White Mountains to Purchase CGU; Maintain Current Contracts, Terms

CGU Insurance Group’s property/casualty operations will be purchased by New Hampshire-based financial services holding company White Mountains through a definitive agreement with CGU parent company CGNU Group. The purchase price is $2.1 billion plus the repayment of approximately $500 million of CGU’s debt to its parent.

The relatively small White Mountains, domiciled in Bermuda, was able to beat out at least two other competitors, due in part to a $1-billion debt financing commitment from Lehman Brothers Inc. and a commitment by Warren Buffett to invest up to $300 million in a convertible preferred stock of White Mountains.

A small group of private investors and management have also committed to invest $300 million directly in a newly formed acquisition company in return for approximately 10 percent of its common stock. Additionally, the seller will retain a note in the amount of $210 million, payable six months from the closing date in cash or stock at White Mountains’ option.

Robert C. Gowdy, CGU president and chief executive, said the company is pleased with the agreement because White Mountains supports CGU’s “exclusive commitment to the independent agent system and to the U.S. property/casualty marketplace.”

White Mountains spokesman Dennis Beaulieu said CGU will continue doing “business as usual” under White Mountains. “There’s no combining two companies here,” he said. “This is just a straight purchase.”

CGU management will stay on, Beaulieu said, and contract terms for agents will remain the same and under the control of CGU.

Beaulieu said White Mountains, “a quiet company without a lot of fanfare,” was able to woo CGU from other suitors such as Travelers because of chairman and chief executive Jack Byrne, a venerable insurance executive, and his old friend Warren Buffett.

“I think what basically happened was the sellers wanted out clean,” Beaulieu said. And with Buffett’s backing, White Mountains was able to provide that.

Meanwhile, analysts are generally pleased with the planned purchase. Kevin Maher with Standard & Poor’s said White Mountains won because the company considered strategic fit, not whether they could turn around and sell it for a profit in a few years. Then there’s the question of why Buffett would be interested in backing such a deal.

“What might be in it for [Buffett] is perhaps some reinsurance in this business,” Maher said. “Their participation might ultimately get them a minor ownership in the new business and that, in turn, could send some business to GenRe.”

Two years ago, CGU was created through the merger of Commercial Union and General Accident. “The remaining link,” Gowdy said during a recent press conference, “was to secure shareholders who were also committed to the future of the property/casualty insurance business in the United States.”

The sale to White Mountains includes all of CGU’s U.S. property/casualty insurance operations. Immediately prior to the transaction, CGU will purchase from Berkshire Hathaway a reinsurance policy on its discontinued operations. The premium will be $1.25 billion and will cover substantially all net liabilities emanating from policies written before 1987 up to a $2.5-billion limit.

Under the terms of the agreement, Byrne will become chairman of the acquisition company; Ray Barrette will become president; and Gowdy will continue as chief executive of the insurance operations.