Swiss Re's decision to buy GE Insurance Solutions will elevate it further in the size-is-king reinsurance stakes, learns Helen Yates
Swiss Re is set to lap heavyweight rival Munich Re in the race to become the largest reinsurer in the world. When its acquisition of GE Insurance Solutions (GEIS) is completed in mid-2006 the combined operation will generate net written premiums of $34bn, compared to Munich Re's $28.9bn (based on 2004 figures). But it is more than just sheer size that defines the Zurich-based reinsurer. A highly diversified portfolio, both globally and across lines of business, broad global reach and strong brand awareness all serve to contribute to a strong competitive position.
A strategic acquisition
Ongoing speculation as to the future of GE Insurance Solutions ended with Swiss Re's decision to buy General Electric's insurance and reinsurance arm for $6.8bn. The $6.8bn includes a 24% discount on its book value, reflecting a $2.1bn reserve increase before closing. In total, Swiss Re aims to raise $7.5bn in capital, of which GE will provide 50% (in return for 10% of Swiss Re shares and a place on its board for GE vice chair Dennis Dammerman). Capital raising is being achieved through cash, shares, mandatory convertibles and notes.
After closing GEIS will almost immediately be subject to Swiss Re's strict underwriting targets. As a combined entity one aim is to realise annual pre-tax operating cost savings of $300m within 18 months of closing. Perhaps unsurprisingly, one method in which these synergies will be realised is through axing 1,700 jobs following completion of the acquisition. In an interview with the Financial Times in January, Swiss Re CEO Jacques Aigrain confirmed the redundancies and said, "We will try to see what we can offer the GEIS people - not all will have a position. On the other hand, some will take on jobs occupied by Swiss Re people at present."
Another aim is to discontinue or reduce some lines currently written by GEIS, retrocession in particular, while other areas will see an expansion.
"This transaction is going to enhance the client base and product capabilities in attractive lines of business," said Michel Lies, head of client markets and member of the executive board. In terms of capacity and diversity most of GEIS' businesses fit well with Swiss Re's existing business mix.
According to Aigrain they will provide "the opportunity for a better balance in geographic terms between life and non-life". Put simply, the acquisition will help it extend its life business in Europe and increase its focus on property/casualty in the US. "The power of diversification in our business has never been more important," said outgoing CEO John Coomber. "For that reason we believe that the future favours strong players who can provide clients with the capacity and the security, which they need."
While GE Insurance Solutions has suffered in the past from legacy issues and uncertainty over its long-term ownership, Swiss Re was quick to silence any critics on the day of the announcement, with both Coomber and Aigrain referring to a "very powerful" due diligence involving both specialist and external advisors. "We are satisfied that reserves at the time of closing will be of the same quality as our own reserves", said Coomber, while Aigrain insisted the group was "not driving in the night without headlights".
Swiss Re at a glance
Even without the new range of GEIS businesses, Swiss Re is highly diversified in terms of lines of business, geography and product. In 2004, 55% of net written premiums were from property/casualty business, 35% from life and health and 10% from financial services activities. Geographically the US is its key market (accounting for 51% of gross written premiums in 2004), followed by Western Europe (27% of gross written premiums), specifically the UK, Germany, France, Switzerland and the Netherlands.
The final 22% represents business from other parts of the world.
A market leader in the life reinsurance sector, Swiss Re's main advantage has been its size and the consequential cost advantage. Focused on providing mortality protection, it constitutes 23.2% of all life reinsurance premiums earned worldwide while returns continue to improve. The return on operating revenues increased to 9.5% in the first half of 2005, up from 8.6 in the same period of 2004 and 2003.
In non-life, Swiss Re contends with a lot more competition from the global reinsurance marketplace, but its advantages are again size and diversity, affording it the ability to write business unconstrained by capacity in the marketplace. However, according to S&P, long-term non-life underwriting performance has not been at a level consistent with an "AA" rated reinsurer (between 2000-2004 the performance of Swiss Re America suffered from gross previous year reserve additions totalling $3.8bn). Gross written premiums by line of business in 2004 were 31% property, 31% liability, 13% motor and 25% other lines (including engineering, accident, marine and aviation).
Swiss Re's overall share of the non-life market is 11%.
In June 2005, Swiss Re announced a change in its structure designed to align its management structure more closely to its strategic objectives.
As a result, its three business groups, property/casualty, life and health, and financial services were replaced with three business functions: client markets, products (which includes the underwriting and pricing functions of both the property/casualty and life and health units), and financial services. Aligned with the new organisation structure and the long-term management plan was the announcement in August 2005 by Swiss Re's board of directors that it had appointed former investment banker Jacques Aigrain as CEO, effective 1 January 2006, to succeed John Coomber, who retired on 31 December 2005.
