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Endurance Specialty to be Purchased by SOMPO for $6.3B

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Endurance Specialty Holdings Ltd. recently announced that it has inked an agreement to be acquired by SOMPO Holdings, Inc. for a cash payment of $6.3 billion. The transaction, which is pending shareholders’ approval, is expected culminate by Mar 2017. The acquisition will help SOMPO Holdings fortify its U.S presence.

Transaction Details

The purchase consideration of $6.32 billion translates to $93 per share.  The transaction price represents about 40.3% premium to Endurance Specialty's closing stock price on Oct 3, 2016.

According to the definitive agreement signed by the companies, Tokyo-based SOMPO Holdings will finance the purchase consideration using the existing sources of liquidity as well as additional facilities without a financing emergency. SOMPO Japan NI Inc., the wholly owned subsidiary of SOMPO Holdings, will execute the transaction.

Acquisition Rationale

The acquisition of Endurance Specialty complements SOMPO’s strategy to expand its overseas insurance business. Bermuda-based Endurance Specialty has evolved over the years to become a global specialty provider of insurance and reinsurance operations. The company now boasts significant presence in the U.S., the U.K. and Bermuda. The company is the fifth-largest company in the U.S.(based on underwriting insurance fees for 2015) in underwriting crop insurance. According to Kengo Sakurada, President and CEO of SOMPO Holdings, “Today's agreement marks the beginning of SOMPO's overseas transformation which undoubtedly enhances the quality and reach of our insurance services. Endurance brings strength in the primary insurance business in developed market.” SOMPO Holdings expects the acquisition to boost its return on equity.

SOMPO Holdings’ strategic buyouts as well as strong operational profile have been driving its bottom-line growth. Notable acquisitions by the company include Turkey-based FibaSigortain 2010, Malaysia-based Berjaya SOMPO in 2011, additional stake in Brazil-based Maritima in 2013 and the acquisition of Canopius in Lloyd's in 2014. The acquirer primarily eyes buyouts that are likely to boost its primary insurance business in developed as well as emerging markets.

SOMPO Holdings eyes adjusted consolidated profit of $2.9 billion (JPY 300 billion) and adjusted consolidated ROE of more than 10% from fiscal 2020 onward. This transaction will result in $0.3  billion (JPY 32.1 billion increase in adjusted consolidated profit from $1.6 billion (JPY 164.3 billion to $1.9 billion (JPY 196.4 billion) and a 130 basis points increase in adjusted consolidated return on equity to 8.2% from 6.9%. Income from SOMPO's overseas insurance business as a percentage of the total group income would jump to 27% from 12% presently.

Rating Actions

A.M. Best placed the Long-Term issuer credit rating (ICR) of “bbb” and the Long-Term Issue Credit Ratings (Long-Term IR) Endurance Specialty under review with positive implications. Subsequently, the rating agency placed the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term ICR of “a” of Endurance Specialty and its rated affiliates under review with positive implications.

The credit rating giant reiterated the Financial Strength Rating of A+ (Superior) and the Long-Term ICR “aa-”of Sompo Japan Nipponkoa Insurance Inc. However, Moody’s Japan reiterated the insurance financial rating of A1 subordinated bond rating of A3 of Sompo Japan Nipponkoa Insurance Inc. with a stable outlook.

Moody's Investors Service, a wing of Moody’s Corp. (MCO - Free Report) reiterated the insurance financial strength (IFS) ratings of Endurance Specialty Holdings’ principal operating subsidiaries at A2.

Acquisitions Ramping Growth Profile

Acquisitions are a well-accepted strategy for growth among insurers. Last month, First American Financial Corporation (FAF - Free Report) closed the buyout of RedVision Systems, Inc. Marsh & McLennan Agency LLC (“MMA”), a wholly owned subsidiary of Marsh & McLennan Companies Inc. (MMC - Free Report) , recently announced that it has acquired Vero Insurance, Inc.

Zacks Rank

Endurance Specialty currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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