Carlyle doubles-down on legacy with Fortitude Re, as AIG sells most of its stake

Private equity giant The Carlyle Group has significantly increased its ownership stake in American International Group’s (AIG) legacy reinsurance vehicle Fortitude Re, becoming the largest shareholder as AIG freed up more capital by downsizing its share significantly.

Carlyle partnered with insurance giant AIG to help transform its DSA Re legacy reinsurance vehicle into a standalone reinsurer, which saw Carlyle take almost a 20% stake in the vehicle which was subsequently renamed to Fortitude Re.

The vehicle gave the private equity player a deeper hook into the reinsurance market, with access to multiple-asset classes within the Fortitude investment portfolio, as well as a chance to build a viable business that can turn a multiple in terms of value as well.

Legacy insurance liabilities are seen as an increasingly attractive investment for large private equity investors, who seem to view them as source of opportunity (in terms of building value, profits and eventually successful exits), as well as source of investment float.

As we explained at the time:

It’s a deal that appears all about efficiency and capital assets, with benefits flowing both ways and it also underscores the attractiveness that originating a source of reinsurance linked premium float and returns has for the world’s major investment houses.

Now, AIG has entered into an arrangement with The Carlyle Group and Japanese primary insurance group T&D Holdings, which saw a newly created Carlyle-owned investment fund alongside T&D partnering to acquire 76.6% of Fortitude Group Holdings, whose group companies operate as Fortitude Re, from AIG for around $1.8 billion.

After the deal closes, Carlyle and investors in its fund will be the major shareholders in Fortitude Re, with 71.5% (including its original almost 20% stake), while T&D Holdings will own 25% and AIG just 3.5%.

AIG is set to receive a further $500 million distribution from Fortitude Re as well, but is also on the hook should the reserves held in the reinsurance vehicle deteriorate.

AIG will have to pay Fortitude Re for certain adverse development up to the end of 2023 in some of the property casualty related reserves held in the reinsurer, based on an agreed methodology. AIG’s maximum liability for adverse development in Fortitude Re’s reserves would be $500 million.

It’s a further step in AIG and Carlyle’s ambitions to “stand up Fortitude Re as an independent company and position it as a premier provider of retroactive reinsurance and legacy run-off management solutions for long-dated, complex risks to the global insurance industry,” the pair explained.

The deal means Carlyle can provide additional support as Fortitude Re grows, while also meaning Carlyle’s range of investment strategies are at its disposal as well, while T&D entering with an ownership stake helps to bring additional expertise to the table, the announcement explained.

Of course, this has gone beyond asset gathering and for AIG this is another step in removing itself from what were viewed as troublesome reserves that weighed heavily on its capital (DSA Re launched to take on $36 billion of AIG’s Legacy Life and Annuity and General Insurance liabilities in a reinsurance deal after its launch).

So AIG is freeing up more of its capital while Carlyle gains the access to investment assets (some $40bn at this stage), plus opportunity to help build Fortitude Re into a major international legacy reinsurance player.

Brian Duperreault, AIG’s President and Chief Executive Officer, commented, “Today’s announcement is another important step in our strategy to efficiently manage our legacy liabilities by further preparing Fortitude Re for independence, while strengthening our balance sheet and maintaining our primary focus on upholding policyholder and regulatory commitments. Carlyle’s expertise in separating and standing up companies has been invaluable to date, and we look forward to working with their team and T&D, with whom we have a longstanding relationship in Japan, as we continue the separation process. I also want to thank the entire Fortitude Re team for all their hard work in building the organization. We look forward to their future success.”

Kewsong Lee, Carlyle’s Co-Chief Executive Officer, added, “This transaction demonstrates Carlyle’s strategy of developing scalable platforms to drive shareholder value. Fortitude Re, led by CEO James Bracken, is strongly positioned as an industry leader in managing run-off insurance liabilities, and Carlyle looks forward to partnering with the management team to help Fortitude Re grow. We are excited about the prospects of further developing our global investment management services for Fortitude Re as we work to deliver attractive returns across a variety of asset classes. We welcome T&D to our partnership with AIG, both of whom are highly experienced players in insurance, and look forward to creating an attractive investment opportunity for our fund investors.”

Hirohisa Uehara, T&D’s Representative Director and President, said, “We are really honored to invest in Fortitude Re, which has developed a sophisticated platform for managing life and P&C insurance liabilities. We have longstanding relationships with both AIG and Carlyle, and we believe Fortitude Re’s closed book business will contribute significant synergies to our domestic life insurance business as well as diversification of our business portfolio. Additionally, we look forward to supporting Fortitude Re’s growth by leveraging our years of experience as a Japanese life insurer.”

For AIG, the deal means its access to Fortitude Re as a low-cost source of reinsurance for legacy portfolios going forwards may not be as cheap or efficient now it’s no longer the majority owner, but the insurer will be hoping it won’t need the services of a legacy player as frequently anymore.

Analysts said that they would like to see AIG putting the proceeds to work in driving further growth, rather than shareholder returns, with acquisitions in the U.S. domestic commercial insurance market a viable place for it to be spent.