Montpelier Re U.S. Holdings Ltd., a wholly-owned subsidiary of Montpelier Re Holdings Ltd. (MRH) has agreed to divest Montpelier U.S. Insurance Company (MUSIC) to Selective Insurance Group Inc. (SIGI) for a total consideration of $55 million. The transaction is expected to close in the fourth quarter of 2011 pending regulatory approvals.
The purchase consideration is based on the net asset value as on June 30, 2011 and includes tax benefit carry-forwards of approximately $3 million. The divestiture would also increase Montpelier’s book value per share.
MUSIC was acquired in November 2007 from GAINSCO Inc. MUSIC is the company’s U.S. excess and surplus lines insurance business. Montpelier, to focus more on its short tail reinsurance underwriting, has agreed to vend off MUSIC, which writes insurance risks that do not conform to normal underwriting patterns for standard lines. The divestiture will also help the company deploy capital for its Bermuda and London platforms.
MUSIC reported $48 million in gross written premiums in 2010 and $28.4 million in the first half of 2011. Per the agreement, Montpelier Reinsurance will retain all unearned premium reserves and all loss and loss expense reserve risk for any business written through closing.
On the flip side, the acquisition would help Selective to add new products to its portfolio of offering as well as enhance the scale of operations and geographic exposure. Oklahoma based MUSIC underwrites in 47 additional states and the District of Columbia.
Montpelier’s second quarter suffered largely due to catastrophe losses, resulting from tornado activity in the United States in April and May, lower investment income and higher operating expenses. However, favorable prior year loss reserve movements were a partial offset.
The Zacks Consensus Estimate for third-quarter 2011 is 36 cents per share. For full years 2011 and 2012, the Zacks Consensus Estimates are respectively, loss of 80 cents and earnings of $2.25 per share.
We retain an Underperform rating on Montpelier. The quantitative Zacks #5 Rank (short-term Strong Sell rating) for the company indicates downward pressure on the stock over the near term.
Headquartered in Branchville, New Jersey, Selective Insurance Group through its subsidiaries, provides property and casualty insurance products in the United States.
Headquartered in Pembroke, Bermuda, Montpelier, through its subsidiaries in the U.S., the U.K. and Switzerland, provides customized and innovative reinsurance and insurance solutions to the global market.
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SELECT INS GRP (SIGI): Free Stock Analysis Report
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