Endurance Specialty Holdings (NYSE:ENH) agrees to buy Montpelier Re (NYSE:MRH) in a cash and stock deal valued at $1.83B based on yesterday's closing prices. Montpelier owners will receive 0.472 shares of Endurance plus $9.89 in cash for each share they own, or $40.24 based on ENH's close of $64.30 yesterday.
It's a 5.5% premium to MRH's Monday close, and 1.2x Dec. 31 book value.
The reinsurance sector is nearly universally lit up red in today's session, but Montpelier Re Holdings (MRH +0.6%) is carving out a gain amid a report in The Insurance Insider suggesting Endurance Specialty (ENH -1.3%) and Chinese conglomerate Fosun are among the final bidders in the MRH's sale process.
Another possible suitor is Aspen Insurance (AHL), but its involvement hasn't been confirmed.
Lack of scale has never been the problem at Axis Capital (AXS +5.4%), say Citigroup's Todd Bault and James Kaklick. The current issue is low demand, they say, and a merger with PartnerRe (PRE +1%) won't solve that.
Noting the merger is being done at "no premium" (presumably to book value), the two say this deal and others in the industry are acts of necessity, rather than strategic opportunities. "The pressure to cut even more costs will be enormous given the lack of significant deal premiums."
The team reiterates its Sell rating and $46 price target on Axis.
More on the terms: PartnerRe owners will receive 2.18 shares in the combined company for each share they own, and Axis shares will convert on a one-to-one basis.
A check of others in the industry: ACE Limited (ACE +0.1%), XL Group (XL +0.4%), Everest Re (RE +0.7%), RenaissanceRe (RNR +0.9%), Aspen Insurance (AHL +0.9%), Arch Capital (ACGL +0.2%), Reinsurance Group of America (RGA -0.6%), Montpelier Re (MRH +0.3%), Unum Group (UNM +0.1%).
Relentless rate reductions, low investment returns, and the continued influx of alternative capital face reinsurers at the Jan. 1 renewal season, according to the latest 1st View Renewals report from Willis Re (NYSE:WSH).
Given this backdrop, says Willis, the long-expected pickup in M&A activity is now reality.
Chairman Peter Hearn: "Many reinsurers recognize they can no longer hope for salvation through major market losses or increasing interest rates. Their only sustainable course of action is to change their business models, portfolio mixes and to strive for scale."
"Fierce competition, over-capacity and low returns continue to put pressure on the industry," says Moody's, reinforcing its negative outlook on the global reinsurer sector (first changed to negative in June).
There are positive developments though, particularly a slowing in price declines. Moody's previously believed a 15-20% drop in cat prices next year a "distinct possibility," but says such a severe scenario has become less likely.
One reason for the slowing price decline, says Moody's, is non-traditional competitors like insurance linked securities (ILS) are having a tough year and have less scope to cut pricing.
Deutsche throws in the towel on its Buy rating on Montpelier Re (NYSE:MRH) following this week's big earnings miss, with the team also citing material pricing pressure. The price target is cut to $31 from $38.