The market and media were awash with rumours about investment bank Goldman Sachs planning to sell a majority stake in its reinsurance interests yesterday, rumours which were then confirmed by Goldman Sachs itself in its Q4 earnings call later in the day. Net revenue from Goldman Sachs Reinsurance Group was $1.08 billion in 2012, $317m in Q4 alone, so why would the bank sell such a valuable unit at a time when reinsurance as an asset class is commanding so much attention?
According to the investment bank the reason it is looking into ways to offload a majority stake in its reinsurance operations is the Basel III capital rules. Harvey M. Schwartz, Global Co-Head of The Securities Division at Goldman Sachs, said on the earnings call; “As we gain greater clarity on regulatory changes, particularly capital requirements, we will respond accordingly. For example, given the Basel III capital changes that we incur as an owner of our own reinsurance business, we are considering a potential sale of the majority stake in the business.” The Basel III capital rules include provisions which can give regulators the power to force banks to exit non-core businesses.
The potential sale has generated a significant amount of interest in the press, as does any news regarding Goldman Sachs. It’s worth considering how Goldman might approach the sale of a majority interest in their reinsurance business and whether it presents any opportunities.
The reinsurance segment contributed approximately 13% of Goldman Sachs equity revenue in 2012, so it is a meaningful part of its business. It’s also a part of the Goldman business which had been growing, back in March Goldman Sachs bought Bermudian insurance and reinsurance business Ariel Holdings, to add to their property casualty and life and annuity reinsurance operations. A number of sources we spoke with yesterday were unsure why Goldman Sachs would sell the reinsurance business, a conundrum clarified by their earnings call when they mentioned Basel III. That makes sense as a reason to sell, but will they sell to an existing insurance or reinsurance operation, private equity investors or someone else?
There is a chance that Goldman Sachs may use this sale as an opportunity to secure itself an interest in the collateralized reinsurance sector. Were the bank to sell the majority stake to a hedge fund, group of investors or to spin it off to a fund manager backed by capital market investors, it would give it a small but valuable stake in a collateralized reinsurance vehicle. This would allow Goldman to continue to profit from its share of the premiums, while also offering a great opportunity for a hedge fund or syndicate of investors to gain an established foothold in the reinsurance market at a time when reinsurance-linked investment is a hot opportunity.
Schwartz wouldn’t be drawn on the reasons for the sale of the majority of the reinsurance business, so we can only speculate. He said; “Now of course, over time, as businesses like the reinsurance business are maybe better held in other people’s hands and we can be a minority owner because of capital reasons, then we’ll make those decisions.”
Of course it could simply be sold to another re/insurance firm, with Goldman keeping a minor stake. But we think it might make more sense right now if Goldman Sachs lined up a selection of its institutional investor clients who have reinsurance market aspirations to take over on a collateralized basis, enabling the bank to keep up with the changing face of third-party capital in the convergence reinsurance space.
Update: The Insider has said this morning that it has received confidential documents about the sale which show that Goldman Sachs already has commitments from prospective investors for over $600m of the reinsurance platform, so it looks as if this deal will be sealed pretty quickly.
We’ll update you as and when more information becomes available.