It is no longer a question of if but rather when GE Insurance Solutions will cut ties with its formidable parent Helen Yates takes a look at a company set for change.
General Electric (GE) is a bastion of US capitalism. But GE Insurance Solutions' privileged upbringing as a member of the GE family is now coming to an end. The facts speak for themselves: GE wants to "reduce its exposure" to the insurance and reinsurance business; parts of the business have already been sold off - most recently a further chunk of mortgage insurer Genworth Financial; and finally plenty of candid comments from GE Insurance Solutions' CEO Ron Pressman on GE's "ringing endorsement" of its insurance business. Is change on the immediate horizon in this slow moving M&A market? It's unlikely but that doesn't mean it won't happen.
To GE or not to GE
There has been much speculation in the industry on when GE Insurance will cut ties with its parent company. GE CEO Jeffrey Immelt has made no bones about his intension to sell off the group's insurance businesses - piece by piece if necessary - ever since he was named Jack Welch's successor in 2001. With his intension for "GE to outperform any market that we're in" he has decided insurance does not fit the GE business model. In his recent letter to stakeholders 'The Future is Now' Immelt said: "Insurance generated only about 3% of our earnings in 2004, and we will continue to reduce our exposure in this industry."
Genworth Financial - GE's primary life and mortgage insurance businesses - is being sold off piece by piece. First 30% of its shares were sold off in an IPO in 2004, and then on 22 September 2005 a second public offering of a further 40% (equating to 80 million "class A" shares) was announced - with GE retaining ownership of just 30% of its common stock.
The sale of Medical Protective (MedPro) to Berkshire Hathaway (for $825m) in July seemed to further confirm GE's intension to continue to sell down its insurance businesses. Following the transaction Standard & Poor's immediately upgraded MedPro to its highest "AAA/stable" financial strength rating after acknowledging its "prospectively strong earnings". At a recent media event in New York Pressman said the sale had been very positive for the medical malpractice insurer that had been "starved of capital" as a GE company. "Berkshire Hathaway is very interested in growing the Medical Protective business and making it a national franchise, which requires significant capital," he reiterates. "GE has been interested in reducing its investment in the insurance sector, and this was an opportunity to do so at an attractive price for GE investors."
Pressman has been quite outspoken about GE's loss of enthusiasm in the insurance and reinsurance industry. In a speech to the Casualty Actuarial Society in May this year he spoke about Immelt's view of insurance which was "similar to Karl Marx's mother, who was reputed to have said: 'I wish Karl would stop writing about money and start making some'. GE," he continued, "which is profoundly a good company, as well as a great company, no doubt has a soft spot somewhere in its heart for this business. I just haven't been able to locate it during the past five years."
Confronting its legacy
GE Insurance Solutions' financial strength has been offset in recent years by adverse reserve development - primarily from the 1997-2001 underwriting years although the large number of natural catastrophes in 2004 prompted it to pour a further $1.1bn into its reserves (84% of the adverse development in 2004 was from discontinued lines of business). "We feel we've been prudent and transparent and very open in terms of what we used to do and we increased our reserves for some of the bad years in the past," says Jonathan Isherwood, GE Insurance Solutions' global property leader. "But we feel pretty good about where we are now." As a result of its reserve development the company reported net earnings at the end of 2004 of just $55m, down from $656m at the end of 2003. Net premiums were also down at $8,173m compared to $9,729m in 2003 (see table 1).
Nevertheless, financial performance has improved in recent years following a reorganisation of the company's investment portfolio (and Immelt's first articulation of his intension to sell the business). There has been a strong emphasis on capital improvement, which has been helped along by a $350m cash injection from GE Capital. A further commitment for additional capital support from its holding company, GE Insurance Solutions Corporation, not to mention the $3bn it has received from parent company GE over the past five years has helped this along. At the end of the first half of 2005 statutory surplus stood at $8.2bn. "From a capital point of view we clearly have enough capital to be "AA" at least - so at least one more rating better then what we are today," says Isherwood. "We have 60% more capital now than we did five years ago."
