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AIG to Buy Validus, Expand Reach in Reinsurance Business
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American International Group Inc. (AIG - Free Report) has agreed to buy Bermuda based reinsurer, Validus Holdings Ltd. (Validus) for $5.56 billion in cash. The deal should see light by mid-2018.
Why a Good Fit
Validus is a good pick for AIG given its market leadership in property catastrophe reinsurance, synergies from its AlphaCat alternative capital platform, good liquidity and capital adequacy, and long-term profitability.
These positives are however, to some extent offset by Validus' property catastrophe reinsurance exposures, which subjects it to earnings volatility and the highly competitive operating environment in the reinsurance market.
The deal would be immediately accretive to AIG’s earnings per share and return on equity (ROE).
Rating Actions
Following the announcement of the acquisition, Moody's and A.M. Best jumped into action.
Moody’s affirmed the Baa1 senior unsecured debt rating of AIG and the A2 insurance financial strength ratings of AIG’s US property & casualty insurance operations. The rating outlook for AIG and its units remain stable.
The rating agency notes the focus of the new CEO, Brian Duperreault, appointed last year in May, for preferential use of capital for building the organization via inorganic growth measures, rather than making share repurchases.
Despite the positives that the deal may bring, Moody’s regards the deal as a credit negative for AIG as it may magnify the company’s gross catastrophe exposure, deteriorate the company’s liquidity profile (due to the all cash financing of the deal) and pose execution risk related to the acquisition.
The other rating agency A.M.Best, however, gave a more favorable view of the deal, stating that it will not cause material execution risk, given no business overlapping and modest size of Validus. The rating agency also acknowledged that the deal will improve performance of its property-casualty business.
It also kept the credit ratings (ratings) of AIG and its subsidiaries unchanged.
What’s in Store for AIG
The deal will provide additional heft to the company’s General Insurance business by providing it with a reinsurance platform. It will also allow AIG to take control of third-party capital and investment management business via Validus’ unit AlphaCat Managers.
Share Price Performance
Shares of the company have lost 6% in a year’s time, underperforming the 14.5% growth of the industry it belongs to. Declining top line, weak Commercial Lines business, unfavorable reserve development and catastrophe losses have cumulatively taken a toll on the company’s share price.
Horace Mann Educators beat estimates in two of the four reported quarters with an average positive surprise of 29.5%.
Kemper Corp. beat estimates in each of the four reported quarters with an average positive surprise of 105.6%.
MGIC Investment surpassed estimates in each of the four reported quarters with an average positive surprise of 35.1%.
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
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AIG to Buy Validus, Expand Reach in Reinsurance Business
American International Group Inc. (AIG - Free Report) has agreed to buy Bermuda based reinsurer, Validus Holdings Ltd. (Validus) for $5.56 billion in cash.
The deal should see light by mid-2018.
Why a Good Fit
Validus is a good pick for AIG given its market leadership in property catastrophe reinsurance, synergies from its AlphaCat alternative capital platform, good liquidity and capital adequacy, and long-term profitability.
These positives are however, to some extent offset by Validus' property catastrophe reinsurance exposures, which subjects it to earnings volatility and the highly competitive operating environment in the reinsurance market.
The deal would be immediately accretive to AIG’s earnings per share and return on equity (ROE).
Rating Actions
Following the announcement of the acquisition, Moody's and A.M. Best jumped into action.
Moody’s affirmed the Baa1 senior unsecured debt rating of AIG and the A2 insurance financial strength ratings of AIG’s US property & casualty insurance operations. The rating outlook for AIG and its units remain stable.
The rating agency notes the focus of the new CEO, Brian Duperreault, appointed last year in May, for preferential use of capital for building the organization via inorganic growth measures, rather than making share repurchases.
Despite the positives that the deal may bring, Moody’s regards the deal as a credit negative for AIG as it may magnify the company’s gross catastrophe exposure, deteriorate the company’s liquidity profile (due to the all cash financing of the deal) and pose execution risk related to the acquisition.
The other rating agency A.M.Best, however, gave a more favorable view of the deal, stating that it will not cause material execution risk, given no business overlapping and modest size of Validus. The rating agency also acknowledged that the deal will improve performance of its property-casualty business.
It also kept the credit ratings (ratings) of AIG and its subsidiaries unchanged.
What’s in Store for AIG
The deal will provide additional heft to the company’s General Insurance business by providing it with a reinsurance platform. It will also allow AIG to take control of third-party capital and investment management business via Validus’ unit AlphaCat Managers.
Share Price Performance
Shares of the company have lost 6% in a year’s time, underperforming the 14.5% growth of the industry it belongs to. Declining top line, weak Commercial Lines business, unfavorable reserve development and catastrophe losses have cumulatively taken a toll on the company’s share price.
Zacks Rank and Stocks to Consider
AIG carries a Zacks Rank #3 (Hold). A few better-ranked stocks are Horace Mann Educators Corporation (HMN - Free Report) , Kemper Corp. (KMPR - Free Report) and MTG Investment Corp. (MTG - Free Report) , each carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Horace Mann Educators beat estimates in two of the four reported quarters with an average positive surprise of 29.5%.
Kemper Corp. beat estimates in each of the four reported quarters with an average positive surprise of 105.6%.
MGIC Investment surpassed estimates in each of the four reported quarters with an average positive surprise of 35.1%.
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
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