Morning Star

CHICAGO -(Dow Jones)- In the end, General Electric Corp.'s (GE) Insurance Solutions business had to go because it just couldn't be made to fit into the Fairfield, Conn., company's strict Six Sigma discipline, which prizes steady results and rigid discipline.

But even as GE turns out the lights on its insurance venture, others are clamoring to get into the business, anticipating sharply higher rates for next year, as demand for reinsurance surges.

Robert Hartwig, chief economist of the Insurance Information Institute, said in an interview that at least eight new reinsurers had formed since Hurricane Katrina hit in August, primarily to capitalize on rising insurance rates for insurance policies set to begin next year. The hardening of reinsurance pricing may have helped GE get a price it was willing to take for the unit, after years of apparently failing to reach a satisfactory deal. "This is viewed as a propitious moment to expand in the reinsurance world," Hartwig said.

The volatility of a business that may turn a big profit one year, followed by a year with billions in claims, went head to head with a corporate culture at GE that prized steady returns.

"I think the property/casualty insurance and reinsurance sector in it is inherently volatile - you need look no further than 2001, last year and this year to see the volatility," said Donald Light, senior insurance analyst at research firm Celent. "GE built a corporate culture under [former CEO Jack] Welch of highly predictable results."

When GE announced Friday that it had agreed to sell most of its Insurance Solutions business to the second largest reinsurance company, Swiss Reinsurance Co. (RUKN.VX) for $8.5 billion, the company pointed to the insurance business's "tough strategic fit." with GE.

GE's insurance business lost $700 million over the last five years and required a $3.2 billion cash infusion. "By its nature, reinsurance is volatile and consumes capital to grow," said GE Chairman and CEO Jeff Immelt in a press release. "The terms of this transaction provide compelling value for our shareowners as well as more certainty and greater earnings consistency in the future."

GE is an ardent practitioner of Six Sigma management techniques, Light said. On the company's Web site, it describes the central idea behind Six Sigma as "if you can measure how many 'defects' you have in a process, you can systematically figure out how to eliminate them and get as close to 'zero defects' as possible."

Light said the company ran into trouble trying to apply that rigorous management methodology to insurance, and reinsurance in particular. "Terrorist attacks don't respond to a Six Sigma process," he said.

GE first soured on the insurance business after the 9/11 terrorist attacks, but was hampered in its plans to sell by a troubled reinsurance industry that saw big losses in the past few years.

Years before, Jack Welch built the reinsurance business with a serious of billion-dollar acquisitions, starting with a $1.1 billion buy of Employers Re in 1984. It was Welch's first over-$1 billion acquisition. The purchase of Frankona Re in 1995, reportedly for approximately $1 billion, gave the company global scale. In 1998 it bought the Medical Protective Co. from the family that owned the company. But in the wake of the 9/11 attacks, it has been selling off its business. Most recently, it sold its Medical Protective Corp. unit to Berkshire Hathaway Inc. (BRKA) for $825 million.

Hartwig estimates the deal will propel Swiss Re to the top position in reinsurance with 20.4% of the global market share in terms of global net premiums written, ahead of Munich Re, which has 17.3% of the market, by Hartwig's estimation. But "I don't think this ushers in a wave of consolidation, " he said. "In fact, we may see more new reinsurers be formed in the wake of what is generally viewed as a tightening reinsurance market, so demand is up for reinsurance while the supply is down, so prices will rise."

The book value of the Insurance Solutions business being sold is about $11.1 billion, a GE spokesman said, and Swiss Re will pay $8.5 billion including debt assumption. The difference in the value and the price includes the loss to GE, some goodwill and taxes.