Swiss Re will issue between $800 million and $900 million less equity than it previously planned to help fund its $7.6 billion acquisition of GE Insurance Solutions, the Swiss reinsurer said following its annual general meeting on April 21.
Internally-generated cash will replace the previously planned $800 million to $900 million of equity. Swiss Re will be able to issue about 46 million new shares instead of 74 million, according to estimates by investment bank UBS, because of internal revenue improvements, a no-discount policy on the shares to be issued, and a reduction in the consideration paid to GEIS parent General Electric.
GE has agreed to accept $2.4 billion in shares and $500 million in mandatory convertible securities from Swiss Re – less than the $3 billion to $3.8 billion in shares and mandatory convertibles previously agreed. This brings the shares GE is expected to hold in Swiss Re following the acquisition to less than 10% instead of more than 10%, as originally announced.
Analysts have welcomed the change. “We view Swiss Re’s decision to issue $800 million less equity and replace it with internally generated cash as a positive for the stock and an indication of both Swiss Re’s strong capital position and the increasing quantitative recognition the rating agencies are giving to well managed risk and diversified reinsurers,” said Andrew Broadfield, analyst at investment bank Lehman Brothers, in a report.
He adds that the fact the company has held back surplus capital could indicate more deals are in the pipeline for its Admin Re program, under which Swiss Re buys closed blocks of life business and manages their run-off.
Swiss Re expects to raise additional capital through a $1 billion rights issue to existing shareholders on the basis of one new share for 17 existing shares. It also plans to issue $2 billion of hybrid debt securities, which rating agencies and regulators count as tier-one capital, in the second quarter of 2006. The company already raised $788 million though the placement of mandatory convertible securities in December.
Swiss Re hopes to generate cost savings of about $300 million a year by 2008 through its merger with GEIS, partly by combining its offices in strategic locations, including Munich, London, New York, Kansas City – GEIS’s U.S. headquarters – and Zurich.