By Sweta Singh, Nikhil Subba and Suzanne Barlyn
(Reuters) - American International Group Inc on Monday said it would buy reinsurer Validus Holdings Ltd for $5.56 billion (3.98 billion pounds) in cash, ending a long period of retrenchment for AIG as new Chief Executive Brian Duperreault plots an expansionist path.
Duperreault initiated the deal to buy Bermuda-based Validus, which comes four months after U.S. regulators said AIG was no longer "too big to fail," a designation that carries more stringent government oversight and capital requirements. AIG has dramatically shrunk since the New York-based insurer's near-death experience during the 2008 financial crisis.
Bermuda's insurance industry is familiar turf for Duperreault, who was born there and founded and ran the Bermuda-based Hamilton Insurance Group Ltd before heading to AIG.
Validus has four parts, spanning reinsurance, U.S. specialty lines, asset management and a Lloyd's of London underwriter.
AIG said the deal would boost AIG's earnings per share and return on equity but did not provide details on cost cuts or projected returns.
"The deal is not predicated on cost cuts or synergies. In fact, it's the opposite," Duperreault said in an interview. "The deal hinges around that it puts us in businesses that we are not in now."
AIG's $68 per share offer represents a 45.5 percent premium to Validus' Friday close.
"It's well worth the price and we'll get our money's worth out of it," Duperreault said. "I've thought this through."
Shares of Validus were trading at $67.32, close to the offer price, in afternoon trade. AIG shares were down nearly 1 percent.
The acquisition is AIG's largest since the financial crisis, when the insurer received a $182 billion bailout, based on the U.S. government's belief that an AIG failure would cause more damage to the economy than using public money to keep it afloat, a concept known as "too big to fail." AIG paid off its last debt to the U.S. government at the end of 2012.
The deal marks AIG's reentry into the Lloyd's insurance market, where underwriters get access to a wide variety of international insurance and reinsurance business, often in complex or hard-to-cover areas, which can be risky but also offers more profit potential.
"I was really thrilled to see the news," Lloyd's of London Chief Executive Officer Inga Beale said in an interview. "We are delighted to have any of these big reputable players as part of Lloyd's."
AIG's deal will also expand its reach in other areas such as the reinsurance market at a time when the insurer, like its rivals, is facing stiff pricing pressure. Validus Re, a major Validus business, sells property-casualty reinsurance for disasters such as hurricanes.
Other Validus businesses include AlphaCat, which manages $3.2 billion on behalf of clients who invest in insurance-linked securities products, a repackaging of insurance risk as debt that is often linked to natural catastrophes.
The deal will also add crop insurance to AIG's product lineup.
'LIKE A GLOVE'
"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 an 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.
"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 Securities analyst Elyse Greenspan said in a note.
AIG revenue fell in three of the past 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.
Citigroup Global Markets Inc, Perella Weinberg Partners LP and Debevoise & Plimpton LLP advised AIG. Willkie Farr & Gallagher LLP represented Perella as financial advisor to AIG in this transaction. Validus was advised by J.P. Morgan Securities LLC and Skadden, Arps, Slate, Meagher & Flom LLP.
(Reporting by Nikhil Subba and Sweta Singh in Bengaluru; Additional reporting by Suzanne Barlyn in New York; Editing by Sayantani Ghosh, Frances Kerry and Will Dunham)