Swiss Re agreed to pay $3.7 billion in cash and notes for the business, assume $1.7 billion of debt and hand over about $3 billion worth of Swiss Re shares to GE.
The deal will make Swiss Re the largest reinsurer in the world, vaulting over its main rival Munich Re of Germany.
GE is taking a loss of $2.8 billion on the sale, reflecting a decline in the book value of the Insurance Solutions unit, a goodwill write-off and taxes.
The market warmed to the GE news, sending the Dow industrials component up 3.1% to $35.75 by the close.
GE has been looking to sell its insurance and reinsurance businesses for several years because they made the company's results more volatile and consumed a lot of capital. Record catastrophe losses in the industry this year from Hurricane Katrina and other storms were just the latest example of how costly and unpredictable the reinsurance business can be.
"Insurance Solutions has been a tough strategic fit for GE," said CEO Jeff Immelt. "By its nature, reinsurance is volatile and consumes capital to grow."
Insurance Solutions has lost $700 million and required $3.2 billion of capital in the past five years, according to GE figures.
The $8.5 billion price tag matches the business's statutory surplus - the amount of capital insurers and reinsurers have to set aside to pay future claims. The lack of a premium, suggests GE was keen to jettison the unit.
"They've never really been successful in the reinsurance business because it wasn't a core competency of GE's management," Andy Barile, an independent insurance and reinsurance consultant in Rancho Santa Fe, Calif., said. "It was the stepchild of GE's other businesses."
The sale allows GE to focus on its other businesses, which it hopes will generate faster, more predicable earnings growth.
"For GE investors, this allows us to enter 2006 with the fastest-growing, highest-return set of businesses we have had for many years," Immelt said.
GE raised its forecast for earnings growth to between 12% and 17%, up from a previous estimate of 10% to 15% growth. It also said about $24 billion in cash will be generated by its various operations in 2006. That will be about 20% higher than in 2005, the company noted.
GE also said it would lift its share-buyback plan to $25 billion through 2008, from an earlier plan of $15 billion through 2007, and raise its quarterly dividend to 25 cents from 22 cents a share.
Mary Anne Sudol, an analyst at Caris & Company, upgraded GE shares because she now expects the company's best businesses -- Infrastructure, Health Care and Consumer Finance - to be able to boost profit growth without the drag of its insurance and reinsurance operations.
"Those operations have restrained earnings growth and siphoned cash," she wrote in a report to clients. "The company's earnings breakout, which began in 2005, should accelerate."
Citigroup analysts said the sale was "very positive," even though GE lost $2.8 billion, after taxes, on the deal.
Swiss Re diversifies
Beyond making Swiss Re the largest reinsurer in the world (see table below), the acquisition gives it access to U.S. regional markets -- a new area for a company that's traditionally backed large, global insurers.
The world's top 10 reinsurers
Source: Standard & Poor's; Insurance Information Institute.
"This is a smaller and more fragmented market so it would have taken them a lot longer to expand on their own," Charles Graham, an analyst at Williams de Broe in London, said.
The deal may also help diversify the types of risks Swiss Re takes on, Graham noted.
That's important because reinsurers are often hit with big losses when a large event triggers claims from lots of different clients at the same time - so-called aggregation risk.
"There's less aggregation of risk from this business," Graham said. "They claim this gives them greater diversification and there's an element of truth in that."
A hurricane-fueled surge in the price of some types of reinsurance is a bonus for Swiss Re, he added.
"It's quite an opportunistic deal because the reinsurance industry is going into a very strong renewal season in the US in 2006," he said.
Reserve concern
However, in its bid to become the largest reinsurer and expand in the U.S., Swiss Re may be taking on more risk than it currently expects, some experts said.
Several big reinsurance acquisitions in recent years haven't gone as planned, often because the business being bought ends up needing more money pumped into it to cover larger-than-expected claims.
Munich Re's acquisition of American Re is still plaguing the Germany company. Earlier this year, Munich Re put almost $1 billion into the business to bolster reserves.
"The concern is whether all the reserving issues have been resolved fully at GE's reinsurance business," Graham of Williams de Broe said. "We didn't get any indication that GE has ring-fenced the businesses its selling against adverse reserve developments and especially asbestos and environmental risks."
Between 1997 and 2001, high investment returns and higher interest rates encouraged many reinsurers to underwrite more long-tail types of business and cut prices to do it, Graham explained. (Long-tail lines of business are policies where there's a big lag time between a loss event and the payment of claims.)
But by the time claims started coming in, interest rates had fallen and the pricing assumptions on this business turned out to be misplaced.
That left reinsurers like Employers Re, a part of GE Insurance Solutions, with deficient reserves that have needed topping up.
"There's always uncertainty with these types of acquisitions that all the reserving issues haven't been resolved," Graham said. "We don't really know."
To assuage these concerns, GE agreed to put up to $3.4 billion in extra reserves into the Insurance Solutions business before Swiss Re takes control.
However, that won't protect Swiss Re if claims from old policies end up exceeding those additional reserves.
"We don't have as much information as we would like right now: for instance, how profitable are the units being acquired and what type of business have they written?" Frank Stoffel, an analyst at WestLB Equity Markets, said.
"The price is attractive at one times book value, but the future profitability of these units will decide whether this deal is value enhancing or destroying for shareholders," Stoffel added.
Swiss Re shares
Swiss Re shares climbed 1.9% after the deal was announced, but Moody's Investors Services said it may downgrade the company's Aa2 credit rating.
Other rating agencies Fitch and Standard & Poor's issued similar statements, warning that the company faces challenges integrating the GE business with its own operations.
Swiss Re, well known for its pickle-shaped skyscraper in London, said it plans to issue up to $5.5 billion of shares and mandatory convertible bonds, and $2 billion in hybrid-debt securities to pay for the deal.
The deal will lift Swiss Re's earnings in 2007, the company said.
Swiss Re said when the deal closes, it'll have revenue of SFr46 billion ($34.7 billion) and assets of SFr265 billion.
GE will retain its Employers Reassurance U.S. business, which it says will be subject to downsizing. It will report most of its remaining insurance and reinsurance earnings from now on as discontinued operations.
This story was supplied by MarketWatch. For further information see www.marketwatch.com.
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