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WINTERTHUR, Switzerland-Multinational corporations seeking one-stop shopping to meet their insurance and financial needs will have expanded options if the $9.5 billion merger of two Swiss financial giants, Winterthur Insurance Co. and Credit Suisse Group, is approved by shareholders and regulators.

Commercial clients might see new alternative risk transfer programs and further development of employee benefits products as a result of this insurance-banking union. That potential is part of a larger strategic wish list that directors of the two companies introduced to a generally skeptical media and stock market in Europe.

Some analysts, in fact, speculate that the merger may never get off the ground.

"I don't think it will be easy to get a two-thirds majority of the shareholders after the stock price fell 10%. This reaction will make it difficult for further mergers between banks and insurance companies," said Franco Catanzaro, banking analyst at Bank Sarasin in Basel, Switzerland.

The Swiss market has become wary of mergers in the financial sector, which have been costly and have taken many years to implement, at a low return to investors, according to Mr. Catanzaro. One example has been the takeover by Credit Suisse of Bank Leu which required "many years of restructuring" he said.

Winterthur, Credit Suisse and the Swiss Reinsurance Co. have been cooperating since 1995 on various insurance/banking products for large corporate clients and personal lines customers. Swiss Re recently confirmed that it held 5% of Winterthur, while Credit Suisse CEO Lukas Muhlemann said last week that Credit Suisse holds 10% of Swiss Re.

When the merger was announced on Aug. 11, stock market analysts interpreted it as the culmination of a five-year fight against Winterthur by activist shareholder Martin Ebner, a well-known Swiss corporate financier and head of the Zurich-based investment group, BZ Group.

"They (Winterthur) were afraid of a predator. There was no guarantee that they would remain independent, so they turned to their closest ally," said Michael Lindsay, insurance analyst at the London office of investment bank Lehman Brothers.

BZ Group and its closest clients held a total of 30% in Winterthur prior to the merger announcement. The weekend before the merger was announced, Mr. Ebner had sent Winterthur shareholders a letter detailing three proposed options for the insurer's future: the BZ group could take majority control of Winterthur; Credit Suisse could take it over; or a foreign insurer could take it over. In response, Credit Suisse and Winterthur accelerated their merger plans.

According to a joint statement by the two companies, based on first-half 1997 results, the merged entity would have a consolidated shareholders equity of 23 billion Swiss francs ($15.16 billion), total assets of about 700 billion Swiss francs ($461.4 billion), assets under management of about 700 billion Swiss francs, and a market capitalization of more than 50 billion Swiss francs ($33 billion).

Winterthur Insurance Co. had non-life gross premiums of 15.45 billion Swiss francs ($11.47 billion) last year, life gross premium volume of 10.50 billion francs ($7.80 billion) and reinsurance premium volume of 2.14 billion francs ($1.59 billion).

Credit Suisse Life had a 1996 gross premium volume of 924.6 million francs ($686.4 million).

The merged company, which would serve more than 15 million customers worldwide, would be one of the top providers of comprehensive financial solutions for multinational corporations and the world's third-largest asset manager after Boston-based FMR Corp., better known as Fidelity Investments, and AXA-UAP.

Winterthur will become an independent operating company under Credit Suisse Group's existing holding structure. The other two operating companies will be the banks, Credit Suisse and Credit Suisse First Boston, the latter including the Credit Suisse asset management company.

During an Aug. 14 presentation to investment analysts in London, Winterthur and Credit Suisse executives explained that they had been considering closer collaboration for some time. Mr. Muhlemann and Thomas Wellauer, who will take over as Winterthur chief executive Oct. 1, said that ideally they would have preferred to wait another 12 months before announcing a merger, but recent events took the timing out of their control.

"Back in 1995 we decided that bancassurance (banking and insurance) was the way to go forward. Then we realized that a lot of things were more difficult if we had two groups of shareholders. We would have preferred to wait 12 months, and we would have moved to unite distribution systems in Switzerland and foreign markets and implement some joint ventures," said Mr. Wellauer.

