American International Group (AIG) continues to adjust its operating model under the remit of Brian Duperreault, with the latest change being the announcement that the firms DSA Re legacy reinsurance vehicle is to be transformed into a standalone reinsurer, with the help of private equity giant The Carlyle Group.
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.
AIG announced that Carlyle Group is acquiring almost 20% of its DSA Re legacy reinsurance vehicle and the private equity giant is also entering into a strategic asset management relationship with DSA Re.
The pair have partnered to turn DSA Re into a standalone provider of reinsurance, claims handling, and run-off management solutions for long-dated, legacy and complex risks, positioning the reinsurer as a platform to provide solutions for insurance liabilities globally.
AIG established Bermuda-domiciled reinsurer DSA Reinsurance Company, Ltd. (DSA Re) to act as the firms main run-off reinsurer earlier this year, as our sister publication reported at the time.
DSA Re was initially designed to reinsure AIG’s Legacy Life and Retirement and Legacy General Insurance run-off lines of business, acting as an internal reinsurer and manager of longer-dated risks that AIG would rather have off its books, in order to be more capital efficient.
So DSA Re took on $36 billion of AIG’s Legacy Life and Annuity and General Insurance liabilities in a reinsurance deal after its launch, and AIG said today that this gave the vehicle a solid platform that can be scaled over time, making it attractive to turn it into a market-facing legacy reinsurer, rather than solely for the benefit of AIG.
So up steps Carlyle Group, which has long been said to have an interest in re/insurance opportunities but hasn’t yet done anything particularly meaningful directly in the space.
AIG said that, “Carlyle’s expertise in separating and standing up companies, AIG and Carlyle plan to build DSA Re into a platform that complements DSA Re’s financial strength with its strategically differentiated capabilities.”
So Carlyle is taking a 19.9% stake in DSA Re and entering into a strategic asset management relationship with the reinsurer.
As a result, DSA Re and AIG will allocate $6 billion of assets into various Carlyle managed strategies across corporate private equity, real assets and private credit, providing the investment firm with a significant chunk of assets to boost its $201 billion that are already under management at the firm.
The benefit here for AIG, freeing up capital to add efficiency to its own balance-sheet, which had always been the goal with DSA Re anyway.
Brian Duperreault, AIG’s President and Chief Executive Officer, explained, “AIG launched DSA Re to help us efficiently manage our legacy liabilities, honor our policy obligations and maximize financial flexibility. This partnership with Carlyle meets these objectives while allowing AIG to free up capital and participate in the build-out and growth of the business. We look forward to working closely with Carlyle to position DSA Re for long-term success.”
But the benefits will not stop there, as the build-out of DSA Re as a standalone legacy reinsurance player with the backing of a private equity war chest like Carlyle’s could deliver significant income to AIG, as well as the efficiencies it benefits from by using DSA Re for its own legacy liabilities.
James Bracken, Chief Executive Officer of AIG Legacy and DSA Re, said, “DSA Re’s experienced team, capabilities, diversified risk portfolio and strong capital position, along with Carlyle’s investment expertise and success in building strong franchises, provide a foundation to build a competitive provider of tailored run-off solutions.”
Carlyle will also hope to deliver outsized returns on the assets, or float, associated with the legacy liabilities. Which again will provide greater benefits for AIG and for Carlyle both the access to float as DSA Re grows its book and the returns off the investments will be an extremely attractive proposition.
Kewsong Lee, Carlyle’s Co-Chief Executive Officer, commented, “This strategic partnership extends Carlyle’s investment capabilities into the $15 trillion global insurance industry. Carlyle is excited to deliver our global investment platform across a variety of asset classes to DSA Re, and will work to generate attractive returns for the DSA Re portfolio for many years to come. We have a terrific partner in AIG, and will work closely together to help DSA Re become independent and positioned for growth over time.”
Brian Schreiber, Managing Director and Co-Head of Carlyle Global Financial Services Partners, added, “We see tremendous opportunities for Carlyle and DSA Re as insurers look to improve investment yields and drive higher returns on capital. Our partnership will help DSA Re effectively serve this growing market by offering reinsurance solutions to the insurance industry globally across all lines of business.”
It’s an intriguing prospect and, as we said, further signals the change in direction at AIG under the stewardship of Duperreault.
It also further signals the attraction that major asset managers have to legacy insurance linked returns and access to premium float. Before long we expect that partnerships with investors of the scale of Carlyle will emerge in other areas of insurance and reinsurance as well.
The tie-up between growth focused capital providers and expert, global underwriting teams is another that could add to the disruption in re/insurance, as traditional players find they can help investors into the market, while making their own operations more efficient and gaining a platform to drive significant growth.