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Endurance's hostile takeover bid for Aspen may trigger reinsurer consolidation


Endurance Specialty Holdings Ltd.'s $3.2 billion hostile takeover bid for Aspen Insurance Holdings Ltd. could signal a wave of consolidation among reinsurers this year.

Abundant capital, softening rates, and a quest for critical mass and diversity are factors making the reinsurance industry ripe for consolidation, market experts say.

Bradley Kading, president and executive director of the Association of Bermuda Insurers & Reinsurers, said, “There's always a sense that there is a critical mass at which a reinsurer gains some market clout.''

Hamilton, Bermuda-based Endurance made the unsolicited cash-and-stock offer for Pembroke, Bermuda-based Aspen earlier this month. Aspen immediately spurned the bid, rejecting Endurance's claim about the benefits of a combined entity and casting doubt about the strength of Endurance stock.

The two sides traded barbed statements since then, with Endurance pressing its case that the combination would create a market leader with bigger scale and market presence and a diversified platform across products and geography. Still, Aspen officials remained steadfast in refusing the advances of its unwanted suitor.

“We are hearing a clear and resounding message from our clients and brokers that they seek more expansive business partnerships and select insurers who are top notch competitors of a sufficient size and strength to compete in today's increasingly complex and global market environment,'' John Charman, chairman and CEO of Endurance, said in a statement emailed last week to Business Insurance.


He disclosed in an April 14 letter to Aspen's board of directors that he already owns $30 million of Endurance stock and, showing a personal commitment to the takeover, pledged to buy $25 million of additional common shares “in connection with this transaction.''

Responding in a statement, Aspen Chairman Glyn Jones called Endurance's takeover bid “ill-conceived'' and said “we have actively reached out to shareholders and have found overwhelming consensus for our rejection'' of the offer which “undervalues Aspen.'' Mr. Jones added that the combination would be a “strategic mismatch.''

Mr. Jones was unavailable to be interviewed for this story.

Analysts, however, think the stage is set in the reinsurance market for deals. They stopped short of speculating on whether they think Endurance eventually can consummate a deal with Aspen.

“The fundamentals that currently exist remain conducive for M&A activity,” said James Eck, vice president and senior credit officer at Moody's Investors Service Inc. in New York.

Excess capital and competition from alternative capital, particularly for property/casualty business, in the form of catastrophe bonds, collateralized reinsurance and institutional investors are among factors promoting consolidation, he said.

While there's the potential for more unsolicited offers, analysts say friendly deals are the norm in the market.


“There's a lot of pressure for some of the smaller reinsurance players. Given some of these factors, like the level of undeployed capital, you would expect you might see some consolidation in the industry,” said Brian Schneider, Chicago-based senior director of insurance at Fitch Ratings Inc.

Aspen with $1.23 billion in 2012 annual premiums ($3.23 billion in shareholders' equity) and Endurance with $1.12 billion in annual premiums ($2.74 billion in shareholders' equity) ranked No. 35 and No. 37, respectively, according to a Moody's ranking of the world's 40 biggest reinsurers based on reinsurance premiums.

Munich Reinsurance Co. sits at the top of the group with $41.9 billion in 2012 premiums, while Berkshire Hathaway Reinsurance Group is the largest in shareholders' equity at $98.45 billion.

“The large amount of capital within the insurance industry combined with the large inflow of capital from investors or capital markets vehicles or insurance-linked securities, when you combine those two it's putting a lot of pressure on companies,'' said Jason Porter, a director at Standard & Poor's Corp. in New York.

In its reinsurance analysis, Moody's said, “Reinsurance buyers have long exhibited a "bigger is better' perspective when it comes to considering the capital bases of their reinsurance counterparties.”

There is a cluster of reinsurers with $5 billion to $10 billion in market capitalization and another cluster with $1.5 billion to $3 billion in capitalization, said Mark Dwelle, director of insurance equity research at RBC Capital Markets, a unit of RBC Dominion Securities Inc., in Richmond, Va.


“I think it's natural and realistic that some of those in that smaller camp would want to combine together to be part of the larger camp,” Mr. Dwelle said.

Mr. Kading, of the Association of Bermuda Insurers & Reinsurers, said, “It's about getting a critical mass that allows a company to expand its global playing field, have a stronger balance sheet, and reach into a different tier of clients that are looking for scale or that are looking for a certain size in the balance sheet.”

Meyer Shields, managing director and an analyst at Keefe, Bruyette & Woods Inc. in Baltimore, agreed that size and reach can be assets as brokers and reinsurance buyers consider a smaller set of larger companies.

“Having a wider array of lines and business does imply some diversification and is also beneficial to reinsurers,” Mr. Shields said.

Analysts say Endurance's $47.50 per share offer for Aspen leaves little room for higher bids from other potential suitors because it's at the upper end based on Aspen's book value.

Endurance said its offer represented a 21% premium on Aspen's closing share price of $39.37 on April 11, and a 15% premium on Aspen's record high share price of $41.43 on Dec. 31, 2013.

Aspen's share price has since risen, closing at $45.40 per share Friday.

“The proposed price worked out to be just about 1.2 times book value,” Mr. Dwelle said. “It would be hard to make a case for a multiple of 1.5 or higher.''