How Will Validus Acquisition Help AIG’s General Insurance Segment?

by Trefis Team
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Ever since the Federal Reserve’s massive $150 billion bailout of AIG during the financial crisis, the company’s strategy to sustain long-term has been to dispose of underperforming businesses. As a result, the company’s size has shrunk over the years. Meanwhile, a series of catastrophes and the struggle to optimize premiums pricing has impacted the insurance industry. That said, the appointment of a new CEO seems to have brought an enhanced focus on growth for the company. In January, the company executed its first major deal of the decade, a $5.6 billion acquisition of Validus Holdings, a leading reinsurance company. More recently, AIG announced its plans to acquire Ellipse from Munich Re.

Below, we expand on the Validus acquisition and how it could help the company going forward. In a subsequent note, we will cover the impact of the Ellipse acquisition. We have created an interactive dashboard analysis of AIG’s revenue growth that shows the impact of acquisitions on AIG’s revenues and margins. You can adjust the revenue drivers to see the impact on the overall revenues, EPS, and price estimate.

Validus Acquisition To Drive Growth In AIG’s General Insurance Segment

The Validus acquisition looks like a sound decision as the deal adds businesses that the company had never ventured into or had pulled out from, thereby expanding its general insurance portfolio. This should generate additional premiums, while giving AIG access to Validus’ customer base to cross-sell its products. Also, with the deal, AIG will enter the crop insurance business, and Talbot, an operator in Lloyd’s insurance market, will re-introduce AIG to complex, but profitable underwriting areas. That said, it will take some time to create synergies. Furthermore, services and products from AlphaCat, which invest in insurance-linked securities (ILS) products for clients, could boost the company’s top line. Several pension funds are investing in ILS such as catastrophe bonds in hopes of getting better returns than traditional investments. Consequently, investment in ILS has jumped from $24 billion in 2011 to about $88 billion. This growth trend, along with AlphaCat’s expertise in such investment products should generate higher asset management fees. Meanwhile, per NOAA’s (National Oceanic and Atmospheric Organization) predictions, which have been reliable in the past, the number of hurricanes may be lower than last year. While this bodes well for insurers because of lower expected catastrophe losses, it also means that product pricing could go down, thereby negatively impacting the net written premiums.

After several years of struggles, the General Insurance segment, which generates about 59% of the company’s total revenue, will likely be revitalized on the back of Validus acquisition and experience positive growth. We expect revenue from the segment to grow by 5.2% to $31.3 billion.

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