In research carried out in December 2005, S&P said it did not expect Swiss Re's leadership in life reinsurance to be significantly challenged in the medium term and, for non-life, that it was in a strong position ahead of the January 2006 renewals. "We are gaining share in the property and casualty market at the right time," said Coomber at the GEIS acquisition announcement. The reinsurer is also expected to perform better in its non-life operations in the future due to the centralisation of strategy and controls.
At the time of going to press the results of Swiss Re's performance at the renewals had yet to be released, however all the signs were pointing to a successful season for the group. At a recent renewals precis, Charlie Cantlay, Aon Re UK deputy chairman, said, "Swiss Re and Munich Re had a very successful year end. Sticking to technical rates (and not increasing prices across the board) has gone down well with their client base and they have won back some of the market share lost to Bermuda and London."
In the first half of 2005, Swiss Re's income was down marginally at CHF1.35bn ($1.07bn), compared to CHF1.44bn ($1.14bn) in the same period of 2004.
At the time of these results, earnings were expected to be in line with its over-the-cycle target of 10% earnings per share growth and 13% return on equity, but that was assuming normal business development for the remainder of the year. This was not to be. With most recent estimates that Hurricane Katrina will cost the company around $1.2bn in claims, and an additional $750m for Hurricanes Wilma and Rita, Swiss Re announced in November 2005 that it did not expect to meet these target of 10% earnings per share growth but said it would use equalisation reserves to mitigate part of the claims and that its dividend guidance of CHF2.50 per share for 2005 was unchanged.
Despite these massive losses the group was quick to point out that Katrina would be an earnings and not a balance sheet issue and credited its highly diversified portfolio for helping it absorb losses. "Our financial strength remains very strong, enabling Swiss Re to take full benefit of the excellent pricing conditions in the current renewal season," said Coomber following the release of the group's Wilma and Rita loss estimates. Nevertheless, results for 2005 will be heavily affected by hurricane losses and according to S&P should show a single-digit return on equity.
With the prospect of another active hurricane season in 2006, Swiss Re has implemented a new rating tool for US flood and storm surge in order to reflect these risks more adequately in its pricing. "We believe that a solid exposure analysis will become even more important for any player in this field and may well lead to higher protection levels purchased in the future," said Lies.
The reinsurer's track record of accessing the capital markets and its innovative risk-transfer strategies has resulted in a very strong financial flexibility. On 21 January 2005, it completed its first securitisation of future profits from a portfolio of US life insurance policies (the $245m Queensgate transaction). By transforming insurance risk into a tradable security, Swiss Re is converting intangible assets, which would only emerge over time into cash. This transfer of risk to the capital markets allows it to manage its capital more effectively. Following on from the first securitisation, a second $370m issue (the ALPS transaction) was successfully completed on 28 December, and its first credit securitisation was completed on 23 January (a $308m issue). According to S&P, the group's ability to monetise the present value of future profits contributes to its strong capitalisation.
With an increasing reliance on the capital markets for risk transfer, Swiss Re's strategy going forward is to retain underwriting risk rather than incur credit risk through retrocession (exceptions include aviation and certain financial transactions). Geographically the expansion continues, spurred on by an increasing demand for insurance-related products in the emerging markets, particularly Asia, and with the intension to further diversify the Swiss Re portfolio. "Under the new leadership of Jacques Aigrain, Swiss Re will continue to adhere to strict underwriting principles, optimise organic and transactional growth, extend leadership in Asia and further accelerate the balance sheet through risk securitisation," said Lies.
- Helen Yates is deputy editor of Global Reinsurance.
- Swiss Re completes first credit securitisation
- 1,700 jobs to go at Swiss Re/GEIS
SWISS RE - JACQUES AIGRAIN - SWISS RE'S NEW CEO
Jacques Aigrain became chief executive officer of Swiss Re on 1 January 2006, succeeding John Coomber who has now retired. He joined Swiss Re in June 2001 as head of the Financial Services Business Group and member of the Executive Board Committee. In this role, he consolidated the insurance-related businesses of Financial Services and rejuvenated Swiss Re's proprietary asset management. In August 2004 he was appointed deputy CEO, in addition to his Financial Services role, a task that included a number of coordination functions across the firm, in particular regulatory affairs. Aigrain is a member of the Board of Directors of Swiss International Air Lines Ltd, a member of the Capital Market Consultation Group of the International Monetary Fund and member of the Institute of International Finance.
SWISS RE RATINGS ACTIONS
On 18 November, following Swiss Re's announcement that it had agreed to acquire GE Insurance Solutions, Standard & Poor's placed its "AA" long-term counterparty credit and insurer financial strength ratings on Swiss Re and its core operating companies on creditwatch with negative implications.
Moody's Investors Service has placed Swiss Re and its rated core subsidiaries on review for possible downgrade, while AM Best has placed Swiss Re and its rated subsidiaries under review with negative implications. "The creditwatch status reflects the execution risk associated with integrating a group of the size and complexity of GEIS, which has a lower rating than that on Swiss Re," said Standard & Poor's credit analyst Simon Marshall.