The acquisition of Bermudian reinsurance group Validus Holdings, Ltd. by primary insurance giant American International Group, Inc. (AIG) will provide the AlphaCat Managers ILS investment team with access to a much deeper and broader universe of insurance risk, the unit believes.
AlphaCat Managers is a $3.4 billion insurance and reinsurance linked investment fund manager, that is part of the Validus Holdings group of companies.
In recent years the AlphaCat unit has been delivering an increasing income boost to Validus’ results and has become an important part of the overall Validus reinsurance platform.
When the announcement of the acquisition of Validus by AIG was made recently, AIG noted AlphaCat will, “leverage the underwriting expertise within Validus Re” and provide the insurer with greater risk management flexibility.
AIG CEO Brian Duperreault said that AlphaCat “has great growth potential” adding “there’s tremendous potential for big upside here, I’m very positive about this one.”
Duperreault noted the importance of being able to effectively match risks with the right capital, something he said Validus is adept at, saying, “In Validus we have a company that does that well, using AlphaCat and using retro.”
But from the AlphaCat Managers and Validus side of the deal, the synergies and opportunities presented by becoming part of the AIG family are significant and recognised as well.
Ken Driscoll, CEO of Validus Re, explained in a letter to shareholders and clients, “Our partnership with AIG brings together two highly complementary companies with strong prospects and limited overlap. Validus’ underwriting expertise, market access, research capabilities and strong history of profitability are core motivations for AIG in the acquisition. Since our founding in 2005, we have worked tirelessly to deliver solutions to our reinsurance partners. Fundamentally, we sell a promise to pay. The collaboration with AIG meaningfully enhances our financial size and strength.”
Driscoll said that the Validus Re and AlphaCat units will operate within AIG’s General Insurance business, with little changes to how they operate today largely as they do today.
He told investors and clients, “You should expect the same responsive, solutions-driven approach that we have endeavored to bring to our customers. We view the acquisition by AIG as very compelling. The access to one of the biggest balance sheets in the global markets will allow us to meaningfully expand our business, and specifically our capacity, and product offerings.
“In addition, this will accelerate AlphaCat’s development as the premier aligned asset manager in the ILS space.”
The AlphaCat Managers leadership team also wrote to their investors and stakeholders, explaining that, “AlphaCat’s strong partnership with ILS investors” is one of the “core motivations for AIG in the acquisition.”
“AlphaCat will continue to access the reinsurance and retrocession markets through Validus Services and the research/modeling capabilities of Validus Research,” the AlphaCat team explained, continuing, “Moreover, AlphaCat will now have direct access to a much deeper and broader universe of insurance risk, further enhancing our ability to deliver attractive risk-adjusted return to our clients.”
The synergies between AIG and the reinsurance divisions Validus Re and AlphaCat are indeed significant and flow both ways.
AIG will benefit from access to a new source of underwriting returns from the reinsurance and retrocession sides of the market, as well as access to efficient capital that could be used to augment its own underwriting capabilities.
AlphaCat and Validus Re will sit within a massive insurance risk underwriting machine, which could bring enormous opportunities to grow into new risks, access more of the catastrophe and weather risk exposed U.S. property insurance market and also to provide efficient capital to back large commercial insurance solutions as well.
A number of reinsurance industry analysts and rating agencies have cited concern over the increase in AIG’s exposure to catastrophe risks as a result of the acquisition. But the platform, of AIG plus Validus Re and AlphaCat provides the ideal way to lower the volatility of these catastrophe risks, while leveraging third-party capital as an underwriting partner and source of risk transfer.
It’s going to be interesting to watch how AIG leverages third-party capital going forwards and what this does for AlphaCat’s growth potential.