Moody's (MCO) to Buy Climate Risk Modeling Firm RMS for $2B

Moody’s MCO has inked a $2-billion deal to acquire RMS, a pioneer in providing climate and natural disaster risk modeling and analytics, from Daily Mail and General Trust plc. The move, which will fortify the company’s insurance data and analytics business to nearly $500 million in revenues, comes as it seeks to boost its global risk capabilities in order to cater the new developments in risk assessment.

Following the announcement, shares of Moody’s have gained 1.1%.

The transaction is expected to close in the third quarter of 2021, subject to regulatory and customary closing consents. Moody’s will use a cash and long-term debt combination to fund the deal.

RMS caters to 120 countries with its 400 risk models, serving the global property and casualty insurance and reinsurance industries. Its services help organizations measure and manage their climate and natural disaster risk modelings.

The acquisition capitalizes on Moody’s and RMS’ complementary customer bases, and competencies in the life and P&C insurance and reinsurance units. While Moody’s facilitates strong risk and finance solutions for insurers, RMS accommodates a wide spectrum of climate and catastrophe risk modeling solutions for insurers, aiding them to better analyze, assess and estimate risks. Thus, RMS will strengthen Moody’s integrated risk assessment strategy for customers in the insurance industry through greater innovation and amalgamation of both companies’ crucial fortes and services, with proficiencies across climate, cyber, commercial real estate and supply-chain risks.

The companies also expect to derive some financial benefits from this deal. As part of Moody’s Analytics division, RMS is anticipated to muster up to $150 million in incremental run-rate revenues by 2025. It is also projected to generate nearly $320 million in revenues and $55 million in adjusted operating income. The acquisition will be accretive to Moody’s earnings per share (EPS) in 2025 (U.S. GAAP basis) and adjusted EPS in 2024 (excluding purchase price amortization).

Consequent to the RMS acquisition, Moody’s has updated its guidance for full-year 2021.While previously the company estimated share repurchases worth $1.5 billion, it now predicts the same to be nearly worth $750 million, subject to available cash, market conditions and other capital allocation decisions.

Additionally, Moody’s 2021 GAAP EPS is now projected at $10.90-$11.20, while earlier it was estimated to be in the $10.95-$11.25 range. Its adjusted EPS outlook lies in the range of $11.55-$11.85.

Leveraging the market increase to $40 billion, and for continued sustainable and profitable outreach, this transaction provides new expansion opportunities across multiple risk arenas to Moody’s, while also enhancing its core offerings.

Per the president and CEO of Moody’s, “In the context of a global pandemic, the climate crisis and increasing cyberattacks, our customers must manage a wider range of risks than ever before. We are excited to add RMS and its team of world-class data scientists, modelers and software engineers to the Moody’s family to help accelerate solutions that enable customers to build resilience and make better decisions."

In the past six months, shares of Moody’s have gained 38.9%, outperforming 5.3% growth recorded by the industry.
 

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Currently, Moody’s carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Competitive Landscape

Many finance companies have started to come ahead and participate in environmental, social and governance (ESG) investing for the past couple of years.

In July 2021, Affiliated Managers Group AMG announced that it will acquire majority equity stake in Parnassus Investments, one of the largest sustainable investing fund managers in the United States. Earlier in February, it announced a deal with Boston Common Asset Management, LLC, an independent, partner-owned global equity manager that focuses on integrated ESG impact investing.

In the same month, The Blackstone Group Inc. BX inked a $1.4-billion deal to acquire Sphera, a pioneer in providing environmental, social and governance software, data and consulting services. The move was part of the private equity giant’s efforts to directly impact the transition to a low-carbon economy and provide ESG-focused investment opportunities.

This June, JPMorgan JPM signed a deal to acquire San Francisco-based financial technology start-up, OpenInvest, to bank on its ESG skills with 55ip's tax-smart investment strategies, in order to offer personalized solutions to clients “that are values-aligned and tax-efficient.” Apart from this, the bank’s asset management division — J.P. Morgan Asset Management — also announced the acquisition of Campbell Global, LLC, a forest management and timberland investing company to integrate sustainability into its business.

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