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Canopius Strikes Deal to Acquire Lloyd's Underwriter Omega

Source: A.M. Best

Posted on 26 Apr 2012

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A long drawn-out struggle for possession of Omega Insurance Holdings Ltd. appears to be over as the boards of both Omega and Canopius Group Ltd. announced an agreement on the terms of a cash acquisition.

In a statement posted with the London Stock Exchange, Canopius and Omega said the 163.6 million pound (US$263.9 million) cash acquisition would be implemented by way of an amalgamation under the Bermuda Companies Act.

"Omega is a good business with a successful underwriting track record over a long period," said Canopius Executive Chairman Michael Watson in a statement. "The acquisition of Omega represents a significant acceleration of Canopius' ambition to create a global and well-diversified insurance group with a substantial presence at Lloyd's. The combination of the two businesses will result in an insurance group with enhanced scale and increased breadth of market offering and presence, including in the United States."

Omega shareholders will get 67 pence in cash for each common share, valuing Omega's existing share capital at about 163.6 million pounds.

Omega's board of directors said it considers terms of the acquisition "to be fair and reasonable." Omega's directors said they will unanimously recommend that Omega shareholders vote to approve the acquisition at a special general meeting. The meeting is expected to be held in early June and the acquisition completed by the end of July.

Canopius received irrevocable undertakings to vote in favor of the acquisition from certain institutional Omega shareholders representing 48.11% of the existing issued share capital of Omega.

Omega's existing business platforms at Lloyd's and in Bermuda and the United States will be integrated into the wider Canopius Group under the Canopius brand. "It is envisaged that Omega's Bermuda platform will re-commence third-party underwriting, subject to necessary regulatory consents," Canopius said.

Earlier this year, Omega had rejected a second merger approach from fellow Lloyd's underwriter Barbican Group Holdings Ltd., declaring it contained "no improvement on [an] earlier proposal" (Best's News Service, Jan. 23, 2012). Omega had also rejected a partial cash offer from Haverford (Bermuda) Ltd.

In a separate announcement, U.S.-based Tower Group Inc. said it committed to invest $75 million in Canopius, subject to completion of the latter's acquisition of Omega.

Tower said it would acquire 10.7% of the ordinary share capital of Canopius and have the right to appoint one member of the Canopius board of directors. "Canopius has also committed to assist Tower, at Tower's option, with the establishment of a presence at Lloyd's, subject to the required approval of Lloyd's and the [U.K.] Financial Services Authority," Tower in a statement.

Tower would also acquire an option, "exercisable in its sole discretion," to combine with the Bermuda reinsurance business currently operated by Canopius, which combination, if effected, is expected to enhance the profitability of Tower's Bermuda reinsurance operations.

Tower President and Chief Executive Officer Michael Lee said in a statement the deal gives Tower a chance to "significantly accelerate our involvement with the Lloyd's market and its access to profitable specialty and international business."

It will also allow Tower to work with Canopius to evaluate transaction structures, including a combination with the Bermuda reinsurance business currently operated by Canopius, to enhance overall profitability. "We intend to exercise this option if we believe that the execution of the merger would allow us to achieve a return on equity in excess of our current target range of 10% to 12%."

A.M. Best Europe Rating Services Ltd. has recently affirmed the financial strength rating of A (Excellent) and issuer credit rating of a+ of Lloyds Syndicate 958 (United Kingdom), which is managed by Omega Underwriting Agents.

The outlook for both ratings remained stable.

At the same time, A.M. Best downgraded the FSR to B++ (Good) from A- (Excellent) and ICR to bbb from a- of Omega Specialty Insurance Co . Ltd. Both ratings have been removed from under review with negative implications and assigned a negative outlook.

Concurrently, A.M. Best has withdrawn OSILs ratings at the request of its ultimate holding company, Omega Insurance Holdings following a decision to cease underwriting third-party business through OSIL.

A.M. Best said the rating downgrades for OSIL "are due to the significant reduction in the company's risk-adjusted capitalization as a result of weak operating performance in 2010 and 2011 and the anticipated withdrawal of capital from OSIL to its parent by way of dividends. The negative outlook reflects A.M. Bests expectation that risk-adjusted capitalization will be further reduced following the groups decision to cease underwriting third-party business through OSIL."