GMAC Will Sell Property-Casualty Insurance Business (Update2)
GMAC Inc., the lender that received two U.S. bailouts, will sell its property-casualty insurance business to American Capital Acquisition Corp. after posting losses in seven of the past eight quarters.
The deal includes GMAC’s U.S. consumer operations insuring cars, commercial fleets and recreational vehicles, the company said in a regulatory filing today; terms weren’t disclosed. AmTrust Financial Services Inc., a New York-based insurer, said separately it will invest $42.5 million in American Capital, which doubles its sales force with the acquisition.
GMAC is selling insurance units as it tries to rebound from losses tied to home and auto loans. The Detroit-based lender reached a deal in November to sell a reinsurance business and two insurance units to Maiden Holdings Ltd.
“This is getting them additional capital,” said Mirko Mikelic, who helps oversee $19 billion at Fifth Third Asset Management in Grand Rapids, Michigan. Proceeds from the sale are likely to be relatively small, he said. “It was one of the businesses that was just hanging in there.”
The acquisition gives AmTrust the chance to sell its own products through 10,500 agents at the GMAC unit, AmTrust said in its statement, adding that it expects “substantial fee income.” The firm, run by Chief Executive Officer Barry D. Zyskind, earned $82.9 million last year on revenue of $573.7 million.
More Fees, Bigger Staff
“We saw this as a great opportunity,” said Hilly Gross, AmTrust’s vice president of investor relations. “The fees alone are going to make this immediately accretive. Overnight it doubled our sales force.” Current management will stay and “at present time, a substantial majority” of the workforce will remain, Gross said.
GMAC reported a pretax loss of about $476 million in the three months ended June 30 from insurance, which included a $607 million writedown of the business. Insurance earned $459 million in both 2008 and 2007. The company posted more than $1.3 billion in sales last year in auto insurance, ranking 19th in the U.S., according to the National Association of Insurance Commissioners.
“The consumer property-casualty segment isn’t a core business for GMAC,” Gimme Credit analyst Kathleen Shanley said in an e-mail. “Its resources at this point are better directed to strengthening the balance sheet and the core auto finance franchise.”
GMAC’s Focus
GMAC provides financing for customers of General Motors Co., its former parent, and Chrysler Group LLC. The U.S. pumped $13.5 billion into GMAC after deciding the lender was crucial to the survival of the nation’s auto industry. The government now controls a 35.4 percent stake in GMAC, according to the company.
“This is part of our effort to refocus our resources on strategic operations and restore financial performance,” said Chris McNamee, a spokesman for GMAC, in an interview. “Our dealer-related insurance business, which includes extended service contracts and insurance for auto dealer inventories, does remain a key strategic component of our platform.”
Last year, control of the insurance group was transferred to Cerberus Capital Management LP, then the majority owner of GMAC, to insulate the company from mortgage losses and corporate credit problems. Cerberus bought a controlling interest in GMAC from GM in November 2006.
Bump in the Road
U.S. car insurers may post their first underwriting loss since 2002 as carriers hold back on price increases to win clients, Fitch Ratings said in a report this month.
“Heightened market competition has weakened pricing over the last several years, leading to a gradual deterioration of results and a strong likelihood for a return to an underwriting loss,” Gretchen Roetzer, a Fitch analyst, said in the report.
The purchase will be completed in the first quarter of 2010, AmTrust said. GMAC stock isn’t traded publicly; AmTrust rose 30 cents to $12.07 at 12:46 p.m. in New York on the Nasdaq Stock Market, leaving the shares up 4.1 percent this year.