But the rating agencies are retaining their concern over the company's adverse development. In its recent downgrade of the company from "A+" to "A" Standard & Poor's director Laline Carvalho noted that "Although GE Insurance Solutions is pricing its current business to profitable levels, its medium-term operating performance remains exposed to potential further reserve development for prior years. As a result, the company's operating results - in Standard & Poor's opinion - are likely to underperform relative to industry peers over the next 2-3 years." In another downgrade to "A1" from "Aa2" Moody's noted continued "uncertainty about the reserve adequacy of GE Insurance Solutions because the group writes significant amounts of long tail business - including professional liability, workers' compensation and excess casualty reinsurance."
A market-changing event
Following Hurricane Katrina GE Insurance Solutions announced its intention not to cancel or non-renew any professional liability policies held by independent agents in Louisiana, Mississippi and Alabama. "We stand ready to fulfill our mission as an organisation that helps people, communities and even entire cities recover from natural and man-made disasters," says Pressman. He insists the company can manage its losses but highlights how Katrina and previous catastrophes have raised important questions on the accuracy of current models: "Today's global cat volatility modelling is in need of major restructuring. We will be tasking our team to re-evaluate our current models, update them and then introduce our updated technical underwriting guidelines into the market."
Despite the expected losses Isherwood insists the impact of Katrina is "not going to be a balance sheet issue at all - we still hope we're going to make some profit this year". Before Katrina the company's intention was to maintain discipline in a softening market explains Isherwood. Since the hurricane however, with the industry predicting insured losses of between $40-$60bn (latest RMS figures) and the company expecting its losses to equate to 3% of gross profit and 1% of net profit, the aim is to drive rates back up ahead of January's renewals season. "We've had a market-changing loss this year - and in that sort of circumstance we need to ensure that the appropriate prices are out there for the exposures we've taken," insists Isherwood. The company will shortly be issuing updated underwriting guidelines with the anticipation that rates will go up.
The Welch legacy
It is impossible to discuss any GE company without mentioning "six sigma", the quality tool with its mathematical formula and martial arts jargon that has become synonymous with Jack Welch (he credited it with "changing the DNA of the company"). Once the sole domain of the six sigma "black belts", the initiative is now everybody's responsibility at GE Insurance Solutions. "The main focus is eliminating the non value-added part," explains Inga Beale, head of Continental Europe at GE Insurance Solutions. "Six sigma means there are only three defects in every million opportunities - so that's the jargon behind it - but basically you're looking to eliminate any errors. It used to be a standalone team but now it's being embedded more, now you're using it as part of the everyday way you run the business."
Now also part of the culture is a major push for transparency and contract certainty, championed by Pressman himself. A new company-wide aim - Challenge All Industry Norms (CAIN) - has been implemented with principles that centre on transparency, disclosure and consent. "I've been in the industry for over 20 years and you get used to doing things a certain way," explains Beale. "Now we're being challenged to look at everything we do and benchmark ourselves against other industries? Contract certainty is one example - we still have policies where there are no premium payment conditions. It will still say things like - as soon as possible - which is crazy. And it's because everybody is so used to doing business the same old way."
Doing business the same old way doesn't seem to be much of an option for a company that could be sold at any point. "There are significant advantages in being part of a large company like GE. Equally, we're not part of GE long-term and that's not necessarily a comfortable position to be in either," explains Isherwood. There remains plenty of uncertainty ahead and 2005 has certainly thrown in plenty of challenges. The surprise departure in August of COO Richard Smith (to become CEO of Equifax) has led to some internal changes with Pressman taking over Smith's main responsibilities and the operating unit leaders assuming more responsibility within a new management structure. "Even before Katrina, the industry had experienced a number of events from the winter storm in northern Europe, the typhoons in Asia, and the five air crashes," reminds Pressman. With the promise of potential buyers never far away, now more than ever GE Insurance Solutions must prove its mettle.
