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Endurance case still compelling despite doubters: KBW


There remains a better than 50 percent chance that Endurance will succeed in acquiring Aspen Insurance, according to analysts at Keefe, Bruyette & Woods (KBW), who made that conclusion after spending two days with senior executives from Endurance.

After spending time with Endurance chief financial officer Michael McGuire and senior vice president Greg Schroeter, the analysts said they believe the case for the deal going ahead is compelling enough to potentially outweigh the fact that a number of proxy advisory firms have recommended that Aspen’s shareholders reject Endurance’s proposals.

The analysts said they “consider their arguments compelling enough (we think better than 50/50 odds) to possibly outweigh the proxy advisory firms’ recommendations against Endurance’s proposals. Ironically, strong shareholder votes for Endurance’s proposals would probably pressure its stock near-term, so we’re staying at Market Perform, but the longer-term case for this acquisition looks solid to us."

On the merits of the deal itself, the note said that while shareholders should be wary of the risks inherent in such deals in the insurance business, benefits such as increased diversification could outweigh these problems.

“We’ve long been skeptical about most insurer M&A activity, primarily because of the reserve risk, and secondarily because (unlike personal lines’ more scientific processes) commercial insurance underwriting success depends almost entirely on human resources that are susceptible to distraction and defection. Endurance has very recently undergone a material restructuring that, while apparently quite successful, could leave its ranks wary of more disruption,” the research note said.

“Offsetting those issues are benefits like increasing diversification (we believe the deal itself largely resolves concerns over Endurance’s ‘over-exposure’ to crop insurance), potential expense reductions, and the rising importance of size and scale.

“The first two factors aren’t particularly new, and past poor acquisitions show that the costs can outweigh the benefits, but there are also successful M&A examples, so it really comes down to execution, in our view.

“Execution also matters for scale-focused M&A, but we think scale will matter more in the future than in the past. We don’t see much evidence (yet) supporting the idea that bigger, more diversified primary commercial insurers’ underwriting results outperform smaller competitors’; in fact, we contend that bigger companies have an inherently tougher time distinguishing themselves from the aggregated industry’s historically underwhelming performance.

“Still, as leading insurance brokers have developed systems and technology allowing them to analyse their own profitability, they’ve recognised that the cost of working with too many insurance companies eventually outweighs any very marginal benefit, and we expect a steady decrease in the number of carriers with whom the bigger brokers will place business.

“Fewer carriers should improve overall industry efficiency (benefiting brokers, insurers, and clients), and in that context, bigger insurers’ greater negotiating leverage should provide access to more pieces of more desirable business. Bigger primary insurers are also generally bigger reinsurance buyers, and their potentially higher reinsurance spend provides more negotiating leverage versus the reinsurance brokerage oligopoly.”

Keefe, Bruyette & Woods , Endurance, Aspen, Bermuda, North America

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