Arch gets Enstar onboard with increased offer for Watford Re

Arch Capital Group Ltd. looks set to secure the outright acquisition of its total-return reinsurance joint-venture Watford Re, after increasing its offer and gaining the support of key shareholder and rival bidder for Watford, legacy reinsurance solutions specialist Enstar Group.

Back in October, legacy insurance and reinsurance specialist underwriter and investor Enstar Group had made an offer of $31.00 per share to buy-out Watford Re entirely.

Arch had previously been reported to have offered $26.00 per share to buy-out the rest of Watford Re’s share capital recently.

The re/insurer than outbid Enstar, as Arch offered $31.10 per share to buy Watford Re. But Enstar wasn’t onside at that price and wanted to continue pursuing the acquisition.

Now, an amicable agreement appears to have been reached, as Arch Capital raised its bid to $35.00 per share and said that it now has the support of Enstar at that price.

At that share price it values total-return, or investment oriented reinsurance company Watford Re at $700 million, representing a stunning roughly 96% premium to the Watford Re share price back in September when this saga began.

This newly negotiated transaction is slated to close in the first-quarter of 2021.

Why the significant premium for a share that has consistently traded at a discount and a reinsurance company that has often failed to make any profit, on either side of its balance-sheet?

It can only come down to the efficiencies that Watford Re brings to Arch’s own business model, as it gets a significant proportion of its premiums via Arch and as a result provides reinsurance and capital efficiencies for the company, as well as a platform that could be grown and potentially turned into a multiple if its profits can be made more sustainable.

Private equity investors Warburg Pincus and Kelso & Company have joined Arch in the deal and will be holders of Watford Re.

At the close, Arch will assign its interests and obligations under the merger agreement to a newly formed entity of which Arch will own approximately 40%, while investment funds managed by Warburg Pincus LLC and Kelso & Company will each own approximately 30%.

Which perhaps provides another glimpse into why this deal makes sense economically for Arch, as it can leverage the interest of private equity in reinsurance to fund this buyout of a vehicle that provides third-party capital like efficiencies for the company.

“We continue to believe in the merits of this compelling opportunity and are pleased to be making this revised offer,” Marc Grandisson, President and Chief Executive Officer of Arch stated. “The increased premium and the addition of Warburg Pincus and Kelso as active investment partners will position Watford to capitalize on its significant value generation potential while ensuring continuity of service for all policyholders.”

“This transaction delivers an attractive premium to our shareholders, and offers Watford the opportunity to fulfill its potential as a private company,” added Jon Levy, President and Chief Executive Officer of Watford. “This is a significant milestone for us, both in our pursuit of shareholder value as well as for our strategic growth plans. We look forward to deepening our longtime relationship with Arch, and collaborating with our new partners, Kelso and Warburg Pincus.”

Dan Zilberman, Managing Director and Executive Management Group member at Warburg Pincus, also said, “We were a founding investor in Arch in 2001 and have followed the company’s development closely since our investment. We are excited to partner once again with Arch’s talented management team in a new endeavor. Arch has a compelling plan in place to enable Watford’s continued performance for its policyholders and trading partners. We are excited to participate in this plan, and believe that we can be a value added partner by applying our operating and industry resources to enhance Watford’s inherent value proposition.”

Chris Collins, Managing Director of Kelso, commented, “We have a successful history of partnering with Arch and are excited to be joining them in the acquisition of Watford. Watford is a strong platform, and we believe that Arch is uniquely qualified to augment its position with its clients and counterparties. We look forward to leveraging our industry expertise and capabilities to support Watford in its next phase of growth.”

Enstar has entered into a voting support agreement with Watford and Arch, committing to vote all of its Watford shares in favor of the transaction.

Arch Capital Group was a founding partner in the launch of Watford Re and also its largest shareholder already, while providing underwriting management services to the total-return reinsurer.

Highbridge Principal Strategies was another founder and also provides investment management services to Watford.