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Arch Capital to Buy Watford Holdings in a Cash Transaction

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Arch Capital Group Ltd. (ACGL - Free Report) agreed to acquire Watford Holdings Ltd. (WTRE - Free Report) for $622 million in cash. Pending approval, the transaction is expected to culminate in the first quarter of 2021.

Watford Holdings is a multi-line Bermuda reinsurance company. Arch Capital acquired 11% stake in Watford Holdings for $100 million in 2014. As of Jun 30, 2020, Arch Capital owned a 13% stake in Watford Holdings. Notably, Watford Holdings is considered a variable interest entity and Arch Capital believes that it is the primary beneficiary of Watford Holdings.

Per the definitive agreement, Watford Holdings’ shareholders will receive $31.10 per share in cash, a 74% premium to Watford Holdings’ closing price on Sep 8, 2020. Arch Capital decided to fund the buyout through available cash.

The Zacks Rank #3 (Hold) insurer has made significant efforts to boost its inorganic growth through strategic acquisitions. These, in turn, helped it expand internationally, add capabilities, enhance operations and diversify business. In February 2020, Arch Capital inked a deal with France-based corporate and investment bank Natixis to buy a 29.5% stake in the trade-credit insurance firm Coface for $520 million. The acquisition is in tandem with the acquirer’s efforts to develop uncorrelated sources of underwriting income.

Post closure, the acquired entity will continue to operate as a standalone business and remain consolidated within Arch Capital’s financials. Watford Holdings stands to gain from Arch Capital’s underwriting strength.

Shares of Arch Capital have lost 24.6% year to date compared with the industry's decline of 7.9%. Efforts to diversify the Mortgage Insurance business via strategic acquisitions that also complement strength in the specialty insurance and reinsurance businesses, and strong capital position should help shares bounce back.

There has been a host of acquisitions in the insurance space of late, given the significant capital available. Stewart Information Services Corporation (STC - Free Report) acquired 57 title offices in the states of Arizona, Colorado and Nevada from ET Investments for $105 million. Arthur J. Gallagher & Co. (AJG - Free Report) acquired The Merriam Agency.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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