Goldman Sachs Group, trying to boost revenue from businesses that aren't shackled to its struggling trading and investment-banking operations, said it agreed to acquire reinsurer Ariel Reinsurance.
The purchase price for the Bermuda-based unit of Ariel Holdings wasn't disclosed. A person familiar with the matter said the deal is valued at less than $500m.
Reinsurers like Ariel Re charge fees to insurance companies to take on the responsibility for paying some of the claims on policies issued to businesses and consumers. The business can be lucrative, especially when reinsurers raise prices following a wave of natural disasters.
Goldman struck the deal in the hope higher prices will take hold in the wake of last year's Hurricane Irene, tornadoes that tore through the Midwest, Japan's tsunami and flooding in Thailand. On January 1, many reinsurers increased prices modestly. That was the first rise in three years, said Stanislas Rouyer, an associate managing director at Moody's Investors Service.
"It is a volatile sector," he said. Returns on equity, a measurement of profitability, can top 20% during years with relatively few big catastrophes but plunge if there is a flurry of disasters.
Over the long run, property-and-casualty reinsurers often aim for a return on equity of 15%, Rouyer said.
That is much higher than Goldman's return on equity of 3.7% in 2011 amid a slump in the New York securities firm's core trading and investment-banking businesses. Regulators also are clamping down on some kinds of risk-taking, many Goldman clients remain cautious and deal volume has been muted.
Just before the financial crisis hit, Goldman's returns topped 30%.
Completion of the deal is expected on April 1. Plans call for Ariel Re to be folded into Goldman's property-and-casualty insurance operations in London. Goldman also owns annuity and life-insurance operations known as Commonwealth Annuity & Life Insurance. Goldman doesn't disclose reinsurance revenue and profit.
Ariel Re was among about a dozen reinsurers to launch in Bermuda following a spate of hurricanes that slammed the US in 2004 and 2005. Ariel Re started with $1bn in capital from investors.
Some of those reinsurers have been sold or gone public as their original investors seek to cash out on their ownership stakes.
Goldman could get another lift from Ariel Re if it eventually decides to sell the reinsurer. In 2005, Goldman bought wind-energy company Horizon Wind Energy for an undisclosed amount. Horizon was sold in 2007 for more than $1bn, according to people familiar with the matter.
In another example of how Goldman is trying to improve its profitability, the securities firm last year started giving start-up money to hedge funds. That is less risky than creating in-house hedge funds and can generate returns on equity of more than 10%.