Tuesday, 8 September 2015

Another One Bites The Dust: Reinsurer Amlin (AML) to be Acquired by Mitsui Sumitomo

Hot on the heels of a number of other acquisitions in the specialty insurance and reinsurance sector, this morning Mitsui Sumitomo declared that they were planning on acquiring FTSE250 reinsurer, Amlin.

Amlin has been in my portfolio since March 2015. Indeed, it replaced another FTSE250 reinsurer, Catlin, which was acquired in May this year by XL Group. The sector is consolidating rapidly with the modestly sized UK companies in the sector being snapped up pretty swiftly after one another.

I can’t deny I am a little sad to see this happen. Amlin—like Catlin before it—I considered an extremely well-run company and a good long-term dividend investment. To see another well-covered and solid 5% yielder leave my portfolio will be sad.

That being said, the deal is very generous. So what is being offered?

The Offer

Well, according to the prospectus issued today the deal would be an all-cash affair. They are offering:
  1. To pay 670p per share in cash, and;
  2. To pay the interim dividend of 8.4p per share due in October (ex-dividend date was at the start of the month).
This means that for those of us already holding Amlin we should see a return of 678.4p per share between now and when the purchase is finalised.

What is so striking about this is just how good a deal for Amlin shareholders this is. It represents a price of 2.4 times book value. This is well ahead of other recent acquisitions (Brit was acquired at 1.6 times and Catlin at 1.5 times book value). That is quite a deal. 

What It Means for Me: Numbers

Back in March I bought a total of 126 shares for £648.02. Since then, dividend reinvestment (thanks to a final and special dividend) has grown this to 134 shares with a cost basis of £688.50.

With the deal above I will therefore receive:
  1. £897.80 in cash from the purchase (a 30.4% return on my total cost basis);
  2. £11.26 in cash from the dividend.
This is a total of £909.06. A princely sum indeed. 

Hold or Sell?

At the moment the shares has rocketed to about 652p per share. This leaves me two options:
  1. Sell out now: Sell my shares now. I would still get the dividend payment but would receive less than the stated purchase price as well as incurring trading fees.
  2. Hold on: Hold the shares until they are purchased (supposedly sometime in Q1 2016). This would not incur trading fees and be a higher return. However, it does incur a risk in that the deal may not go through.
Needless to say, at the moment I plan to sit on the shares until the purchase goes through. I really don't see the acquisition failing to go through. So the risk in that regard is minimal.

However, if the share price does reach the c.670p mark whilst the rest of the market remains depressed I may consider selling early and using it to reinvest elsewhere. We will see. But it is something to be aware of.

What to Replace Amlin?

Of course, it also leaves me with the--admittedly pleasant--matter of working out where I should push the capital. Amlin was an ideal holding for me. It had a high and well-covered yield, a fairly low Beta value, and was in the FTSE250.

Another speciality insurance company is attractive. But the options are becoming increasingly limited. I still hold Lancashire (LRE) which is an attractive company. Alternatively, Beazley (BEZ) and Novae (NVA) look pretty good as well.

That being said, I could use the cash to bolster some sectors which are underweight in my portfolio. Currently it looks like this:

With Amlin gone, my financials exposure will drop below 25% of my entire portfolio. There are plenty of sectors here which could be beefed up a bit with this cash. We will see. 

So, do I need to resign myself to the fact that it is unlikely I will be able to replace the yield of Amlin with any replacement purchase? As a result, will it affect my dividend income for next year? No, not really. 

Certainly, on the average purchase price of my holding (513.8p), Amlin's trailing twelve month dividend of 27.3p yielded 5.3% and would have thrown off about £37 in dividend income next year. 

However, the nice premium in the acquisition would mean that to replace that £37 income with the £900 or so I would get from the deal I would need a company yielding about 4%. Although fairly high, I don't think that this is impossible at all.

