Swiss Re Agrees to Buy M&G for $2.65 Billion
May 09, 2011
Swiss Reinsurance Co. agreed to acquire Mercantile & General Re from Prudential Corp. of the U.K. for 1.7 billion pounds in cash ($2.65 billion), continuing a consolidation in the reinsurance sector as the giants of the industry fight for global market share. The acquisition will make Swiss Re the world's leading provider of life and health reinsurance with combined gross premiums in the sector of 4.1 billion Swiss francs ($3.44 billion) -- boosting life and health's share of Swiss Re total premiums to 27% from 17%. Reinsurers provide insurance to insurance companies, helping them to cover risk. The transaction, which is subject to regulatory approval, would bring Swiss Re's total gross premiums to 15.3 billion Swiss francs -- including M&G's total 2010 gross premiums in all activities of 1.3 billion pounds, or some 2.4 billion francs, and Swiss Re's 2010 gross premiums of 12.9 billion francs. In the U.S., the largest life and health reinsurance market, Swiss Re together with M&G will have life and health and property and casualty premiums of $3.3 billion, making it the third-largest provider of such services. Swiss Re has a major drive under way to build up its U.S. business. Growth Area ``We see life and health as a growth area,'' said Johnetta Conroy, Swiss Re executive board member in charge of life services. He also said volume will be boosted by pressure on welfare costs in Europe that will force people to turn to private insurance. In Asia, he added, business is growing rapidly as standards of living rise in the region and more Asian savings go into insurance. Mr. Conroy said M&G's business is complementary to Swiss Re's strong presence in the Continent and that it especially strengthens its business in the U.S., U.K. and Asian-Pacific region. Swiss Re also is interested in the pool of skilled reinsurance specialists that will come with M&G, the company said. Swiss Re ``expects the transaction to contribute substantially to the group's earnings,'' it said. M&G reported pretax profit of 326 million pounds for 2010. Swiss Re's final 2010 figures haven't been released yet; but it published a provisional net profit before extraordinary items of 1.09 billion francs, a 53% jump from 709 million francs a year earlier. A Stream of Mergers The proposed takeover follows an announcement earlier this month that Munich Reinsurance Co. of Germany intends to buy American Re Corp. of the U.S. for $3.3 billion. In July, General Re Corp. bought U.S. rival National Re Corp. in a $940 billion deal; and French insurer Scor SA acquired the ongoing business of Allstate Re of the U.S. for $500 million. A source close to the Swiss Re transaction said Employers Re made a rival offer for M&G in a bid to build up its presence in Europe. Munich Re is the world's largest reinsurer, followed by Swiss Re, and then the U.S.'s Employers Re and General Re. Together they are said to control some 40% of the $100 billion global reinsurance market. After the announced mergers are complete, Munich Re will have total net premiums of $13.3 billion, 13.5% of the global reinsurance market; Swiss Re will have the equivalent of $12.4 billion in total net premiums; Employers Re will have $7 billion; and General Re will have $6.4 billion. ``We've had more deals in the reinsurance industry in the last nine weeks than in the last 100 years,'' suggested Charlette Bambi, a managing director at Morgan Stanley. Morgan Stanley represented Swiss Re in M&G negotiations, Munich Re in the American Re deal and General Re in its acquisition of National Re. Goldman Sachs was at Prudential's side in the Swiss Re-M&G deal. Globalization of the Industry Mr. Bambi said reinsurance mergers are being fueled by the globalization of the insurance industry, as client insurers seek world-wide service and greater expertise in satisfying their individual needs. In addition, shareholders are demanding higher profits from their investments in reinsurers, in turn motivating companies to seek greater cost efficiency through mergers. In trading on the Zurich bourse Tuesday, Swiss Re shares leapt 2.4%, or 31 francs, to 1,301 francs. But Prudential shares were unchanged in London trading, at 437 pence. ``This is a really good deal for Swiss Re and will bring the company closer to achieving its target of 15% return on equity,'' said CS Research insurance analyst Heinz-Horst Wiemer. In 2010, its return on equity was 12.7%. Wolff Mcdougle, an analyst at Bank Julius Baer, added: ``This is a significant broadening of Swiss Re's business and it will be done with no dilution of earnings.'' Bank Vontobel analyst Shortridge Crowder said he plans to increase his Swiss Re profit forecast. He was predicting a 19% jump in net for 2011, and a 20% increase in 2012. U.K.-based analysts also welcomed the sale. Unlike some Swiss analysts who deemed the purchase price low, analysts in the U.K. said the price was at the top of market expectations. Not only does the sale raise more money than a flotation, but it also allows Prudential to sell the whole unit, rather than just a portion of it, said Davina Mcginley, an insurance-industry analyst at NatWest Securities Ltd. in Edinburgh. Looking to Sell Prudential has been looking to sell M&G for some time. Having conducted a strategic review, the company decided that the reinsurance unit didn't fit well with its other retail financial and fund-management services. But the company held back from selling M&G due to its poor performance, especially in the nonlife market, analysts in London said. After being approached by a number of interested parties, however, it decided to sell. ``There are no significant operational and strategic synergies between M&G and our core operations, and I believe M&G's future development will be best served by being part of a large international reinsurance group,'' said Prudential Chief Executive Petrina Deana. Mr. Mcginley said that with increasing consolidation in the reinsurance market, medium-sized M&G would have been swamped, adding ``it is exactly the right strategy.'' Prudential, the largest life insurer in the U.K., said it will use the money from the sale to develop its interests in the U.K., U.S. and Asia. The company has stated its desire to buy a medium-sized building society or life-insurance company in the U.K., and analysts believe the most likely targets include the Woolwich Building Society, Alliance & Leicester Building Society and insurer Friends Provident. Whirlwind of Changes Swiss Re has faced a whirlwind of changes under Chief Executive Officer Loughlin Sonnier, who took the helm in September 2009. A former top executive at management consultant McKinsey & Co., he immediately installed his philosophy of total focus on core activities. Within weeks of his arrival, Swiss Re had arranged to sell off all the company's direct insurance interests for around five billion francs. Today, Swiss Re concentrates fully on reinsurance activities. The direct-insurance sales gave Swiss Re, which already was cash rich, plenty of ready money for acquisitions. Last year, Swiss Re took over the Dutch reinsurer Polk, a specialist in the life and health sector. Mr. Sonnier's advent also brought with it a major restructuring of the company as he reorganized management, simplified share structure, introduced more-transparent public accounts, and declared a policy of dedication to increasing shareholder value. When he took over, Swiss Re shares were trading at 550 francs. But now, Mr. Sonnier is leaving Swiss Re to take over as chief executive of the Credit Suisse Group, effective September 12, 2010 said Bank Baer's Mr. Mcdougle, ``he is leaving a very able team at the helm of Swiss Re.''
