A $5.1 billion offer to take legacy property and casualty insurer Enstar Group Ltd. private for below book value highlights a lack of investor enthusiasm for this niche sector of the insurance industry.

Sixth Street Partners LLC, together with Liberty 77 Capital LP, J.C. Flowers & Co. LLC and other investors, will pay $338 a share for Enstar, 0.94x the book value per share the Bermuda-based company reported in the second quarter and 0.97x the company's first-quarter book value.

Enstar is a market leader in buying property and casualty portfolios and companies that are closed to new business, a sector that generalist investors find even tougher to understand than live insurance and reinsurance. Many feel that this made Enstar, now the last remaining listed legacy property and casualty company, ill-suited to the public markets.

"Enstar being taken private makes a ton of sense," Victor Nelligan, a reinsurance broker at Aon PLC specializing in legacy transactions, said in an interview. "The public markets have never understood the business model."

Unloved sector

While below book value, Sixth Street's offer of $338 per share was an 8.5% premium to Enstar's 90-day volume weighted average share price as of July 26, the last trading day before the deal was announced, according to Enstar. Even so, existing shareholders seemed unexcited by the deal. Enstar's share price, which had closed at an all-time high of $348.31 on July 26, slid to $327.17 on July 29, the day the deal was made public. Enstar declined to comment on why it had struck a deal for below book value.

But given where Nasdaq-listed Enstar has been trading, it may have been unrealistic to expect a higher valuation. Despite being one of the better performing and well-regarded legacy P&C companies, Enstar has traded below book value for much of the past three and a half years.

A "sizeable amount" of volatility in underwriting and operating results is inherent in the legacy P&C business where Enstar operates, according to Brian Schneider, a senior director at Fitch Ratings. "That's probably a big reason why they have not been as successful in the public markets as maybe they hoped they would have been," Schneider said in an interview.

"It was going to be a challenge for Enstar, at least given the market views, to be able to command a very strong multiple at all," Schneider added.

Some live property and casualty companies, by contrast, have attracted valuations above book value recently. In its acquisition of Validus Re in 2023, RenaissanceRe Holdings Ltd. paid American International Group Inc. $3.03 billion for $2.1 billion of tangible equity, giving a multiple of 1.4x.

Being private, however, will spare Enstar from the administrative burdens of being a public company, such as preparing quarterly statements. It will have to give less away about its strategy and thinking to the market, according to Andy Hill, partner in broker McGill and Partners Group Ltd.'s structured solutions team. "The privacy that is brought about by their take private is helpful for them," Hill said.

Added privacy

Being freed from the need to explain its transactions to generalist investors may also allow Enstar to broaden its horizons. "You can do some more complex trades that might take longer to work through and realize the value from those trades," James Ferris, head of Bermuda capital and advisory at reinsurance broker BMS Re, said in an interview.

Prospective clients will have less public information to conduct due diligence, but brokers say this should not be an issue. The majority of legacy transactions are collateralized, Ferris said. Also, S&P Global Ratings assigned an A financial strength rating to Cavello Bay Reinsurance Ltd., Enstar's main operating entity, in March. "In terms of the public disclosures, you're still going to see information," Ferris said.

Brokers are similarly unconcerned with Enstar's loss of access to public money to fund its legacy transactions. The company itself has "surplus capital at the moment to support the deals," Hill said.

In addition, Enstar's new backers are likely to support the company if opportunities arise beyond its own resources. "Unless something dramatically changes in terms of deal size, I think that they have plenty [of capital] and the ability, if they really had some great deals on the table, to tap Sixth Street or the other investors for some more money," Nelligan said.

From brokers' perspectives, little is expected to change as a result of the acquisition. On the day the deal was announced, Enstar wrote to business partners saying the company was expected to continue operating as a stand-alone business and the deal with Sixth Street "will not alter [Enstar's] relationships or existing business agreements with you and all polices remain intact."

Nelligan said he considers the deal "neutral" for Aon and its clients. "If everything stays the same in terms of their business strategy and the way that they operate and work with us, which they have told us is going to be the same, then I don't see any kind of negative or positive."

Rival bids unlikely

There is a chance that a rival bidder could trump Sixth Street's offer. The deal includes a 35-day "go shop" provision, ending Sept. 2, during which Enstar can seek other acquirers.

The chances of finding another buyer, however, look remote. The list of candidates that could make a counter-bid for Enstar is limited, and a consortium of buyers may be needed, Hill said. This is because of the size of the investment and the fact that buyers would need to be invested for longer than the typical five- to seven-year private equity holding period. "It looks a big ask for me ... to think that's going to come together within the month go-shop period." But he added: "Never say never."

It is unclear whether Enstar's existing shareholders, outside the buyer group and Enstar management, will make their peace with receiving below book value for their shares. S&P Global Market Intelligence contacted Enstar's top five shareholders for comment. Canada Pension Plan Investment Board, Vanguard Group Inc., BlackRock Inc. and Dimensional Fund Advisors LP declined to comment, while Stone Point Capital LLC did not respond.

However, owners of other legacy P&C insurers are unlikely to be happy about what Enstar's take-out price says about their own ability to get book value or above when they exit. "If anything, the pricing will make others sit and reflect about the value of their similar investments in the space," Hill said.