Final Thoughts

So that is what is proposed and what I have been thinking. The reality is that it will be sad to see Amlin go. Nonetheless, hopefully I will be able to find an attractive investment to replace it. We will have to wait and see.

What do you think?

Do you hold Amlin? What are you planning to do? Have you already got a good idea what you would like to replace it with?

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[Creative Commons picture reproduced from Flickr user Anders Sandberg]


  1. Hi DD

    Thanks for this post - I heard on the news but hadn't read about the price being offered per share or that the October dividend would be paid, which is great news.

    I was hoping to hold Amlin long term, so like you, will need to find a replacement.

    I bought when the share price was just under £5 (in March), so along with the dividends received, I make a nice little profit.

    Anyway, I'll be holding on to mine until they are purchased.

    1. I picked up the news story late last night. However, they were suggesting a much, much lower price (c.550p per share). At 670p I think it is a good deal for shareholders.

      It is sad to cut the journey with Amlin short so quickly. But it was always a strong possibility with the way the sector was moving and it was just not big enough to fend off too many advances!

      Yes, with the dividends included it looks like I could pocket a return on investment of just under 40%. Not bad at all. Just need to work out where to push the funds when they come!

  2. I'd bought Beazley instead of Amlin or Catlin over the last year, so this news only affects me in that there's probably no point buying the stock anymore! I've got Lancashire on my watch list though... The sector sends to be shrinking really quickly, so we may as well snap up a few shares before even more of the companies get bought out!


    1. Yes, I remember you buying Beazley. I am sorely tempted by it, it must be said.

      Both Beazley and Lancashire do seem potentially acquisition targets still. Woodford has been beefing up his Lancashire holding of late--I wonder if he knows something we don't!

      The premium in this deal is quite staggering when you look at it (especially when compared with the Catlin deal). Foreign companies seem to be tripping over themselves looking to snap up Lloyds exposure.

      It may not be long before there are no London-listed companies of their type left. that would be a shame as it is an attractive sector. We will see!

  3. Hi DD, I own Amlin as well, and personally I'm always happy to be taken out by acquisition at a nice premium. The annualised returns for me are over 25%, so it's hard to be upset about that (of course it's pure luck, but investing is hard enough so I'm happy to take whatever luck I can get).

    I may sell Amlin rather than wait as the additional upside from the current 650p to the 670p takeover price is less than 3% over the next few months, so I would be willing to sell now to remove the uncertainty of whether or not the deal will go through and then just get on with reinvesting the proceeds.

    As for what will replace it, I have no idea yet, but I hope that whatever it is it can perform even half as well as Amlin.

    1. I am pretty amazed by the premium paid in this deal to be honest, John. I saw an early estimate which suggested a 550p buyout. That did seem low, but 670p was well beyond what I anticipated. My annualised return (after holding for under 6 months) is about 70% with dividends included. Not bad!

      As you say, it is nice to get lucky like this every now and then. I have been so twice with the speciality insurance investments I have made. Pretty neat.

      I have been thinking along the same lines today. Sell early and then put it to work elsewhere. I don't see it failing to go through. However, the difference between today's price and the final total is very slender indeed even with fees. We will see though. I will have to think about it more.

  4. I've got this feeling that the second half of September will be volatile... Could soon be a good time to snap up Lancashire and/or Beazley? I'd love to get a few of these speciality insurers in my NISA, they tend to be strong dividend payers and often give out special dividends on top - WIN!

    1. It could well be, M. Certainly it seems unlikely the recent volatility will just dissipate suddenly! But maybe it will.

      I suspect we may have to wait a while for the remaining specialty insurers to be solid value, to be honest. They have jumped on the Amlin news. This is especially true of Novae and Lancashire, both of which seem to be generally considered the next likely targets.

      It is definitely an attractive sector. Hence why I keep trying to keep two of them in my portfolio. Looks like it is a losing battle though. However, with a acquisition premium like this I don't mind losing too much!