AIG making major slash to long-odds PMLs on Validus Re sale: CEO
US insurance group AIG will enjoy a major de-risking from the pending sale of its reinsurance operations, focused on Validus Re, with some peak-peril long-odds PMLs down by 50 to 85%, rendering a $400 million cut to AIG’s risk-based capital requirements.
The vast bulk of hurricane risks worldwide comes out of the AIG book on the deal, CEO Peter Zaffino (pictured) indicated while rattling off results from a rough and ready test on the disposal.
Worldwide hurricane PMLs would be cut by 60% at the 1-in-250 year risk period and 70% at the 1-in-100, including a 70% cut in the North America hurricane PML at the 1-in-100 interval. Elsewhere, North American earthquake PMLs may come down 55% at the 1-in-250 interval, Japan major perils are down ca 50% and EMEA all-peril PMLs are down a heady 85% at the 1-in-250 and 75% at the 1-in-100.
The upshot: AIG will benefit from a $400 million reduction in risk-based capital requirements, Zaffino said during his company’s second quarter earnings call.
Comments follow word in May that RenaissanceRe will pay AIG $2.74 billion in cash and $250 million in new equity for AIG’s reinsurance operations, chiefly Validus Re, exclusive of 95% of existing reserve development, plus the ILS manager AlphaCat and renewal rights to the treaty reinsurance book at unit Talbot.
While that transaction had been well described and argued at the time, Zaffino launched his introductory comments on the call with a lengthy defence of the decision to sell the reinsurance operations.
“This business is capital intensive and disproportionately contributes to AIG volatility and PMLs,” Zaffino said of the disconnect between the asset and AIG’s new strategy.
Citing the AIG goal of moving from a massive financial conglomerate to a leaner, more focused insurer with less volatile earnings, Zaffino said: “When you want to continue to reduce volatility, we do it through reinsurance, so when you have a treaty reinsurance business, that makes it harder to do.”
Did you get value from this story? Sign up to our free daily newsletters and get stories like this sent straight to your inbox.
