Reinsurance News

Analysts’ commentary suggests AIG / Validus deal is positive, overall

23rd January 2018 - Author: Luke Gallin

Insurance and reinsurance market analysts’ comments on AIG’s proposed $5.56 billion takeover of Validus Holdings underlines a positive stance on the transaction, with AIG making fundamental changes to its commercial P&C segment and maintaining confidence in previous reserve comments.

MergerFollowing the announcement, AIG management held an investor call, during which the rationale for the takeover was discussed, alongside the potential for growth in new segments via the acquisition of a reinsurer, a Lloyd’s of London operation, and an insurance-linked securities (ILS) asset manager.

Overall, industry analysts appear to view the deal as positive, with Morgan Stanley analysts stating that a sizeable acquisition of Validus and the potential for future deals, “should help alleviate some reserve concerns, in our view.”

AIG suffered large year-end reserve charges in 2015 and 2016 and investors are concerned about a further large adverse development in the final quarter of 2017, says Credit Suisse, but as noted above, the Validus takeover should remove some reserving doubts.

Furthermore, and as noted by analysts at Buckingham Research Group, AIG management noted its reserve position during the investor call, stating that it remains confident in the comments it made around reserves during its third-quarter 2017 earnings call.

This notion was echoed by Credit Suisse analysts, who said that AIG appeared to suggest that reserve activity in the fourth-quarter will be muted.

Regarding the $5.56 billion takeover, Credit Suisse analysts said; “AIG was able to address several initial uncertainties we had on the deal and we are net positive on the deal as the financial considerations outweigh apprehensions around valuation and strategic rationale.”

While Morgan Stanley analysts underlined that management at AIG is “making fundamental changes to its commercial P&C operations. We believe AIG should be able to close the underwriting gap (~69% core loss ratio vs. ~60% at peers) over time.

“We think a strong new management team and an attractive valuation (~0.8x P/B) offer a powerful combination for multi-year ROE improvement and shareholder value creation.”

During the investor call, AIG was questioned on the potential for more acquisitions in the future, and although management was eager to point out that the company is currently focused on this deal, Morgan Stanley analysts think that Chief Executive Officer (CEO) Brian Duperreault’s growth strategy suggests more deals in the future.

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