Authors: Ross Larsen, Jan-Henrik Förster and Katherine Chiglinsky | December 21, 2015 |
Zurich Insurance Group AG agreed to buy a Wells Fargo & Co. crop-insurance business for as much as $1.05 billion as the Swiss company puts to work excess cash left over from a separate takeover bid that it abandoned this year.
The purchase or Rural Community Insurance Services, or RCIS, will giveZurich a 20 percent share of a highly regulated market guarding farmers against weather-related losses, Vontobel analyst Stefan Schuermann wrote in a note after the deal was announced Friday. It will provide about $1.6 billion in net earned premiums by 2017, adding 3.5 percent to Zurich’s top line, he wrote.
Zurich joins HCC Insurance Holdings Inc. and Maurice “Hank” Greenberg’s Starr Cos. in expanding into crop coverage to bet on long-term growth in food demand and benefit from government subsidies that help absorb losses. HCC agreed last year to buy Producers Ag Insurance Group from CUNA Mutual Group, while Farmers Mutual Hail Insurance Co. of Iowa reached a deal to buy Deere & Co.’s crop-insurance unit.
“The acquisition of RCIS will increase risk diversity of our general insurance business by leveraging the crop exposure, which has low correlation to the rest of our book,” Kristof Terryn, chief executive officer of Zurich’s general insurance business, said in a statement. Zurich is one of the largest providers of business coverage in the U.S. and has exposure to the home and auto markets though its management relationship with Farmers Insurance.
Zurich, which already provided reinsurance to RCIS, will pay Wells Fargo $675 million plus the amount of excess capital in the unit when the deal closes, estimated at as much as $375 million, according to statements from the companies. The insurers’ annual operating results are “not material” to the bank and the transaction is expected to be completed by the end of the first quarter, San Francisco-based Wells Fargo said.
Wells Fargo, the largest U.S. bank by market value, has focused on boosting commercial-lending and wealth-management units, while paring some insurance operations. The lender has been adding wealth advisers from Credit Suisse Group AG and agreed this year to acquire most of General Electric Co.’s railcar- and locomotive-leasing unit. Insurer AmTrust Financial Services Inc. reached a deal in May to buy a Wells Fargo business that provides vehicle service contracts. “The sale of our long-standing crop insurance business allows us to focus on and strengthen our distribution businesses, which account for approximately two-thirds of our insurance revenue,” Laura Schupbach, head of Wells Fargo Insurance, said in the statement.
Zurich had about $3 billion of excess cash on its books after it abandoned its takeover of RSA Insurance Group Plc in September. The company has said the capital will be invested in the business or returned to shareholders by the end of 2016. Switzerland’s biggest insurer is searching for a CEO after Martin Senn resigned Dec. 1 and Chairman Tom de Swaan was named as interim chief.
“There is no reason to wait for deploying the capital,” said Zurich Insurance spokesman Pavel Osipyants. “The decision to deploy the capital was made earlier.”
Wells Fargo, the largest U.S. bank by market value, said in August that it was looking into “strategic options” for the insurance unit. The business’s net loss widened to $7.98 million in the first six months of this year from $3.24 million for the same period in 2014, according to a regulatory filing.
Evan Greenberg’s Ace Ltd. and RCIS have been the largest U.S. crop insurers in recent years. Starr, led by Evan’s his father Hank Greenberg, won approval in 2013 to participate in the government’s crop insurance program from the U.S. Department of Agriculture.