Not strictly on-topic for Artemis, but no doubt of great interest to our readers, major buy-outs and mergers in the reinsurance sector are big news as they allow for the movement of capital around the sector and are the end-goal of many investors who commit capital to the reinsurance space. So the news today that the boards of Validus Holdings and Flagstone Re have approved a merger agreement that will see Validus purchase all the issued and outstanding shares of Flagstone is significant.
Under the terms of the merger agreement, Flagstone Re shareholders will receive 0.1935 Validus Holdings voting common shares and $2.00 in cash for each Flagstone Re share they hold. The transaction pays Flagstone Re shareholders a decent premium on their equity investment in the reinsurer. Each shareholder will make a 19.4% premium and $8.43 of value per share based on the closing share price for each of the companies as of yesterday. The merger agreement represents an aggregate equity value of $623.2m for Flagstone Re.
The merger should go through in the fourth quarter of 2012 and the merged company will operate under the Validus name. Approval is required from Flagstone Re’s shareholders, although that is likely to be a formality given the premium each will make on their investment. Validus has already sought and received approval from investment funds associated with Lightyear Capital and Trilantic Capital Partners which own around 22.5% of Flagstone Re equity.
Ed Noonan, Validus’ Chairman and Chief Executive Officer, stated; “This is a compelling transaction for us that allows Validus to further build upon our market leading position in catastrophe risk. Flagstone brings a strong client base that will add scale to our business. Validus has an established track record of integrating acquisitions quickly and effectively with a focus on the needs of our clients and intermediaries. We are confident that this transaction will generate excellent value going forward for Validus and Flagstone shareholders.”
David Brown, Flagstone’s Chief Executive Officer, said, “We believe this transaction offers a significant premium and immediate value for our shareholders, and provides a more stable capital base with which to underwrite over the long-term. Over the past ten months, Flagstone has taken steps to strategically shift our business model, becoming a more focused and efficient underwriter and we believe this transaction reflects our progress. Further, we believe that Flagstone and Validus share a strong technical, analytical approach and a commitment to providing exemplary service for our clients. We look forward to working with Validus to complete this combination and create shareholder value. The transaction, which our Board of Directors has unanimously concluded is in the best interest of Flagstone, concludes a lengthy and extensive process in which the Board carefully considered a broad range of strategic alternatives.”
Both Validus and Flagstone were formed in the wake of hurricane Katrina to take advantage of rising catastrophe premiums. Validus has appeared the more successful of the two, with Flagstone suffering after the catastrophe losses of 2011. The merged group will, we’d assume, seek to be more measured in their approach to underwriting and their own risk transfer than perhaps these companies had been historically.
The merger creates a much stronger reinsurance group with a larger underwriting capacity and base and will see the merged group become a significant player in the catastrophe risk markets. It also demonstrates yet another way investors make significant returns in the reinsurance markets as the owners of Flagstone equity will make a decent premium.
Flagstone Re has a track record of utilising the catastrophe bond markets, as well as collateralized markets for its own retrocessional purposes. It will be interesting to see where the merger into a single group under the Validus banner will prompt Validus to look more closely at the cat bond market which to date they have not been involved in.