By Sweta Singh and Nikhil Subba
(Reuters) - American International Group (N:AIG) on Monday said it would buy Validus Holdings (N:VR) for $5.56 billion in cash to strengthen its reinsurance business, the company's first deal under Chief Executive Brian Duperreault.
The acquisition snaps a long period of retrenchment for AIG, which was brought to the brink of collapse during the 2008 financial crisis, and comes months after U.S. regulators said it was no longer "too big to fail".
The deal will also help AIG re-enter the Lloyd's of London insurance market and add new businesses, including crop insurance, at a time when insurers are facing stiff pricing pressure in their traditional businesses.
"I particularly like the reinsurance business as additive to what we do. There are a lot pieces to this company that fit us like a glove," Duperreault said on a conference call with analysts.
Reinsurers play a little-known but important role in the financial industry by assuming risks that are either too large or too unpredictable for their insurance clients to take on their own.
AIG's $68 per share offer represents a 45.5 percent premium to Validus' Friday close.
Shares of Bermuda-based Validus were trading close to the offer price in early trade. AIG shares were down 1 percent.
"We would be buyers (of AIG) as we focus on the accretion from this transaction, the strong underlying margins VR brings and the fact that AIG will still have excess capital after this deal is done," Wells Fargo (NYSE:WFC) Securities analyst Elyse Greenspan said in a note but added that the company's shares may initially trade down on the reinsurance exposure.
AIG has been struggling to grow its topline over the past few years. Revenue fell in three of the last four quarters and the company has been plagued by losses related to prior-year accident claims.
Duperreault, who replaced Peter Hancock last year, is seen as a turnaround expert and has promised to streamline AIG's operations and boost profitability.
As his first major restructuring action since taking over, Duperreault reorganized AIG into three new units. The new structure is expected to reflect in the company's fourth-quarter results on Feb. 8.
The Validus deal is expected to close in mid 2018 and immediately add to AIG's earnings per share and return on equity, AIG said in a statement on Monday.
Citigroup (NYSE:C) Global Markets Inc, Perella Weinberg Partners LP and Debevoise & Plimpton LLP advised AIG. Validus was advised by J.P. Morgan Securities LLC and Skadden, Arps, Slate, Meagher & Flom LLP.