Endurance Specialty Holdings Ltd. has just announced that it is to acquire Bermudian reinsurance specialists Montpelier Re Holdings Ltd., giving the company a ready-made third-party capital and ILS investments unit in Blue Capital Management.
The fate of Montpelier Re has been up in the air for some time, with a bid process ongoing as re/insurers showed their interests in the property catastrophe specialist firm. Now it transpires that John Charman’s Endurance Specialty Holdings is to acquire Montpelier Re in a $1.83 billion agreement.
The definitive merger agreement that has been reached will see Endurance acquire Montpelier Re for consideration of 0.472 shares of Endurance and $9.89 in cash for each Montpelier common share, representing $40.24 per Montpelier common share, or $1.83 billion in aggregate, based on Endurance’s closing price on March 30, 2015.
John R. Charman, Endurance’s Chairman and Chief Executive Officer, commented; “Endurance’s strategic acquisition of Montpelier represents a compelling value creation opportunity for Endurance’s shareholders, with accretion to earnings per share and return on equity. As a result of the transaction, we expect to achieve meaningful transaction synergies through cost savings and greater capital efficiencies.
“Importantly, the acquisition materially increases our breadth of distribution with the addition of a good-sized and scalable Lloyd’s platform and an attractive property catastrophe business that complements our existing reinsurance portfolio. The acquisition also provides Endurance with a natural introduction to the business of managing insurance and reinsurance investment products for third-party capital investors. Montpelier’s historic high quality portfolio reflects a disciplined approach to underwriting that is consistent with Endurance’s strong risk management and underwriting culture.”
Endurance has never had its own third-party capital unit and in the past Charman has displayed some reluctance to embrace the business model. So it is perhaps telling of the market environment that, by acquiring Montpelier Re, Endurance will inherit a well-rounded ILS specialist manager, with exchange listed ILS fund and collateralized reinsurance operations under the Blue Capital brand.
Christopher Harris, Montpelier’s President and Chief Executive Officer, stated; “This transaction with Endurance provides significant value for Montpelier shareholders through up-front cash and an equity interest in a combined Endurance with enhanced scale, greater market presence and substantial product and geographic diversity. The combination of our balance sheets, our diverse underwriting platforms and high-quality books of business is a compelling opportunity for our shareholders, customers and distribution partners.”
Endurance’s Board of Directors will grow once the acquisition closes, with the addition of three of Montpelier Re’s current directors. The expanded Endurance senior management team will lead the combined reinsurance company from its Bermuda headquarters.
The fit between these two reinsurance firms is interesting, perhaps compelling, as Endurance’s specialty lines business and Montpelier Re’s regional property catastrophe focus, will not result in a huge amount of duplication.
Also interesting is the fact that Montpelier Re has a Lloyd’s of London platform, something that John Charman had been looking to acquire in the past.
Most interesting to Artemis though, is the position of Blue Capital Management, Montpelier Re’s ILS, third-party capital and collateralized reinsurance investments manager, in the deal.
Once the deal is completed, Endurance will have an established ILS and collateralized reinsurance platform, with around $800m of capital under management. The fit becomes even more compelling when you consider how the Blue Capital platform could now give its third-party investors to an even broader range of reinsurance lines, with Endurance operating in some interesting areas that may be applicable.
Endurance has considerable specialism in crop, agricultural covers, marine, energy, aviation and other specialty lines that may be of interest to third-party capital, as well as casualty clash and casualty lines that could also be a target for third-party investors in the future.
Endurance also has a growing primary insurance platform, which perhaps could be another interesting opportunity where third-party capital could be leveraged in the future.
It’s also worth considering how Endurance’s Global Weather unit, which is led by long-time weather risk management market specialist Marty Malinow, could factor into the third-party capital equation as well. Weather risk deals are increasingly a target for diversification for some ILS investors and the Endurance weather unit is one of the leading market’s in that space.
Both reinsurers do have property catastrophe reinsurance underwriting specialisms, but Endurance has scaled its back in recent quarters as it has pushed capacity to other lines of business. So the cross-over between the two firms may not be significant even here, in Montpelier Re’s specialism.
Bermuda’s roster of global reinsurance firms is set to shrink by one again. It’s likely that there will be further shrinkage in numbers of firms in the coming months, as the expectation is that the mergers already in play will not be the last.
More details on the deal from the press release:
Under the terms of the agreement, the aggregate consideration for the transaction will consist of $450 million in cash and approximately 21.5 million Endurance ordinary shares, which are valued at approximately $1.4 billion based on Endurance’s closing price on March 30, 2015. The cash portion of the consideration will be funded through a pre-closing dividend paid by Montpelier to its common shareholders. Following completion of the transaction, Montpelier’s existing shareholders will own approximately 32% of Endurance’s outstanding ordinary shares.
The acquisition price of $40.24 per Montpelier common share, based on Endurance’s closing price on March 30, 2015, represents a 19% premium to Montpelier’s unaffected closing price per common share as of the close of business on December 10, 2014. The acquisition price also represents a multiple of 1.21x Montpelier’s fully converted book value per common share as of December 31, 2014.
For the twelve months ended December 31, 2014, the two companies had pro forma gross premiums written of $3.6 billion. Endurance common shareholders’ equity will increase from $2.8 billion to $4.1 billion, total capital will increase from $3.7 billion to $5.5 billion, and total cash and invested assets will increase from $6.7 billion to $9.3 billion on a pro-forma basis. Endurance expects to achieve more than $60 million of annual run-rate cost savings and to realize meaningful capital efficiencies from the acquisition. The transaction is expected to be immediately accretive to earnings per share and return on equity, excluding non-recurring integration and transaction costs.
The agreement has been unanimously approved by both companies’ Boards of Directors. The transaction is expected to be completed in the third quarter of 2015 and is subject to the approval of both companies’ shareholders, regulatory approvals and the satisfaction of customary closing conditions. Funds affiliated with Charlesbank Capital Partners have agreed to vote their Montpelier common share stake in favor of the proposed transaction.