Ariel Re parent company Goldman Sachs to sell off reinsurance business
Bermuda-based Ariel Re’s parent company, Goldman Sachs, has been at the centre of much speculation this week amid rumours the investment bank is planning to sell off a majority stake in its reinsurance business.
The rumours stemmed from a report first published in
The Insurance Insider. Wondering what that would mean for Ariel Re employees here in Bermuda,
The Royal Gazette attempted to confirm the rumours with Goldman Sachs earlier this week, but a spokeswoman for the firm said it was “premature” to comment.
But during the firm’s earnings call Wednesday night, incoming chief financial officer Harvey Schwartz confirmed the news saying the move is all in preparation for new regulations requiring banks to hold more capital.
“Given the Basel III capital changes that we incur as owner of our own reinsurance business, we are considering a potential sale of a majority stake in the business,” Mr Schwartz said on the call.
Basel III rules were created by regulators in the wake of the 2007-2009 financial crisis in an effort to make the global banking system more resilient. Under the proposed rules by the US Federal Reserve, the Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the Currency (OCC), the biggest banks would have to hold the most capital. The rules are forcing banks to look to sell businesses they see as non-core to meet those new capital requirements.
Goldman Sachs generates the most revenue from equity trading of any bank in the world.
Its equities division generated about $2 billion more than its closest competitor in the first nine months of the year. $1.08 billion of that revenue comes from its reinsurance business.
The unit produced $1.078 billion of net revenue in 2012, including $317 million in the fourth quarter alone. That’s up from $880 million in 2011, including $158 million in the fourth quarter of 2011.
The reinsurance segment, a part of the firm’s securities division, contributed approximately 13 percent of Goldman Sachs’ equity revenue last year — a significant part of its business. It’s also a part of Goldman’s business, which has been growing.
Goldman Sachs Reinsurance Group has a global property and casualty reinsurance business as well as a life and annuity reinsurance operations primarily in the US. Now the company is said to be selling off 75 percent of the $1.4 billion reinsurance group
The move to sell control of the unit, which generates a steady stream of fees, comes less than a year after Goldman, the fifth largest bank in the US by assets, bought Ariel Re’s Bermuda-based insurance and reinsurance operations last April to expand property and casualty coverage.
At the time of the sale, Ariel Re Bermuda had 61 employees, 42 of whom are Bermudian or spouses of Bermudians. None were said to be in danger of losing their jobs due to the sale. When asked how this latest sale might affect employees here, a spokeswoman for Goldman Sachs declined to comment.
It is also unclear at this time is who Goldman will sell to — whether to an existing insurance and/or reinsurance operation, private equity investors or someone else.
There is speculation the firm may be using the sale as an opportunity to get into the collateralised reinsurance sector, something that started as a trend, but is quickly becoming a more permanent feature of the reinsurance market.
The bank could sell the majority stake to a hedge fund, group of investors or create a fund backed by capital market investors allowing them to raise capital it can use to underwriting more catastrophe risk business and then split the premiums they earn with investors.
Mr Schwartz gave no indication if this might be the plan or if they intend to sell to another re/insurance firm, but said, “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.”
Published reports late yesterday indicate that Goldman Sachs has already received letters of intent from prospective investors that exceed $600 million of the reinsurance platform, so this could be a fast-moving deal.