In retrospect, the name GE Insurance Solutions (principal operating company Employers Re or ERC)–seems prophetic. Almost from the day that Jeffrey Immelt took over the reins at GE from its long-time CEO Jack Welch he began looking for a solution for GE’s underperforming insurance operations. He found one–sell most of it to Swiss Re.
Few people in the industry were surprised by the announcment on Friday, Nov. 18, that Immelt had finally achieved his goal. “Insurance Solutions has been a tough strategic fit for GE,” he observed in the company’s press release. “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.”
GE’s problems with ERC, and the related insurance operations that were eventually melded into Insurance Solutions, testifies to the tricky nature of the reinsurance business. CEO Ron Pressman who has headed the company since 2000 has done his best to make the unit work. He’s a senior VP at GE, reporting directly to Immelt. However, like his predecessor, his experience isn’t in reinsurance.
In October 2002, rumors surfaced that that Berkshire Hathaway’s Warren Buffett was interested in acquiring ERC to go along with General Re to create the world’s largest reinsurer with around $20 billion in turnover. The deal fell through when GE asked too much, around $8 billion. Immelt on the other hand repeated that he wouldn’t let ERC go at a “fire sale” price. Enter Swiss Re.
While $6.8 billion isn’t exactly a “fire sale” price, it’s not really all that expensive either, considering how the deal is structured. The tentative plan calls for GE to receive up to $3.7 billion in cash and notes, representing around 55 percent of the purchase price and shares of Swiss Re common stock equivalent to the remaining 45 percent. Swiss Re will also assume $1.7 billion of debt. GE will retain the U.S. life reinsurance operations of GE Insurance Solutions, which are being downsized. The $6.8 billion is around 76 percent of the unit’s approximately $8.9 billion book value (U.S. GAAP). However, as part of the deal GE Insurance Solutions will provide approximately $3.4 billion pre-tax in additional reserves to the extent permitted by accounting rules. When the acquisition is formalized, which is expected by the end of the second quarter of 2006, GE will own between 10 and 13 percent of Swiss Re’s shares, and will have the right to nominate one director for election to Swiss Re’s Board.
Swiss RE’s outgoing CEO John Coomber stated: “This is both strategically and financially a very attractive transaction that creates significant value for our shareholders.”
Is it a good deal? Swiss Re certainly has reinsurance expertise. With the acquisition it will overtake Munich Re as the world’s biggest reinsurer in terms of net premiums written ($33.95 billion in 2004). Munich Re will, however, remain the larger company due to its primary insurance and banking operations.
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