Endurance thinks bigger is better in re/insurance, makes offer for Aspen

Insurance and reinsurance firm Endurance Specialty Holdings has made a, what’s being termed hostile, takeover bid for Aspen Insurance Holdings Ltd., but the offer has been firmly rejected by Aspen in a statement today.

Bigger is clearly better in the eyes of Endurance Specialty Holdings and its CEO John Charman, who today published a statement on the firms proposed takeover of Aspen. Endurance offered to acquire all of the common shares of Aspen for $3.2 billion, or $47.50 per Aspen share, with a combination of cash and Endurance common shares.

The offer price represents a 21% premium to Aspen’s closing share price of $39.37 on April 11, 2014 and is 1.16x Aspen’s December 31, 2013 diluted book value per share. The offer is actually as much as a 15% premium on top of Aspen’s all-time high share price of $41.43 on December 31, 2013, which clearly shows the value Endurance places on closing this deal.

The reasoning behind the bid seems to be all about acquiring scale, with Endurance saying that the merged group would command increased scale, market presence, diversification and profit potential. The combined group would underwrite over $5 billion of annual gross premiums across a diversified set of products and geographies. The combined group would also have over $5.4 billion of shareholders equity and $7.6 billion of capital, which Endurance said would give it a large and strong capital base to compete in the global market.

Charman, Endurance’s Chairman and Chief Executive Officer, commented on the offer; “This transaction is, quite simply, a unique opportunity to deliver value to shareholders of both Aspen and Endurance, while creating a new global leader in the industry.  The proposal offers up-front value for Aspen’s shareholders, who will receive a substantial premium for their shares, as well as the opportunity to participate – along with Endurance’s shareholders – in future value created by a stronger and more profitable company.”

“The specialized businesses of Endurance and Aspen, such as Endurance’s market-leading agriculture insurance business and Aspen’s Lloyd’s operations, are highly complementary, and together we will create a company with increased scale, an attractive diversified platform across products and geographies, and greater market presence and relevance.  The combined company will have a strong balance sheet and capital position, with an enhanced ability to pursue growth opportunities and to withstand volatility.  Further, we believe the combined company will enjoy increased profitability driven by a strong management team comprised of industry-leading talent and world-class underwriting expertise from both companies, as well as meaningful transaction synergies,” Charman added.

So scale as well as diversification is clearly the driver here and Charman sees acquiring an insurance and reinsurance group like Aspen as the best way to build that scale quickly, as a way to create greater relevance in the current market environment.

The offer has been rejected by Aspen and Charman said that every attempt to engage on the topic of a merger has been rebuffed so far.

“Despite our repeated attempts since late January to engage in confidential and friendly discussions, Aspen’s Board and management have rebuffed our proposal and refused to engage with us, thereby denying Aspen’s shareholders the ability to understand and attain the clear financial, operational and strategic benefits of this transaction.  We are fully committed to this transaction and are confident that Aspen’s shareholders will recognize the value of our proposal and actively encourage their Board to begin constructive discussions with Endurance without delay, with the goal of reaching a negotiated transaction,” Charman commented.

Endurance has gone as far as even creating a website containing an investor presentation to show the benefits of merging the two groups.

Should the deal go ahead we could see another large private equity player come into the insurance and reinsurance space, with CVC Capital Partners Ltd. said to be prepared to buy $1.05 billion of the new equity created by the merger of the two groups.

Aspen said that its board of directors unanimously reject the unsolicited offer, saying that it is not in the best interests of the firm or its shareholders.

Glyn Jones, Chairman of the Board of Directors, stated; “After careful review and deliberation, the Board of Directors unanimously determined that Endurance’s proposal is not in the best interests of Aspen or its shareholders. Endurance’s ill-conceived proposal undervalues our company, represents a strategic mismatch, carries significant execution risk, and would result in substantial dis-synergies. Furthermore, most of the consideration to Aspen shareholders would be in a stock that would reflect these problems.”

In fact it seems that Aspen does not agree that Endurance is the right partner for it, highlighting its mixed fortunes over recent years and the fact that John Charman has not been in charge for very long.

“Aspen has a proven track record of performance and a clear strategy to increase shareholder value. Endurance has a mixed operating track record, new leadership, an unproven strategy, and no experience with large acquisitions. Moreover, this transaction would be highly disruptive to Aspen’s corporate culture, which has proven to be a significant competitive advantage in the marketplace,” Jones added.

Mergers & acquisitions as a way to acquire scale, market share, secure bigger signings and become more globally diverse, are seen as a likely outcome of current market conditions. With reinsurance rates on the decline, lower-cost capital eating into once profitable segments for reinsurers and the knock-on effect of capital and competition being likely softening in some insurance segments too, scale is one possible antidote.

It seems that this dance between Endurance and Aspen has been happening for some weeks with no progress at all being made. It’s now come to a head, with both firms issuing releases and publishing details of the offer and reasons for its rejection.

Where this goes next could be interesting to watch. Will there be any attempt to buy greater control of Aspen shares by Endurance, perhaps backed by CVC Capital Partners, or will Endurance walk away? Walking away seems unlikely after the publication of so much detail of the bid.

Earlier today we published this article, Consolidation ahead for smaller reinsurers, which discusses some of the reasoning behind reinsurers perceived need to acquire scale in the current market environment.

Endurance is clearly in acquisitive mood and wants to pick up one of the most attractive players to fund its continued growth before others begin to look at mergers or acquisitions as an attractive, or the only, proposition too. Aspen is clearly not keen to play ball right now, feeling its immediate future is more secure in its own hands.

If no deal emerges between Endurance and Aspen it will be interesting to see where both firms turn to next, whether Endurance looks for other acquisitions and whether Aspen may find itself in a position later this year where a rapid scaling-up may seem like an opportunity missed.