Helen Yates is deputy editor of Global Reinsurance.
GE Insurance Solutions CEO Ron Pressman
Ron Pressman has served as chair, president and CEO of the GE Insurance Solutions group of companies since 2000. Following the departure of COO Richard Smith in August, Ron announced he would also take on those responsibilities. During his GE career he has worked in major GE industrial businesses and GE Capital Services. He has also spent a significant portion of his career focused on and living in markets outside the US, including six years in Europe. Named a GE officer in 1993, he is a senior vice president of GE and reports to Jeff Immelt, chairman and CEO of GE.
GE Insurance Solutions Table 2 - Ratings
Standard & Poor's: A (stable)
Standard & Poor's lowered GE Insurance Solutions rating from "A+" to "A" on 4 April 2005. Credit analyst Laline Carvalho said: "The downgrade reflects GE Insurance Solutions' poor operating performance over the last five years, primarily as a result of substantial reserve strengthening during this period. In addition, although GE Insurance Solutions is pricing its current business to profitable levels, its medium-term operating performance remains exposed to potential further reserve development for prior years. As a result, GE Insurance Solutions' operating results, in Standard & Poor's opinion, are likely to underperform relative to industry peers over the next two to three years."
AM Best: A (stable)
AM Best affirmed GE Insurance Solutions "A" rating with a stable outlook on 31 March 2005. It said: "These rating actions follow management's implementation of various steps taken to restore and maintain ERC's and GE Re's risk-adjusted capitalisation at prudent levels relative to their ratings and risk profile. Management of GE Insurance Solutions provided AM Best with a capital restoration plan at that time, which included explicit support from General Electric Capital Corporation (GECC). Major components of that plan include a recently concluded increase in cash capital of $350m from GE Capital Services; a commitment from GE Insurance Solutions to provide additional tangible capital by the end of the third quarter of 2005; the exchange of $1.2bn of ERC preferred stock for new ERC common stock, thereby improving financial flexibility and the quality of capital; and other potential activities designed to further improve its surplus position, risk-adjusted capitalisation and business profile."
Fitch Ratings: AA- (stable)
Fitch Ratings affirmed the "AA-" insurer financial strength rating on GE Insurance's subsidiary, ERC, on 28 January 2005 and said: "This reflects GE Insurance's moderate financial leverage and reasonable earnings-based interest coverage and ERC's strong competitive position in the global reinsurance market. Fitch's ratings also reflect concerns about ERC's reserve adequacy ... Additionally, the company's underwriting performance continues to lag that of peers. Fitch's stable rating outlook incorporates an expectation that ERC will continue to experience adverse prior accident-year reserve development. It also reflects the expectation that GE Insurance's underwriting profitability will improve moderately over the near term, but that it will be pressured as the reinsurance and commercial lines sectors experience cyclical pricing pressure."
GE Insurance Table 3 - Company breakdown
GE Insurance Solutions provides commercial insurance, reinsurance and risk management services. Its main lines of business include property & casualty, accident & health reinsurance (US), life & health reinsurance (Europe), professional liability, healthcare reinsurance, programmes for managing general underwriters, workers' compensation and pensions, annuities and equity release (UK). GE Insurance Solutions as a brand name has only existed since 2004 despite the company's long history. The brand was designed to encompass GE's insurance and reinsurance companies including:
- GE Employers Reinsurance Company (ERC)
- GE Reinsurance
- GE Commercial Insurance
- GE CyberComp
- GE ERC Healthcare
- GE Global Asset Protection Services
- GE Industrial Risk Insurers
- GE Westport
- Medical Protective (now owned by Berkshire Hathaway)
- GE Frankona Re
- Coregis Insurance
- Employers Reassurance Corporation (ERAC)
- GE Global Life and Health
- GE Global Property and Casualty