GE Deal Might Make Swiss Re Top Dog

Munich Re may be eclipsed as number one reinsurer, but rating agencies cite concerns

By mark e. ruquet

Move over Munich Re, there's a new top dog in town. Last week's announcement by Swiss Re that it would buy GE Insurance Solutions for $6.8 billion will make the Zurich, Switzerland-based company the biggest reinsurance carrier in the world, at least one leading analyst contends.

Laline Carvalho, an analyst with Standard & Poor's, noted that S&P's "Global Re Highlights" for 2004--the latest statistics available--credited Swiss Re with about $26 billion in net reinsurance premiums, making it number two to Munich Re with $29 billion. Acquiring the $6.2 billion in premium from number five GE would allow Swiss Re to leapfrog over Munich Re, with some $32 billion in premium.

"Does this make Swiss Re the largest reinsurer in the world? The answer is yes," said Ms. Carvalho.

Other analysts were more conservative. Mark Rouck, senior insurance analyst with Fitch, said the deal would make Swiss Re a comparable competitor with number one Munich Re, but he was not comfortable saying if Swiss Re would become the new number one with the acquisition. "They will be the two biggest in the world," he said.

Under the terms of the deal, Swiss Re will pay $6.8 billion for GE Insurance Solutions, subject to closing adjustments. The company said this represents about 76 percent of the approximately $8.9 billion in book value for the company, not including additional reserves. GE Insurance Solutions, based in Kansas City, Mo., will provide $3.4 billion, pre-tax, in additional reserves. As part of the deal, Swiss Re will also assume $1.7 billion in debt.

To finance the deal, Swiss Re said it plans to raise up to $7.5 billion in new capital. Of that figure, $5.5 billion will be in shares and mandatory convertibles, of which GE will take between $3.0 billion and $3.8 billion. Another $2 billion of hybrid debt securities will also be raised by Swiss Re.

The closing of the deal--which does not include GE's life and health insurance business--is expected to occur by mid-2006.

The sale of GE Insurance Solutions by General Electric Corp.--the Fairfield, Conn.-based services giant--does not come as a surprise. It was long rumored that GE was not comfortable being in the insurance business and was working to divest itself of its insurance assets.

"Insurance Solutions has been a tough strategic fit for GE," Jeff Immelt, GE chairman and chief executive officer, said in a statement. "Over the last five years, the Insurance Solutions business has lost $700 million and required the infusion of $3.2 billion of capital. By its nature, reinsurance is volatile and consumes capital to grow. The terms of this transaction provide compelling value for our shareowners as well as more certainty and greater earnings consistency in the future."

Emphasizing the enthusiastic reaction to the deal by Swiss Re, Jacques Aigrain, CEO-designate, said he would not be concerned if the company were placed on rating watch.

The four major rating agencies did just that. Fitch Ratings, Moody's Investors Service, S&P and A.M. Best placed Swiss Re on rating watch with negative implications. Moody's said it placed the company on rating watch with a possible downgrade.

The rating agencies said they were concerned with the complexity of the integration of GE Insurance Solutions with Swiss Re, while also noting the poor performance of GE Insurance. However, the agencies also cited Swiss Re's past ability to integrate acquisitions successfully as a positive sign. "This could turn out well," said S&P's Ms. Carvalho, "but we will have to wait and see."

Speaking to analysts in a conference call the day of the announcement, Mr. Aigrain said the company took the reaction of ratings agencies into account when deciding to make the deal. He added that being put on credit watch did not concern the carrier. At worst, he said, a rating adjustment of one notch would not mean a downgrade. "We have not done this transaction overnight. This has been a very deep process, done in excruciating detail," he said.

"We are not driving in the night without headlights," he emphasized. "We write all business. We know what are appropriate reserves and adequacy, and we have learned some hard lessons. We believe the reserves are adequate at closing."

As to the failure of Swiss Re to acquire GE's life and health operations, Mr. Aigrain said there was not a good fit. In a statement, GE Corp. said that the business is being "downsized."

"There are a lot of valuable relationships and a lot of opportunity in [GE Insurance Solutions]," said Swiss Re's current CEO, John Coomber. "This transaction will bring to Swiss Re new clients, new ideas and talented people."

He noted that the company has grown through acquisition and is well acquainted with the process. "Event-driven risks are growing larger and liability risk is growing in importance," said Mr. Coomber, explaining the reason for the acquisition. "Size and diversification--the ability to diversify risk--has never been more important. For that reason, we believe that the future favors the strong [carriers] that can provide clients with the capacity and security that they need."

As outlined by Swiss Re, the company sees little overlap in business between it and GE Insurance, whose property-casualty portfolio is made up of largely smaller regional business, while Swiss Re serves primarily global and national accounts.

Mr. Aigrain said there would be about a 30 percent attrition of GE Insurance business because of Swiss Re's risk appetite and overlap of a few risk exposures. This would include London market business, retrocessions, workers' compensation and program business. As a reinsurer, the company would be keeping the retrocession business that GE Insurance currently places elsewhere, he noted.

Ms. Carvalho of S&P said that even with the 30 percent attrition rate, the deal would still put Swiss Re ahead of Munich Re in terms of reinsurance premium.

Concerning legacy issues, Mr. Coomber said Swiss Re's experts and outside advisers did in-depth due diligence, and with the additional $3.4 billion in reserve strengthening, "we are satisfied that reserves, at the time of closing, will be of the same quality as our own reserves."

Mr. Aigrain said that as far as the renewal season is concerned, "2006 is their business and 2007 is ours."

With the $3.4 billion in reserve strengthening and total GE Insurance Solutions reserves of $18 billion, the need for additional reserves appears to be remote, according to Ms. Carvalho. She cautioned, however, that with the volatility of the p-c market, such as potential asbestos exposures, "you can't ever say never."

Swiss Re gave a broad outline about its plans to integrate the business, which it said would include retaining key people and incorporating Swiss Re's underwriting standards into GE Insurance. A company representative, Steve Dishart, said GE Insurance would be fully integrated into Swiss Re and would not be maintained as a stand-alone subsidiary.

Flag: The Skinny

Head: Rating Agency Roundup

Insurer rating agencies are concerned with the complexity of the integration of GE Insurance Solutions with Swiss Re. Their initial reaction to the deal was as follows:

o Moody's--which rates Swiss Re at "Aa2"--said that if a review process resulted in a downgrade, it "would highly likely be limited to one notch."

o S&P--which put Swiss Re's financial strength rating at "double-A"--said if the deal goes through as currently planned, the rating would be lowered to "double-A-minus" with a stable outlook.

o Fitch, which rates the financial strength at "double-A-plus," said it expects to resolve the rating level with the close of the transaction in mid-2006.

o A.M. Best placed the financial strength rating of Swiss Re at "A-plus" (Superior) and put the rating under review with negative implications. GE Insurance Solutions was also put under review with developing implications by Best. The rating agency said it planned to discuss its concerns with Swiss Re and resolve the review status "as soon as possible."

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GE Acquisition Might Make Swiss Re The Top Global Reinsurance Company

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