Schroders Paris Trip

As Frances AGF reviews the future of its reinsurance business, the UKs Schroders is

well placed to take advantage, Peter Shearlock reports.

Insurers are quitting capital-intensive and competitive reinsurance market in favour of devoting the efforts to business of building distribution.

Of all the investment banks now targeting Frances booming M & A market, none has made a bigger effort in the past year than Schroders. Its Paris office has poached several M & A specialists from the opposition and it has supported them in the financial sector with the development of a financial institutions group run from London by Robert Hingley.

 

All of which was sorely needed, for Schroders fell out of THE BANKERs league tables for the top 10 cross-border and international M & A advisers for the first time last year, The bank has some catching up to do. But at least it appears to be getting something back on its outlay.

In January, Assurances Generales de France (AGF), the big insurance group, announced it had appointed Schroders to review the future of its 47 per cent stake in Societe Annonyme francase de Reassurance (SAFR), a broadly based reinsurance company. Athena, the French insurer controlled by the Paris bank, worms et Cie, held a further 10 per cent of SAFR and said it too was joining in the review.

The move was not a surprise. AGF made it plain at its privatisation last May that reinsurance was not a core business, and it had sold its 10 per cent stake in reinsurer Scor on the stock market only last August.

Increasingly, insurers are quitting the capital-intensive and competitive reinsurance market in favour of devoting their efforts to the business of building distribution. Even so, one function of the announcement was to concentrate the minds of Europes leading reinsurance groups-anyone of which could have been a potential buyer of SAFR.

A month ago, Swiss Re-already a minority shareholder in SAFR - popped up as buyer of both the AGF and Athena shareholdings and launched an offer at the same price for the outstanding minority. Including a special dividend to shareholders, the deal values SAFR at FF 1,500 a share - or close on $950 million. The price equates to about 1.3 times book value.

That compares with the 1.4 times book Swiss Re paid for Britains Mercantile & General last year and prices as high as three times book achieved in recent US mega-deals. However, for most of last year, SAFRs shares were trading at between FF 800 and FF 850, so AGF and Athena do not appear to have lost out.

Once the takeover is complete, Swiss Re - which is being advised by Credit Suisse First Boston - is to resell SAFR to the Bermuda-based Partner Re, a specialist catastrophe reinsurer in which it holds an 11 per cent stake. Partner R, which called in Morgan Stanley to advise it, has said the deal will be for a mixture of cash and hares and struck in such a way that it limits Swiss Res ultimate shareholding to 27 per cent.

For Schroders, the deal at least suggests it got its recruitment right last year. The two who have been most closely involved in the deal are Guillame de Saint-Seine, who joined from Indosuez in May, 1996, and Mard Vincent, who came from CSFB in September. Both have worked in the sector and known AGF for some time.

One of the last deals Saint-Seine worked on at Indozuez was AGFs multi-stage takeover of Camat, a French-listed subsidiary of the Italian group, Istituto Nationale delle Assicurazoni(INA), which specialised in marine and transport insurance. AGF first contributed a business to Camat, then bought out part of INAs shareholding and finished by buying out the minority. Vincent was part of the CSFB team that advised AGF on its privatisation a year ago.

The two took some ideas to AGF late last year and the firm was hired in December. The range of options for the SAFR stake were a trade sale, disposal by way of a secondary offering (which had been the option chosen by UAP in disposing of its 30 per cent holding in Scor) or moves to find a partner for the company. Given Swiss Res 22 per cent holding in SAFR, the Swiss reinsurance giant was the obvious buyer if route one was chosen.

The outcome was what Saint-Seine describes as a pre-emptive offer from the Swiss. The deal was agreed within six weeks of the January announcement. Saint-Seine says Schroders did not conduct an auction as such, although we had a number of marks of interest from other companies. Among those believed to have shown interest are Munich Re, Hanover Re and Scor.

CSFB Mark Davison says: Our strategy was to exploit the fact that we knew the company and, with our size, were in a position to put cash on the table quickly to pre-empt an auction process.

A shareholder in SAFR of more than 50 years standing, Swiss Re was able to complete the deal without seeking additional representations and warranties. And that is rare, comments Saint-Seine. Paribas is to provide a fairness opinion for the SAFE board.

As part of the deal, AGF is buying back a 14 per cent stake held by SAFR in the credit insurer, Euler. AGF already controls Euler, which, formerly known as SFAC, took over Britains Trade Indemnity. Swiss Re has a 20 per cent stake in Euler - which it will retain.

For Swiss Re, the deal provides an elegant solution to what had threatened to become a knotty problem. As a long-standing shareholder, Swiss Re was clearly not keen to see the business sold off to competitors. However, as one of the leading playing in the French reinsurance market, it risked becoming too big for its own good.

Had it taken over and retained SAFR, it would have found itself the dominant force in the marketplace. And that might well have encouraged some of its clients to take business away and spread it around the competition. It could have ended up where it started - but minus the outlay on SAFR. Hence one explanation for the deal to sell SAFR on to associate Partner Re.

But the move also makes a lot of sense for the Bermudian company, which apparently took the idea to Swiss Re in the first place. As a catastrophe (or Cat) reinsurance specialist, Partner Re finds itself stuck in a market where rates have softened markedly in recent times.

With a lot of excess capital, there was a good case for diversifying into other markets. SAFR represented one of the last high-quality reinsurers partner Re was likely to be able to acquire. The deal amounts to something of a quantum leap for Partner Re, which wrote net premiums of just $231 million in 1995 compared with SAFRs $692 million.

The fine print of the deal between Swiss Re and Partner Re was still being decided when THE BANKER went to press. Prior to the deal, Swiss Re held 11 per cent of the Bermudian reinsurer, a stake that could rise to 19 per cent if it were to exercise a holding of warrants in Partner Re. The proposed 27 per cent ceiling on Swiss Res holding after the deal is calculated on a fully diluted basis and assumes those warrants are exercised.

The deal is just one in a long line since Swiss Re sold off its European direct insurance businesses to Germanys Allianz in 1995 in a bundled transaction worth close on $5 billion. Those deals were complicated by antitrust considerations and took an age going through the approvals process in both Germany and Brussels. Since then, the Swiss company has been concentrating on adding mass as a reinsurance specialist, trying to keep pace with its big US competitors, Employers Re and General Re/National Re, and with European giant Munich Re - which came out of its shell last year to buy American Re for $3.3 billion.

Reinsurance is an area where size increasingly matters: rates have been falling consistently and scale economies are now the key to competitiveness. Swiss Re showed that it was not be outdone by Munich Re when it bought Mercantile & General Re from Britains prudential Corporation for around $2.7 billion last year, a deal which allowed it to leapfrog Munich Re in the health and life reinsurance markets and materially strengthened its position in the US where it was in danger of losing ground. A couple of months back it announced the acquisition of Italys leading reinsurer, Unione di Riassicurazione (Uniorias), from INA. The deal is still being perused by Brussels. That deal, which was complicated by the demerger of all Uniorias real estate and

non-Italian subsidiaries, was financed by CSFB, which has been a regular adviser of Swiss Re throughout - though for the M & G deal the Swiss company appointed Morgan Stanley as its lead adviser.

CSFBs parent, CS Holding has long been close to the Swiss reinsurer. Two years back, the two companies tightened the knot when Swiss Re (still a triple-A rated insurer) bought 20 per cent of Credit Suisse Financial Products, the derivatives business, and CS Holding upped its stake in Swiss Re from 5 per cent to 9 per cent.

(The Banker.)