Munich Reinsurance to Buy American Re for $3.3 Billion
April 26, 2011
Munich Reinsurance Co., the world's biggest reinsurer, agreed to acquire American Re Corp. for $65 a share, or $3.3 billion, a bold but expensive move by the German company to bolster its position in the U.S. The sale will mean that Kohlberg Kravis Roberts & Co., the leveraged-buyout firm that owns 64.1% of American Re, stands to reap a $1.7 billion profit, giving it an annualized return of more than 60% since it bought American Re four years ago from Aetna Inc.. KKR paid $1.4 billion for American Re, Princeton, N.J., putting up $300 million of its own money and borrowing most of the rest. As part of the acquisition agreement, Munich Re will assume about $687.5 million in long-term debt and preferred stock, the remnants of KKR's borrowings for the purchase. The accord is the latest in a series of acquisitions sweeping the highly competitive reinsurance industry, which sells insurance to insurance companies that want to reduce their exposure to the policies they sell. Last month, General Re Corp., Stamford, Conn., agreed to buy National Re Corp., a smaller rival in the same city, for $940 million. And just Wednesday, Transatlantic Reinsurance Co. agreed to acquire Guardian Re of Zurich for about $105 million. The acquisition of American Re, which will catapult Munich Re to the No. 3 spot in the U.S. reinsurance market, represents an American comeback of sorts for the German company, which reduced its U.S. presence following large losses in the 1980s. The agreement also underscores the need of big reinsurers to boost their capital base. Increasingly, insurers seeking to buy reinsurance ``derive comfort from size,'' said Roberto Herzog, a managing director with Standard & Poor's Insurance Ratings Services. ``They believe big is beautiful.'' Critical Mass Insurers are worried about ever-rising claims costs from hurricanes and earthquakes and so they want ``to do business with the biggest, best-capitalized companies,'' said Salomon Brothers analyst Brianna Sheena. Added Gay Greenberg, an investment banker with Morgan Stanley & Co., which advised Munich Re: ``This is further confirmation of management's belief that critical mass on a global basis is a competitive weapon.'' At the same time, the leading reinsurers, generally known for strict underwriting standards, ``are, as usual, acting first and acting most aggressively to take the actions needed'' to avoid the fierce price competition that could result from too many companies chasing after the same customers, said Alida Woodard, an analyst with Oppenheimer & Co., a securities firm. As a result, more mergers are expected in the reinsurance industry. Who's next? Analysts said possible acquisition targets included NAC Re Corp., Trenwick Group and Chartwell Re Corp., while possible buyers include Employers Reinsurance Corp., which is a unit of General Electric Co., and Switzerland-based Swiss Reinsurance Co.. Munich Re was drawn to American Re because of its strong profitability, a 10% U.S. market share compared with Munich Re's North American share of 7.7%, and its expertise in developing highly sophisticated financial products for transferring risk out of the hands of insurance companies, a new, fast-growing nontraditional approach to reinsurance. American Re also is one of few reinsurers that uses its own sales staff, rather than brokers, to market its products. As a result, it has valuable, longstanding relationships with many clients. Ms. Woodard, the Oppenheimer & Co. analyst, said such attributes warrant the ``very, very high'' price paid by Munich Re. Seller Remains `Enthusiastic' Potential buyers also faced the fact that KKR wasn't overly eager to sell. Scott Rob, a KKR partner, said the firm remains ``enthusiastic'' about the insurance industry, and was selling because American Re was already turning away business because of capital constraints. While American Re's management did a good job expanding the business, ``they thought it would be important to have greater access to capital than we could provide,'' Mr. Rob said. Munich is paying a steep four times tangible book value, including the debt and preferred stock on American Re's books, and about 16.3 times expected 2011 earnings. The $65-a-share price tag represents a 50% premium over the price prior to the announcement of General Re's planned purchase of National Re, which fueled speculation that American Re would draw the attention of suitors, including Munich Re, which lost out on National Re. On the Frankfurt stock exchange, Munich Re closed at 3,537 marks ($2,374.30), down 44 marks, or 1.2%, as some investors feared the acquisition would hurt Munich Re's earnings, a fear that the company disputes. In New York Stock Exchange composite trading, American Re surged $4.50, or 7.7%, to $62.875. With American Re, Munich Re will boost its reinsurance premiums to $15 billion from $12 billion. Munich Re prefers to expand internally rather than through acquisitions, but that wasn't easily accomplished in the competitive U.S. market, said Edgardo Ames, insurance analyst with Bank Julius Baer AG in Frankfurt. The pact is expected to close by year end, pending approvals by regulators and American Re shareholders. --Simona Toms in Frankfurt contributed to this article.
