Sompo Japan acquires Endurance for $6.304 billion

Endurance Specialty Holdings Ltd., Bermuda-based property and casualty insurance and reinsurance firm and owner of collateralised reinsurance and ILS fund manager Blue Capital Management Ltd., has been acquired by Sompo Japan for a total consideration of $6.304 billion.

Japanese newspaper the Nikkei reported first yesterday that insurance group Sompo Japan Nipponkoa Insurance, a division of Sompo Holdings, was working to acquire Endurance as the firm looked to further diversify its sources of revenue. The acquisition has now been confirmed this morning by both parties.

Sompo is already a global player, with Sompo Canopius providing a London-based specialty re/insurance platform for the firm. But the strategic rationale for the acquisition which has now been confirmed this morning by Sompo Holdings is to create a globally integrated and diversified insurance and reinsurance business.

The acquisition has been effected through Sompo Holdings subsidiary Sompo Japan Nipponkoa Insurance Inc. in a deal described as “friendly” by the firm. The aggregate purchase price is said to be 639.4 JPY, Sompo’s largest acquisition to date, and a total consideration said to be $6.304 billion.

Adding Endurance provides a Bermuda headquartered platform, with a focus on the U.S. market, specialty insurance products, reinsurance across the gamut of lines of business and collateralised reinsurance products as well as ILS investment fund management through the Blue Capital platform.

As mergers and acquisitions go, in the insurance and reinsurance space, this is a fairly sizable deal, with Sompo Japan now set to acquire all of the outstanding shares of Endurance, a transaction which can go ahead without tender offer due to Bermuda’s corporate laws, according to the Nikkei.

Completion of the acquisition could be as soon as the end of February 2017, but at least by the end of March 2017, according to Sompo Holdings.

The valuation is a significant premium on the share price, as of a couple of days ago, although that share price itself rose 35% during the course of yesterday after the Nikkei broke the news.

With Sompo Japan one of the largest Japanese insurance groups, any deal to acquire Endurance outright would provide a strong signal to the market that underwriting franchises that offer diversification, specialisms and a core stake in major global reinsurance markets could be attractive acquisition targets.

Sompo Holdings said that it is “aiming to establish a position where it is able to compete effectively against global players… For its overseas insurance business, SOMPO is pursuing a drastic expansion of its scale and earnings through organic growth and disciplined M&A both in developed and emerging countries.”

Sompo has been planning to “build a globally diversified business portfolio in order to achieve further growth and improvement of ROE, has been considering the acquisition of an insurance company with strength in insurance business in developed and emerging countries.”

By acquiring Endurance “SOMPO aims to build a genuinely integrated global insurance business by bringing in great talent, which will stimulate significant development and transformation in SOMPO’s overseas insurance business.”

At $93 per share Endurance’s core shareholders, including CEO John Charman, will have realised a very attractive profit through the transaction, as it offers a price to book ratio of x1.36 times Endurance’s book value per ordinary share, and a 40.3% premium to the average share price for the past three months.

But Sompo Holdings considers the price “fair and reasonable” after valuing Endurance and its assets, as well as the contribution buying the re/insurer could add to the group.

With Japanese insurers suffering due to prolonged low interest rates domestically and dwindling demand in some core lines of insurance business, adding specialist underwriting businesses to their stable will prove very attractive.

Since CEO John Charman came on board at Endurance in 2013, investing $30m of his own capital into the firm at the time, it has grown and shown strong profit at times leading the performance of its peers.

Endurance’s global platform includes insurance and reinsurance underwriting operations at Lloyd’s of London, in Switzerland, and Singapore, writing specialty insurance lines such as agriculture, professional lines, property, marine and energy, and casualty and catastrophe, property, casualty, professional lines and specialty lines of reinsurance, as well as having a specialist ILS management unit in Blue Capital and a weather risk transfer and derivatives team in Endurance Global Weather.

For Sompo that offers a significant range of new options and revenue streams for the firm, while for Endurance underwriters and teams the larger balance-sheet and global access could assist them to grow as well.

Sompo Canopius has been investing for some time putting in place its own ILS management operations, including assessing potential ILS related acquisition, but with a parent company acquisition of Endurance now confirmed that will provide the firm with a full ILS fund and investment management function, as well as a unit specialising in the provision of fully collateralised reinsurance, in Blue Capital.

The acquisition has been approved by Endurance’s board but still needs to be approved by its shareholders. At the valuation the firm has received it is hard to think any shareholders would vote against this all cash deal.

Kengo Sakurada, President and CEO of SOMPO Holdings, Inc, commented on the acquisition; “Today’s agreement marks the beginning of SOMPO’s overseas transformation which undoubtedly enhances the quality and reach of our insurance services. Endurance brings strength in the primary insurance business in developed markets.

“Endurance also brings a highly experienced executive team led by one of the world’s leading P&C CEOs in John Charman. Mr. Charman, and certain shareholders associated with Mr. Charman, representing in the aggregate approximately 4.9% of Endurance ordinary shares, have agreed to vote in favor of the proposed transaction.

“This acquisition will be integral in helping SOMPO realize its goal of providing insurance and related services of the highest quality which contribute to the security, health and wellbeing of its customers.”

Charman added; “Today, we have strategically aligned ourselves with SOMPO, a large, well capitalized and highly respected global insurance (and reinsurance) company headquartered in Japan. This signals the beginning of an exciting new chapter for Endurance, our wonderful and incredibly talented people and our much valued clients. When I joined Endurance just over three years ago, I stated quite publicly that cost efficient scale, globally diversified insurance and reinsurance products as well as market relevance were absolutely essential to our future success. I also signaled that I would seek out a high quality, strong Asian partner to further complement our global business capabilities for the future. Our alignment today with SOMPO achieves all those goals and promises so much more.

“Critically, both our companies share and practice important values daily – a commitment to the highest levels of loyalty, integrity and client service. These stated values are clearly reflected in our disciplined, focused underwriting approach which has deeply embedded, strong risk management practices. It is with great honour and with much joy that we all look forward to being welcomed as important family members of SOMPO. Finally, to our Endurance shareholders, we thank you for your loyalty and trust over the years and are happy that you have been rewarded with an attractive premium for your investment.”

It will be interesting to see how Endurance and Blue Capital benefit from this deal in years to come, it could position the firm for significant growth, new diversification and access to an enlarged client base, all of which could make the firm an even more important player in global reinsurance and ILS.