Swiss Re has officially become the world’s biggest reinsurer, overtaking rival Munich Re, following the closure of its acquisition of GE Insurance Solutions from General Electric.
But despite putting Swiss Re on top, the acquisition closure has also sparked a downgrade from rating agency Standard & Poor’s. The agency cut the reinsurer’s financial strength ratings to AA- from AA. This was because of the risks associated with integrating a company of GEIS’s size and complexity, and the state of flux at GEIS in recent years given the uncertainty over its ownership. GE had been planning to sell GEIS, formerly known as Employers Reinsurance Corporation, for several years. It first revealed its intentions in 2002.
At the same time, S&P upgraded the financial strength ratings of GEIS subsidiaries Employers Reinsurance Corporation and GE Reinsurance Corporation to A+ from A. This is because S&P deems them strategically important to Swiss Re following the acquisition.
As well as prompting downgrades at Swiss Re, there is also some evidence that the acquisition is unpopular with the company’s investors. Swiss Re’s share price has fallen nearly 16% since the start of this year. “That’s quite a lot compared with other reinsurers in Switzerland,” says Georg Marti, an analyst at Swiss investment bank Zürcher Kantonalbank. “It seems as if investors are not very happy with what Swiss Re has been doing, otherwise the stock would have performed better.”
Another problem for investors, says Marti, is the length of time the transaction will take. He points out that it has already taken since November to complete the acquisition, and that integrating GEIS will take another 18 months. “Altogether that’s almost two years, which is quite a long time. Investors want transactions to be processed quickly,” he says.
But he adds that the performance of Swiss Re’s share price may improve when some of the uncertainty about the acquisition is cleared up. “Maybe next year we will see how the integration is going to perform and investors will start to get back into Swiss Re stock if the performance is good,” he says.
Swiss Re paid $7.4 billion for GEIS. The price comprised a base amount of $6.8 billion and closing adjustments of $600 million. The company previously estimated that the closing adjustments would be $800 million.