March 1, 2012 / 1:51 PM / 6 years ago

Goldman to buy Ariel Re's insurance operations

(Reuters) - Goldman Sachs Group Inc (GS.N) said it would buy Ariel Re’s Bermuda-based insurance and reinsurance operations, its latest foray into a business that has been lucrative for Wall Street banks, though not a large part of earnings.

The business will be combined with Goldman’s existing reinsurance group and operate under the name of Ariel Reinsurance.

The purchase price was not significant enough to merit disclosure, spokesman Michael DuVally said. The parties expect the deal to close on April 1.

The transaction does not include Ariel’s credit and surety business run through its Zurich branch office, nor its Atrium Underwriting Group at Lloyds, which will continue to be owned and operated by Ariel Holdings Ltd. The majority of Ariel Re’s Bermuda-based staff will continue with the combined organization, Goldman said.

Goldman is no stranger to the insurance business, having invested in a number of Bermuda start-ups over the years. Last summer, the firm found itself in the awkward position of advising reinsurer Transatlantic Holdings Inc TRH.N on a sale that drew two suitors it had helped start.

Investment banks love the reinsurance business, which is relatively easy to enter and generates a steady stream of fees. After major industry-changing disasters, investment banks are usually among the first to sweep into the Bermuda market and set up new companies.

According to a 2008 economic analysis of the Bermudan insurance market by the Wharton School, at least four of the 11 insurers from the “class of 2005” had investment banks or top-tier private equity firms as lead investors. The same was true for at least three of the 10 firms from the 2001 class and four of the nine firms from the 1993 class.

After 2011’s record disaster losses for the insurance industry, some expected a new “class” to emerge. So far, though, hedge funds rather than investment banks are sponsoring many of the largest new companies. The most notable is TP Re, an affiliate of Dan Loeb’s Third Point hedge fund.

In some cases, Wall Street sponsors have started a company and then cashed out with an initial public offering or a trade sale as quickly as they could. In other cases, they have kept a significant stake in the business and maintained a banking relationship with it.

    Some of that has to do with what the insurance industry refers to as “long-tail” vs. versus “short-tail” risk -- in other words, how quickly the insurer is likely to see claims for coverage from insurers.

    Long-tail risk, where claims may come in years after the fact, would include areas like medical malpractice coverage and worker’s compensation policies. Short-tail risk, on the other hand, is the reinsurance people think of more typically, such as hurricane coverage.

    Financial services bankers say Wall Street firms like short-tail reinsurers because they can be started and sold quickly. But investment banks also like long-tail reinsurers because they can obtain deals to manage stock offerings for those companies and get fees as a result.

    Ariel Re’s portfolio tends toward shorter-tail risks.

    In its annual 10-K filing with the U.S. Securities and Exchange Commission on Tuesday, Goldman detailed $23.3 billion worth of insurance liabilities and $529 million worth of insurance reserves as of December.

    Reporting by Ben Berkowitz in Boston, David Henry in New York and Tanya Agrawal in Bangalore; Writing by Lauren Tara LaCapra; Editing by Gopakumar Warrier and Lisa Von Ahn

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