Swiss Re’s planned initial public offering (IPO) of its UK closed book business, ReAssure, is expected to result in a number of benefits for the reinsurer, according to analysts at JP Morgan.
Swiss Re has stated that it intends to reduce its stake in ReAssure to below 50% this year to reduce its exposure to UK credit risk, which consumes a disproportionate level of capital under Swiss Solvency Test (SST) regulations.
The most obvious benefit of the IPO, according to JP Morgan, is that a deal would “crystalise some of the value in the Swiss Re sum-of-the-parts,” which analysts believe is implicitly discounted by the market.
This is because Swiss Re’s earlier transaction with Japanese insurer MS&AS, which acquired 25% of ReAssure in 2017 at an implied value of £3.15 billion, has established a floor price for a sale.
JP Morgan believes that it is unlikely analysts would ascribe a lower value to ReAssure, but given that Swiss Re trades at a discount to our SOTP, actions that remove a possible source of this discount may be rewarded by the market.
By reducing its stake in ReAssure, Swiss Re will also benefit from removing a unit that contributes a disproportionate level of financial market risk, JP Morgan noted.
As a UK closed life consolidator, ReAssure has a disproportionate level of credit risk relative to the wider group. Once removed, the remaining group will have relatively low credit exposure, at 28% of assets under management, compared with an insurance sector average of 32%.
Rebalancing could increase net income by 5%, and analysts believe Swiss Re could add modest risk to this portfolio following a ReAssure sale, with potential uplift to net income estimated at between $49 million to $139 million, JP Morgan said.
Swiss Re appointed Mark Hodges to lead ReAssure into its planned IPO as Chief Executive Officer (CEO), and recently added Archie Kane as the non-executive Chairman of the Board of Directors of ReAssure.
The reinsurer took an £800 million investment into ReAssure from MS&AD Insurance Group Holdings Inc in October 2017, followed by a further investment of £505 million at the start of 2018, and an additional £315 million towards the end of last year.
However, industry reports in early 2019 have said that specialist insurance firm Rothesay Life is reportedly planning a £3.5 billion acquisition of ReAssure, potentially disrupting its IPO plans.
