Gaining third-party capital unit positive for Endurance: Rating agencies

by Artemis on April 6, 2015

Rating agency opinions on the recently announced acquisition of Montpelier Re by Endurance Specialty Holdings make it clear that the addition of third-party reinsurance and ILS capital manager Blue Capital is considered positive for Endurance.

It’s also clear that the need to increase relevance with clients is driving the recent reinsurance M&A trend. Scale is one way to appear more relevant, being able to put out larger lines and be the lead market on reinsurance programmes is seen as key to long-term success in the market these days.

As well as scale, diversification and being able to offer clients and cedents choice and a range of solutions is also seen as key, something that the addition of a fully-collateralized balance-sheet thanks to Blue Capital Management will provide Endurance with.

The addition of new units to the Endurance stable, such as Blue Capital and Montpelier Re’s Lloyd’s operations are strategically important pieces of the deal, the rating agencies believe. Adding these new product offerings can only increase Endurance’s relevance in the eyes of major reinsurance buyers.

Standard & Poor’s affirmed Endurance’s ratings, saying; “The transaction will enhance the group’s distribution channel capabilities, including access to Lloyd’s of London and third-party alternative capital operation Blue Capital.”

S&P also raised Montpelier Re’s outlook to positive, reflecting its; “Expectation that Endurance will manage MRH’s book of business and operations in a highly integrated manner. We expect Endurance to assimilate MRH’s business within a relatively short time, and for MRH to benefit from a fully integrated staff, underwriting platform, and risk management capabilities.”

A fast and smooth integration will benefit Blue Capital and enable that business to operate alongside Endurance’s bigger balance-sheet as a result of the acquisition of Montpelier. That should open new opportunities for Blue Capital and its investors to access additional risks, perhaps providing an opportune time to look to raise more capital to take it beyond the $625m under management it has today.

A.M. Best notes the addition of new product lines as a positive for Endurance, saying; “The transaction will also provide some geographical and product diversification for Endurance with the addition of a Lloyd’s platform and the management of third party capital.”

However, A.M. Best is a little more tentative in its outlook and specifically highlights the need for relevance as key; “It remains uncertain if the combined entity will have the ability to transform itself into a well-diversified, global underwriter capable of generating sufficient long term benefits and the necessary relevance in an increasingly competitive reinsurance market, given that Montpelier was primarily focused on U.S. property catastrophe reinsurance business, which has been under the greatest pricing pressure.”

Moody’s Investors Service also cites the addition of Blue Capital as a positive for Endurance, expanding its product offering; “The strategic benefits would include a meaningful increase in the firm’s scale and market presence, the opportunity to accelerate its business objectives in specialty insurance by leveraging Montpelier Re’s Lloyd’s Market platform, and ownership of Blue Capital, Montpelier Re’s established alternative market and asset management platform that writes collateralized reinsurance and manages third-party capital.”

Moody’s notes the addition of Blue Capital as an “established third-party capital platform” and specifically highlights that along with the Lloyd’s operations this may help Endurance to increase its relevance.

“Given the competitive market conditions that currently exist in specialty insurance and reinsurance, we believe these attributes improve Endurance’s ability to maintain, and possibly increase, its relevance with clients and brokers in this challenging market cycle,” Moody’s explained.

Interestingly Moody’s also highlights Endurance’s ability to hold onto Montpelier Re’s clients as key. We would add to that the importance of holding onto Blue Capital’s third-party investors as also key.

However we do feel it likely that third-party investors in Blue Capital ILS funds and collateralized reinsurance vehicles will look positively on the potential of the acquisition by Endurance and the new opportunities it could bring to them in the future.

Embedding third-party reinsurance capital management within an insurance and reinsurance company with the increased scale of the resulting larger entity, should provide new access to risk, increase deal-flow and also potentially the ability to access more lines of business and larger deal sizes for the Blue Capital funds and vehicles.

Fitch Ratings takes a slightly different tack, focusing on Montpelier Re which it had lined up for a rating downgrade at some point over the next year due to the fact it is “relatively more exposed to the current difficult reinsurance market conditions.”

“Fitch views the transaction as an overall credit positive to MRH, as the purchase by ENH, a somewhat larger and more diversified company, would likely improve the competitive position of the combined organization. This includes benefits relating to diversification of earnings and business profile, as well as potential expense savings. In addition, a larger organization is under less pressure to retain business with less attractive terms under competitive market conditions,” the rating agency said.

Fitch has not at this time provided an opinion on the acquisition from Endurance’s side.

All four of the rating agencies highlight the clear integration and execution risks that any M&A deal raise. However, in this case the embedding of Montpelier Re within Endurance is not foreseen as the most complex of the deals currently on the table and may be a smooth running affair.

For Blue Capital Management itself, given the fact the unit underwrites its own business for its ILS funds and collateralized reinsurance vehicles, it should remain business as usual for the mid-year renewals, as the acquisition will not be completed until later in the year.

How quickly synergies can be realised once the deal is completed remains to be seen. If the deal completes in Q3 2015, as the companies said, it will mean Endurance entering the key January 2016 reinsurance renewals with a larger balance-sheet and a pool of third-party reinsurance capital to deploy as well.

That should position the reinsurer to manage its way through any ongoing challenges or softening. It should also give it an opportunity to put the third-party capital from Blue Capital funds and vehicles to work alongside its own balance-sheet, which could result in a greater selection of business for the Blue Capital underwriters and portfolio management team to select from.

Also read:

Endurance to buy Montpelier Re for $1.83B, to include Blue Capital.

Blue Capital to add capital flexibility, new income source for Endurance.

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