Swiss Re puts excess capital to work in new Admin Re life deal

by Artemis on September 23, 2015

Reinsurance firm Swiss Re has found something to do with some of its excess capital, putting some of it to work in a new deal for its closed life insurance book arm Admin Re which has acquired Guardian Financial Services for GBP£1.6 billion ($2.5 billion).

For some time Swiss Re has been promising shareholders that new Admin Re acquisitions would be forthcoming, as it aimed to build it into the leading closed life insurance book consolidator in the UK market.

This latest acquisition sees Admin Re acquire the holding company for Guardian Financial Services from private equity company Cinven for GBP£1.6 billion, extending Admin Re’s portfolio of closed life policies to now over four million policies in force.

Only a week ago it had been widely reported that Phoenix Group had approached Cinven to acquire Guardian, but it seems that reinsurance firm Swiss Re has beaten Phoenix to the deal.

The acquisition is expected to benefit Admin Re by allowing it to “further diversify its current business and increase its assets and reserves.”

Michel M. Liès, Swiss Re’s Group CEO, commented; “This acquisition is an excellent opportunity for Admin Re® to further enlarge its successful business and diversify its portfolio. It is proof that we can deliver on our ambitions to seek profitable growth opportunities for Admin Re® in the UK. The expected returns exceed our profitability targets for new business and represent an excellent fit with our Group strategy as well as with Admin Re®’s capabilities and existing infrastructure.”

The acquisition of Guardian gives Admin Re another 900,000 annuity, life insurance and pension policies in the UK and Ireland. This takes Admin Re’s UK life insurance business policy count to over four million.

David Cole, Swiss Re’s Group CFO, added; “This acquisition is in line with Admin Re®’s strategic goals as well as with our multi-year financial planning. We will continue to remain well capitalised and our economic solvency ratio will remain comfortably above our risk tolerance.”

Clearly, with Swiss Re deploying excess capital into new acquisitions, there could be a concern that shareholders may not receive the buyback opportunities that they had been expecting. Analysts at Morgan Stanley this morning said that Swiss Re’s stock price may not hold up from this deal, due to that fear, as its share price has held up well versus the sector already.

However, Swiss Re’s excess capital position is high and according to the reinsurance firm the Admin Re deal presented an; “Attractive opportunity to deploy part of excess capital above the Swiss Re Group’s profitability hurdle rate of 11% ROE.”

Cole explained on the buybacks; “This acquisition is also in line with the Swiss Re Group’s capital management priorities and, accordingly, does not alter our view of the share buy-back programme, which was authorised by our shareholders at the 2015 Annual General Meeting. The transaction is of a scale that was already contemplated when we evaluated the scope of the share buy-back programme.”

“The launch of the programme remains subject, as previously said, to the availability of excess capital, and any decision to launch it will also take into account other potential business opportunities meeting Swiss Re’s strategic and financial objectives and major loss events.”

Analysts at RBC Capital Markets noted that they have medium term confidence in the deal, adding that Admin Re acquisitions have not always produced the returns that the company had expected. However, many of those deals took place prior to the financial crisis when interest rates were higher, the analysts noted.

RBC analysts also said they feel the deal is good value for Swiss Re and should produce at least an ROE of 11% on a standalone basis. They also expect the buyback will take place, adding that the main obstacle that the buyback faces is a catastrophe event such as an Atlantic hurricane.

Admin Re is expected to generate around $1.7 billion of gross cash, including capital synergies, over the first three years of the deal. At the same time, the Guardian acquisition boosts the assets under management of the Swiss Re Group, which grow by GBP£12.5 billion, or approximately 15%.

The acquired business is expected to be accretive to Swiss Re’s net income. But, under Swiss Re’s own economic value management (EVM) framework, the deal will result in an EVM loss of approximately USD 0.9 billion at inception it is expected. Over the longer term it will likely generate a positive contribution to EVM economic net worth over time, which the reinsurance firm says supports its focus on long-term value generation.

Bob Ratcliffe, CEO of Admin Re®, commented; “We’re very proud to be taking on Guardian’s policyholders and staff delivering the same seamless service that we bring to our current 3.4 million customers. Admin Re® has an expert team and the infrastructure in place to ensure we can bring the benefits of scale that make a closed life book consolidator successful. Admin Re® has a long track record of migrating life portfolios and maintaining a high level of customer service for policyholders. We expect that after this acquisition, we will continue to seek growth via other acquisition opportunities, developing further our leading consolidation franchise.”

By deploying excess capital from above its ROE target level of 11% Swiss Re can make use of a portion of its share of the capital that has been weighing on the reinsurance industry. The concerns about the buyback, to us, are less important than finding something profitable to do with capital in the currently challenged reinsurance marketplace.

Shareholders should look favourably on reinsurers that find avenues to deploy excess capital into new opportunities, such as this. Over the longer term, having a larger business, with more assets and more profit potential should be seen as more important than immediate capital return, in this current market environment, in our opinion.

Swiss Re reflects this when it said; “The acquisition will be financed from cash on the balance sheet as well as debt financing. Swiss Re believes that significant growth opportunities are still available as vendors seek to refocus on new products and release capital from legacy books.”

A growth opportunity that provides a book of life business that remains profitably, as well as which boosts the reinsurers assets under management by 15% is attractive right now. In fact the asset boost could be significant and this deal may prove to be as much about the float as the policies (on a profit basis).

Rather than returning even more cash, Swiss Re has found a way to give itself another opportunity to outperform, on both the return on underwritten business (if the book performs) and on the asset management side.

Putting excess capital to work in an initiative that could add incremental profit and ROE, in a market that remains depressed and where new opportunities are shrinking in some core areas of reinsurance, may prove to be much better for shareholders over the long-term, than a larger buyback.

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