulatory approvals and approval of Validus shareholders.
AIG notes that as part of its operating group, Validus adds what it terms “attractive and diversified franchises” to the AIG platform.
These include reinsurance platform Validus Re; insurance-linked securities (ILS) asset manager AlphaCat; Lloyd’s syndicate Talbot; U.S. small commercial and excess and surplus specialist Western World; and agricultural specialist Crop Risk Services.
All of these offer something new to AIG, or a renewed focus on the lines they specialise in.
AlphaCat offers an intriguing opportunity for AIG to leverage more third-party capital within its own business, as it looks to control its catastrophe exposures.
Property catastrophe risks have held back the underwriting of some large primary insurers in the past, as they sought to avoid becoming over concentrated on key catastrophe exposed zones, or to avoid having to buy too much reinsurance to protect themselves.
Now AIG has a platform that could support its continued growth into property risks, while allowing it to leverage ILS capital and third-party investor partners through AlphaCat to take the peak catastrophe risk tail that can be less suited to its own balance-sheet.
Used in tandem with its other reinsurance arrangements, the inclusion of AlphaCat within AIG’s broader operations will enable the firm to better manage its exposures and earn fee income where it has underwritten risks, but needs to cede on the catastrophe exposure.
That means AIG can maximise on monetising its intellectual capital, risk knowledge and underwriting expertise, without having to worry so much about becoming over-exposed to catastrophe risks and while still being able to get paid for its role in the market value chain.
Of course having AlphaCat onboard also offers AIG a way to enhance its own reinsurance program, perhaps saving money through ceding risks via AlphaCat to third-party investors, where it can still earn some fee income, instead of paying open market reinsurance premiums.
For the existing and prospective investors in the AlphaCat vehicles, the fact their ILS manager of choice is now part of a global insurance and reinsurance group offers the prospect of enhanced access to risk, more origination control and a chance to benefit from increased scale and future growth of the group.
“We are very pleased to welcome Validus to AIG,” commented Brian Duperreault, President and Chief Executive Officer of AIG. “Validus’ experienced team and complementary businesses will help us deliver sustainable, profitable growth as we continue to build value for our shareholders.”
Peter Zaffino, AIG’s Chief Executive Officer, General Insurance, added, “We look forward to working with the Validus team on the expanded capabilities and value we can deliver to our clients and broker partners. The Validus businesses will be immediately accretive to our performance in General Insurance now that they are officially part of AIG.”