In an effort to rebound from losses tied to home and auto sales, GMAC Inc., the Detroit lender that was given two government bailouts, is selling its U.S. property-casualty insurance company to American Capital Acquisition Corp. This move was undertaken by the company on Oct. 19 and expected to close in the first quarter of 2010. Out of the last eight quarters, GMAC- historically tied to General Motors – reported losses in seven of them, prompting the deal. It will include GMAC’s operations involving car insurance, and the insurance of commercial fleets and recreational vehicles. American Capital’s acquisition is being funded in part by a 25 percent investment, valued initially at $42.5 million over three years, by AmTrust Financial Services Inc. This corporation focuses on casualty-insurance and specialty-property products, such as workers’ compensation, commercial automobile and general liability, warranty coverage and extended service.
According to the National Association of Insurance Commissioners, GMAC ranked 19th in the U.S. in car insurance sales last year, posting more than $1.3 billion. However, the company reported a pretax loss of nearly $476 million in the three months of this year, ending on June 30. Insurance had earned the company $459 million in both 2007 and 2008. “The consumer property-casualty (insurance) segment isn’t a core-business for GMAC,” Gimme Credit analyst Kathleen Shanley said. “Its resources at this point are better directed to strengthening the balance sheet and the core auto finance franchise.”
In 2008, Cerberus Capital Management LP took control of the insurance group and became the majority owner of GMAC in order to isolate mortgage losses and corporate credit card glitches in the company. Providing financing for General Motors Co. customers and Chrysler Group LLC, Washington committed a total of $13.5 billion into GMAC earlier this year, seeing the loan as critical to the survival of the U.S. car industry. According to the GMAC, the government currently controls 35.4 percent stake in the company. “This is part of our effort to refocus on strategic operations and restore financial performance,” Chris McNamee, a spokesperson for GMAC, said. “Our deal-related insurance business, which includes extended service contracts and insurance for auto dealer inventories, does remain a key strategic component of our platform.”
With the acquisition, Amtrust has the ability to sell its own products from 10,500 agents at the GMAC unit. The company statement expressed that they expect “substantial fee income.” What this sell-off of property-casualty insurance will do for GMAC is give the company additional capital, although proceeds from the sale will most likely be small, according to Mirko Mikelic. “It was one of the businesses that was just hanging in there,” he said.