Mr. Muhlemann explained that for banking and insurance to succeed, three conditions are necessary:

The parties should be committed to end all competitive conflicts in the organization. Thus the new group will combine their existing life insurance companies, Credit Suisse Life Insurance Co. and Winterthur Life Insurance Co., under the latter.

The parties must share a customer base.

The parties should not work in opposition to one other, such as fighting over the profit and loss statement in which a certain item will appear.

The sharing of customer bases will be an important factor in developing services for corporate clients, Mr. Wellauer believes. The new group is eager, for example, to combine the employee benefits services provided on the insurance side with the asset management strength on the banking side.

"We know the key to developing employee benefits globally is global asset management. We are a major asset manager," Mr. Wellauer said.

Existing cooperation agreements between the merged companies and Swiss Reinsurance Corp. also should be reinforced by the merger, according to Credit Suisse Financial Director Richard Thornburgh.

Winterthur International, which specializes in developing industry-specific solutions for multinationals in property, liability, accident, health and life insurance, and acts as a consultant in risk management, was established as an independent profit center in June. It will continue to work with Reinsurance Finance Co., a joint venture between Credit Suisse, Swiss Re and Winterthur for alternative risk transfer products, project finance, credit and bonding. Winterthur International generated 1996 gross premium volume of 1.11 billion Swiss francs ($824.1 million) of which 60% were non-life and 40% were life. The bank's derivatives unit, Credit Suisse Financial Products, a joint venture between Credit Suisse and Swiss Re, is expected to work more closely with Winterthur International.

This kind of specialized financial engineering is expected to be the real benefit for commercial clients of both the bank and insurer.

"These are the real benefits on the reinsurance side, to be able to develop finite risk reinsurance and derivatives. You put together banking and intellectual capital," says J.P. James, senior associate at Boston-based management consultants A.P. Kearney. "Smaller insurers do not understand these and cannot offer these to clients."

Mr. James does not believe that this service will make a large return relative to the total earnings of a group as large as Credit Suisse. "But you see this in terms of a long-term market. This is the future," he adds.

Further joint undertaking will include expanding life insurance and pensions in the growing Southern and Central European markets, as well as emerging markets such as China.

What has been obvious to Mr. James and major insurers has not always convinced Mr. Muhlemann. He has been famously skeptical about the European trend to merge banking and insurance. Earlier this year when asked if Credit Suisse would take over Winterthur, he referred to the two companies' existing cooperation agreements and asked: "Why buy a cow when you only need a glass of milk?"

After having his words thrown back at him when the merger was announced, Mr. Muhlemann told London analysts, "I've become used to answering questions on the dairy industry."

Mr. Muhlemann explained that the real architect behind the merger was Mr. Wellauer, who up to his designation as Winterthur CEO has been a director at management consultants McKinsey & Co. in Zurich. He has worked closely with Winterthur since 1992

"It took a while to convince me. We view this merger as a five-year commitment. It is not going to come overnight," Mr. Muhlemann added.

The merged entity would result in pretax cost savings of about 300 million to 350 million Swiss francs ($196.7 million to $229.4 million) over three years, the bulk of which will come from cost cuts within Switzerland, according to conservative estimates, says Mr. Wellauer. The employee count will be reduced by about 500, due to attrition rather than through layoffs, according to the two companies.

This figure has not impressed some analysts. "That is not enough," said Jean Christian Huard, insurance analyst at Paris-based Societe Generale Equities & Derivatives. All investors are wondering about the future structure of the group." Despite Mr. Muhlemann's past position as CEO of Swiss Re prior to joining Credit Suisse earlier this year, the capital markets do not see him as an insurance/reinsurance man but as an organizational expert who, like Mr. Wellauer, honed his skills at McKinsey.

"Mr. Muhlemann is a strategist. I hope he finds something more innovative" to do with the resources of the merger, says Mr. Huard.

