Florida insurer Federated National (FedNat) has seen its share price rise sharply today in early trading on NASDAQ following revelations yesterday evening that it had rebuffed a merger overture from rival HCI Group.


Today, HCI disclosed details of the correspondence between the two parties which began in December 2017 and which concluded on 30 April with a letter from the FedNat board declining HCI’s offer.

“The Board is confident of our management’s ability to provide significant short-term and long-term value to our shareholders”, explained FedNat in a letter signed by chairman Bruce Simberg and CEO Michael Braun.

In early trading on NASDAQ FedNat’s share price was up 3.3 percent at $17.5.

The letter was in response to a formal offer letter on the 18 April - reiterating a December approach - which proposed an all-paper merger which was the then equivalent to a 25 percent increase over FedNat’s share price over the preceding 30 days, valuing the company at around $270mn or $20.50 per share.

According to the offer letter, the merger would realise cost synergies, reinsurance cost savings, higher dividends and accretive book value.

FedNat shareholders would own approximately 42 percent of the company and would have a guaranteed minimum share valuation of $18.

Excluding State Farm and FedNat is the fourth largest Florida P&C insurer, writing $473.9mn in premiums with a 4.7 percent market share. HCI is the sixth largest writing $345.8mn and with a 3.4 percent market share (see table).

But HCI is more highly valued by investors because of its strong underwriting pedigree and nimble approach to new technology initiatives. It is trading at around 1.8 price to book versus FedNat’s sluggish 1x premium to book. Before today FedNat’s market cap was $222mn vs HCI’s $383mn.

On an investor call yesterday, HCI CEO Paresh Patel revealed the talks before saying “the deal is dead”.

Patel said  while historically the firm had sought to buy up companies which were “failing financially”, its recent development of its own underwriting platform had prompted a change in its M&A logic.

“Today when we evaluate companies we often look for well-run organizations who have failed to proactive invest in the technology because this is going to be needed going forward.”

“So if were to merge with a competitor to answer your question, we would implement our technology suite and would have a material impact on their combined ratio, that was said earlier,” Patel said, according to a transcript on Seeking Alpha.

“And for example, kinds of things that we’ve gotten into, we approached FedNat earlier this year about a merger. That would be an example of something we could do where the combined companies would do fantastic together”.

Separately, Patel said he expected the company to take advantage of fierce competition for Florida cat reinsurance business at the US mid-year renewals.

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