G.E. Bond Insurance Biz Sold For $2.2B

General Electric, continuing to streamline its insurancebusiness, has arranged to sell its bond insurance unit to aconsortium for $2.16 billion.

The buyers of the New York-based Financial Guarantee InsuranceCompany (FGIC) include the PMI Group Inc. of Walnut Creek, Calif.,and a number of investment firms. One of the purchasing groupsexecutives said the new owners would make the firm lessconservative and expand its business lines.

FGIC is a monoline bond insurer with some $202 billion ofinsured par outstanding. It provides financial guaranties for debtsecurities, focusing on municipal bond insurance.

Under terms of the deal, the purchase price consists of $1.44billion in equity, $225 million of senior debt, $235 million ofmandatorily convertible participating preferred equity held by G.E.and a pre-closing dividend of $260 million.

The buyer group announced that Frank Binova, former vicechairman and chief financial officer of Ambac Financial Group, aNew York-based bond insurer, will lead the new company.

G.E., which has an insurance business which posted $23 billionin revenues last year, has said it wants to focus on business linesand markets where it sees the “most attractive growth and returnprospects.” In late June, G.E. agreed to sell off its U.S. auto andhome business, as well as its Japanese life insurance unit, toAmerican International Group for $2.15 billion.

“We like this deal very much from a G.E. Insurance perspective,”said Michael Fraizer, chief executive officer at G.E. Insurance.“We gain clear benefit from a transaction that supports both ourglobal realignment strategy and our parent's desire to reallocatecapital to faster-growth segments of the company,” Mr. Fraizer alsoassured FGIC customers that the new company would maintain its“triple-A” ratings.

When the deal is completed, the PMI Group, one of the nationslargest mortgage insurance providers, will have the biggest sharein FGIC, with 42 percent ownership. As for the other buyers in thegroup, Blackstone Group L.P. and the Cypress Group, both privateinvestment firms based in New York, will each get 23 percent ofFGIC. Chicago-based CIVC Partners will own 7 percent.

G.E. will also keep a minority interest in the business, with a5 percent stake. The arrangement will allow FGIC to operate as anindependent business owned by five different corporations,including G.E.

For PMI, the transaction is expected to help the companydiversify its product base to compensate for a tough environment inprivate mortgage insurance business. Last month, PMI posted $70million for its second-quarter profit, down from $81 million oneyear ago.

“We believe our investment in FGIC represents a solid growthopportunity and a diversification that strengthens the overall riskprofile of the PMI Group,” Roger Haughton, chief executive officerat PMI, said of the new deal.

Mr. Haughton added that FGIC will follow a strategic businessplan to compete across the full range of financial guarantybusinesses, including asset-backed securities and internationalmarkets.

Also commenting on the transaction, William Spiegel, managingdirector at the Cypress Group, told National Underwriterthere were a number of factors that drew his firm to theacquisition.

“We started talking about this deal in late March, early April.The stability of this business model drew us to this transaction.We also liked the opportunity to team up with PMI. It is anattractive strategic partner for us because of its strategic visionof being in all the sectors of financial guaranty,” Mr. Spiegelsaid.

According to Mr. Spiegel, when the transaction is completed,FGIC will have the opportunity to broaden its business goingforward.

“G.E. allowed FGIC to participate only in the most conservativemunicipal finance. G.E. also didn't want FGIC to have the exposureto segments of the economy that might overlap with what G.E.broadly focuses on,” Mr. Spiegel observed. “Under our ownership,FGIC will have broader business lines that other financial guarantycompanies already participate in,” he said.

The deal still awaits the regulatory approval, which could takeup to four months, Mr. Spiegel noted. FGIC currently has some 100employees, and going forward, the new owners will add more workers,“as we intend to grow this business,” he said.

Reproduced from National Underwriter Property &Casualty/Risk & Benefits Management Edition, August 11, 2003.Copyright 2003 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.