But Mr. Muhlemann remains adamant about the success of the merger. "As a major shareholder, loaded up to here with stock options," he said, pointing to the top of his head, "I got excited and changed my mind about the cow."

If the companies had not merged and Winterthur was taken over by another company, the existing cooperation agreement with Credit Suisse would have ended. Information to shareholders provided by the companies states, "The existing cooperation agreement between Winterthur and Credit Suisse Group is governed by an umbrella agreement which includes a change of control clause, under which if one party were to come under substantial influence from a third party, the other party would have the right to terminate the cooperation agreement and be entitled to a lump-sum compensation in the amount of 300 million (Swiss francs) ($130.3 million)."

The future of Winterthur's operations in the United States is the subject of discussions between Credit Suisse Group and the Federal Reserve. Under current U.S. law, Credit Suisse will have to halt its banking operations or sell Winterthur's U.S. subsidiaries, which are: Uniguard Insurance Co., Republic Insurance Co., General Casualty Insurance Co., Southern Guaranty Insurance Co., and Blue Ridge Insurance Co. There are two U.S. reinsurers, Winterthur Reinsurance Corp. of America, based in New York, and Winterthur Life Reinsurance Corp. of America, based in Dallas.

Selling the insurance companies or getting out of banking in the United States are the two extreme solutions to this problem, says Mr. Muhlemann, "but there are several ways out of this." He expects the Federal Reserve to grant a grace period of between two and four years to sort out the situation.

Shareholders of the two companies will decide Sept. 5 how the merger will proceed. The deal also needs regulatory approval. The share price of Credit Suisse fell 10% to 186.25 francs ($122.8) in just four days following the merger announcement, reflecting the cool reaction to it in Europe.

"I think they (the Winterthur and Credit Suisse managements of the two companies) expected a boost and it has been a huge disappointment. They may now step back from the deal. There will be problems at the general meetings (of shareholders)," Mr. Catanzaro said. If the deal is approved, "I think in the long term the strategy might work out, but the synergies are very marginal."

If approved by at least a two-thirds majority of the voting rights at each meeting, Credit Suisse Group will make an exchange offer to Winterthur shareholders at a ratio of 1 to 7.3. Based on the closing price of Credit Suisse Group shares on Aug. 8, of 208.50 francs, ($138.11) the exchange ratio equates to 1,522 francs ($1,008.17) per Winterthur share.

Credit Suisse's offer was criticized in the Swiss media as expensive, given that the Winterthur share price has nearly doubled over the last six months due to the speculation about the merger. But some stock market analysts believe the deal is priced relatively low. "They haven't paid a takeover premium. People don't want to pay for good will anymore. That just happened in the 1980s," says Mr. Lindsay.

The amalgamation of the two companies is to be realized through an exchange offer mainly to save on legal costs and to avoid tax implications for private investors. At least 98% of Winterthur shares are required to be offered for exchange. If this percentage is not achieved, the merger will be effected at a slightly reduced, though unspecified, exchange ratio. It will be taxable but institutional investors will be able to claim back taxes paid to the Swiss government. The merger will be effective retroactively from July 1 and completed around the end of the year.

Standard & Poor's Corp. has reaffirmed its long- and short-term ratings for Winterthur and Credit Suisse. "While the stand-alone characteristics of Winterthur will not immediately improve following the merger, Winterthur will benefit from its affiliation with the Credit Suisse Group and there will be significant opportunities to realize financial and operational synergies," an S&P statement said.

Credit Suisse's profitability will remain robust "reflecting the group's strong international and domestic franchise and management's firm control on the bank's cost base," the statement said.

The merger has sparked off numerous rumors in Europe of further banking/insurance takeovers. Deutsche Bank recently refuted reports that it is interested in buying the French insurer Assurances Generales de France. But it does say it is searching for an insurance vehicle. Germany's Commerzbank, a partner in life insurer DBV Winterthur, which is 45% owned and controlled by the Swiss insurer, is also speculated by German analysts to be a takeover target.