Montpelier Re Holdings Ltd. MRH will be acquired by Endurance Specialty Holdings Ltd. ENH in a cash-stock consideration of $1.83 billion. Following the closure of the deal, Montpelier will have a 32% equity stake in Endurance. Shares of Montpelier gained 0.8% in yesterday’s trading session to close at $38.44.
Though the boards of directors of both companies gave their nod to the merger, it is still pending approvals of both companies’ shareholders, regulatory consent and other closing conditions. The transaction is expected to be sealed in the third quarter of this year.
The Purchase Consideration
The $1.83 billion purchase consideration, which translates to $40.24 per Montpelier common share, consists of 0.472 shares of Endurance and $9.89 in cash for each Montpelier common share, based on Endurance’s closing price on Mar 30, 2015. While the cash portion totals $450 million, about $1.4 billion will be in common share or 21.5 million Endurance shares.
The cash portion of the transaction will be funded through dividend paid by Montpelier to its common shareholders.
Rationale of the Merger
With the merger, Montpelier brings along its solid property catastrophe business that complements Endurance’s reinsurance portfolio. Hence, the acquirer will enjoy the benefit of scale and market presence. Additionally, the merger leverages Endurance’s position in the Lloyd’s platform.
Notably, the Lloyd’s platform has been attracting insurers lately. This is likely due to heightened competition and stressed reinsurance pricing. In January, XL Group plc XL inked a deal to buy Catlin Group Limited (CGL.L) CLNGF which boasts a leading presence in the Lloyd’s platform.
The merger also exposes Endurance to the business of managing insurance and reinsurance investment products for third-party capital investors.
On the flip side, Montpelier shareholders will receive cash and have an equity interest in the combined entity with better scale, increased market presence and substantial product and geographic diversity.
With respect to financials, Endurance estimates cost savings of over $60 million annually. The acquisition is expected to be accretive to earnings per share and return on equity (excluding non-recurring integration and transaction cost) immediately. Endurance also expects capital efficiencies from this buyout. Total cash and invested assets will increase to $9.3 billion from $6.7 billion, shareholders’ equity will increase to $4.1 billion from $2.8 billion and total capital will increase to $5.5 billion from $3.7 billion.
Both Endurance and Montpelier currently carry a Zacks Rank #3 (Hold). With optimism over the merger, we expect analysts to pull up their estimates exerting upward pressure on the Zacks Rank.
A.M. Best Gives Thumbs Up
A.M. Best stated that the issuer credit ratings (ICR) of “bbb” and debt ratings of Endurance along with financial strength rating (FSR) of A (Excellent) and ICR of “a” of Endurance Specialty Insurance Ltd. and its affiliates will not change following the merger announcement.
Concurrently, the ICR of “bbb” and debt ratings of Montpelier Re along with FSR of A (Excellent) and ICR of “a” of Montpelier Reinsurance Ltd will stay intact.
Wave of Insurance Consolidations
Acquisitions are a well-accepted strategy for growth among insurers. Recently, Allied World Assurance Company Holdings, AG AWH closed the buyout of Hong Kong and Singapore operations of Royal & Sun Alliance Insurance plc to penetrate into the Asian markets.
Last month, RenaissanceRe Holdings Ltd. RNR closed the buyout of Platinum Underwriters Holdings, Ltd.
In January, PartnerRe Ltd. PRE and AXIS Capital Holdings Ltd. AXS announced their intention to unite in a stock swap merger to be among the top-five global reinsurers in terms of premiums. XL Group agreed to buy Catlin Group for about $4.1 billion eyeing the premier position in global specialty insurance and reinsurance markets.
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