Arch Capital Bests Enstar with Offer to Acquire Watford for $622 Million

By | October 9, 2020

Arch Capital Group Ltd., which had been reported to be pursuing a deal, has agreed acquire all the common shares of Watford Holdings Ltd. in an all-cash transaction valued at approximately $622 million, or $31.10 per share.

Following closing, which is expected to occur in the first quarter of 2021, the Bermuda-based reinsurance firm Watford will continue to operate as a standalone business and remain consolidated within Arch’s financials.

The Arch offer narrowly beat out one from Enstar Group Ltd., which also made an all- cash offer to purchase Watford Holdings at $31.00 per ordinary share, or $620 million.

Since early 2019 when Watford went public, its shares have lost about a third of their value as investors questioned the company’s ability to generate enough from investment returns to adequately cover its expenses as it paid out on insurance policies.

In May, activist investor Capital Returns Management called for Watford to be sold.

In early May, AM Best placed the subsidiary Watford Re’s ratings under review with negative implications after the unit’s 2020 first quarter earnings showed a net investment loss of approximately $300 million due to investment market volatility following the global economic shutdown related to the COVID-19 pandemic.

On October 5, Insurance Journal reported that Enstar offered $30.00 per share, which was higher than the $26.00 per share offer that was reportedly in play from Arch and a group of private equity firms. The report also noted that the current long-term underwriting and investment contracts among Watford, HPS and Arch might make it difficult for other buyers to acquire and operate Watford.

Watford’s underwriting operations are managed exclusively by subsidiaries of Arch, which also has a $100 million equity investment in Watford. Further, a significant majority of Watford Re’s investments are managed by HPS Investment Partners.

Marc Grandisson, Arch president and chief executive officer, acknowledged the close ties between the two firms played a role, saying in his prepared remarks in the announcement that his company is pleased to deepen its existing strategic and financial investment in Watford. “Our longstanding contractual partnership with and financial consolidation of Watford expedited the due diligence process and should give all stakeholders confidence in our ability to close this transaction quickly,” Grandisson said.

The independent members of Watford’s board of directors have unanimously approved the agreement and recommended that Watford’s shareholders vote in favor of the transaction. The agreement still requires approval by holders of the majority of Watford’s outstanding shares.

Arch, which currently owns approximately 13% of Watford’s outstanding shares, has committed to vote in favor of the transaction. In addition, Arch’s directors and executive officers own approximately 2% of Watford’s outstanding shares.

“This represents a clear path forward for Watford, while also delivering an attractive premium to shareholders in a transaction with a high degree of certainty to close,” said Jon Levy, Watford’s president and chief executive officer.

Under the agreement, Arch also retains the option of bringing on additional co-investors in the transaction.

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