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Swiss Re challenges merger history with record GE deal

If its proposed acquisition of GE Insurance Solutions concludes without a hitch next summer, Swiss Re will be able to proclaim itself as the biggest reinsurer on the planet, leapfrogging its rival, Munich Re.

Based on 2005 estimates, the combined operation would generate $27.8bn of net written premiums, accounting for 17.4 percent of the global reinsurance market. This compares with an estimated $27.1bn from Munich Re, or a 17.0 percent market share.

But if it is to capitalise on its lofty position, and to fully tap the wider network and franchise of GE Insurance Solutions chief constituents Frankona and Employers Re, it will have to challenge a track record in the industry that doesn’t reflect well on large scale mergers and acquisition activity.

It also seems likely the Zurich-based giant will see its ratings cut by a notch and some commentators have questioned the timing of the deal, which will leave GE Insurance Solutions and, to an extent, Swiss Re, in a state of flux through a renewals season set to see existing and new players cash in on rising reinsurance rates.

Indeed Swiss Re’s outgoing CEO John Coomber revealed his company had been undertaking due diligence on GE Insurance Solutions for several months, suggesting that the move had been conceived pre-hurricanes, with a softening market in mind.

The 18 November announcement by US conglomerate General Electric that it had reached a deal to shed the majority of its (re)insurance operations (it will keep its US life reinsurance business) was widely expected, as the company has effectively had a “For Sale” sign posted over it for some time.

Swiss Re will pay between $6.8bn and $7.6bn for GE Insurance Solutions – depending on earnings up until closing and agreement on balance sheet structure – as well as assuming $1.7bn of debt.

The Swiss reinsurer will raise $7.5bn to fund the acquisition of GE Insurance Solutions (previously Employers Reinsurance Corporation), with $5.5bn in shares – including a rights issue – and mandatory convertibles, and a further $2.0bn in debt securities.

Swiss Re’s outgoing CEO John Coomber commented: “This is both strategically and financially a very attractive transaction that creates significant value for our shareholders. The acquisition of GE Insurance Solutions provides a powerful business fit offering tremendous opportunities to strengthen our franchise.”

Coomber added that due diligence of GE Insurance Solutions had a particular focus on its reserves.

“This will enable us to incorporate this business in line with our own reserve standards. Swiss Re expects the transaction to be accretive to earnings per share and return on equity, beginning in 2007,” Coomber added.

GE will pump a further $3.4bn pre-tax into reserves of GE Insurance Solutions ahead of the sale.

At a press conference incoming CEO Jacques Aigrain added: “We are acquiring the company at the right price and that will allow us to build for the future. We are moving from strength to strength and the relationship with GE will provide us with new opportunities.”

“We expect to make $330mn in the first 18 months and will deliver that value to our shareholders by 2008,” he revealed.

Following the transaction, GE will hold in excess of 10 percent of Swiss Re stock, and GE chairman and CEO Jeff Immelt said the move was good for both companies.

“Led by CEO-elect Jacques Aigrain, Swiss Re will become the world’s leading reinsurance company. These are complementary platforms with great teams. We believe the GE investment in Swiss Re will benefit from strong execution and financial synergies resulting in further upside for GE shareowners,” he commented.

Immelt conceded the last five years had been difficult for GE’s (re)insurance operations, with losses of $700mn and $3.2bn of capital pumped in to shore up its reserves.

Describing GE Insurance Solutions as a “tough strategic fit for GE”, Immelt explained that “by its nature, reinsurance is volatile and consumes capital to grow”.

And despite the transaction value at around 28 times average 2003-5 earnings, GE will make an after-tax loss of around $2.8bn from the divestment, including loss on book value, goodwill and taxes.

Dennis Dammerman, vice chairman of GE, will stand for election to Swiss Re’s board at an extraordinary general meeting to be held in January 2006.

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