German-based reinsurer Munich Re took a first step in its previously disclosed mission to grow in the U.S. property-casualty market when it announced its intention to acquire The Midland Company for $1.3 billion last week.
Peter R?der, management board member for Munich Re who will be responsible for overseeing the U.S. market, said, "We intend to grow profitably in the world's most important insurance market."
"Establishing and building on a leading position in niche segments of the U.S. primary insurance market is a significant aspect of our strategy for the United States," he said.
In a separate statement, John W. Hayden, president and chief executive officer of Midland, said joining forces with one of the largest reinsurance companies in the world would allow the Cincinnati-based specialty insurer to expand in ways it would not have been able to without Munich Re's resources.
During a news conference, Munich Re executives called the acquisition a logical step in their plan to broadly enter the U.S. insurance market.
Mr. R?der noted the short-tailed nature of the specialty business being acquired, adding that fully integrating Midland into the Munich Re group is part of a strategy to enhance profitability. One of Midland's key niches–a major book of business in manufactured housing and related fire and physical damage insurance–will allow the group to participate in the U.S. market in businesses that have "sustained growth over market cycles," he added.
The main focus for the future for Munich Re will be cross-selling and development of new products as it attracts new producers. But "we are still a major reinsurance player in the United States and will continue to be," Mr. R?der said.
Anthony Kuczinski, CEO-elect of Munich Re America, said the deal gives Munich Re access to distribution outlets it did not have before. The channel now includes managing general agents, specialty and independent agents, financial institutions, lenders, affinity groups, and manufacturers and dealers of home products.
One piece of Midland's business, a barge transportation business, will be sold off, the executives said. They said it is a profitable business worth about $100 million, but it does not fit in with Munich Re's insurance portfolio. The business may be sold to the Hayden family, the executives said, which owns 45 percent of Midland's stock, but no final decision has been reached.
When asked about job cuts, Mr. Kuczinski said the business plan calls for growth and that no elimination of positions is being contemplated. Midland employs about 1,200 people, he said.
He added that Munich Re expects the current management team to remain in place. "Our expectation is to get strong performance with this team."
"This deal allows us to complement what we do on the reinsurance side with minimal conflict," he said. "It is a plus-plus for them and for us."
When asked if Munich Re paid too much for Midland, Mr. Kuczinski said "we are comfortable where [the price] is."
The deal calls for Midland's shareholders to receive $65 a share in cash. Terms of the deal also call for Munich Re to assume $100 million of Midland's outstanding debt.
In addition to manufactured housing and motor homes, Midland through its principal subsidiary, American Modern Insurance Group, provides specialty coverage for motorcycles, watercraft, snowmobiles and recreational vehicles, and physical damage on long-haul trucks, among other things. In 2006, the group posted a p-c combined ratio of 93.0 and gross written premiums were $781 million. (The group also wrote $51.0 million in life premiums.)
In the United States, Munich Re reported gross written premiums of $3.7 billion for 2006, with most of the total coming from reinsurance assumed premiums and $746 million from direct primary insurance.
The deal is subject to shareholder and regulatory approval and is expected to be completed in second-quarter 2008.
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