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Aspen’s O’Kane: Merger with Endurance would lead to ‘material loss of business’

Aspen Insurance Holdings Ltd is the subject of a $3.2 billion takeover bid from Bermuda rival Endurance Specialty Holdings Ltd.

Last month, the unsolicited $47.50-per-share, cash-and-shares bid was made public by Endurance, whose chairman and chief executive officer John Charman has said the two companies were “extraordinarily complementary” and “ripe for a merger”.

Aspen's board rejected the offer, labelling it “ill conceived” and the prospective merger as “a strategic mismatch”.

Aspen's chief executive officer CHRIS O'KANE agreed to give written answers to some questions from The Royal Gazette's deputy editor (head of business) JONATHAN KENT.

Q: Mr Charman has accused you and the Aspen board for having a disregard for the interests of Aspen shareholders by refusing to meet for even exploratory talks with Endurance. How do you respond to this accusation?

A: Mr Charman's characterisations are merely an attempt to deflect from the real point that the “proposal” is extremely unattractive. It grossly undervalues Aspen, is highly conditional, and raises serious issues, none of which Endurance has addressed. Among other issues, they are proposing to pay most of the consideration with a stock that is unappealing and the cash component of their proposal comes from a financing, the terms of which they have refused to disclose and which would dilute the shareholders of both companies. A combination would also result in significant personnel disruption and loss of business.

Our board has carefully and thoroughly evaluated Endurance's “proposal” and concluded that it is not in the best interests of the company or our shareholders. We have a diversified and growing business with a strong balance sheet, proven management team and disciplined risk management process — and we are confident that continued execution of our strategy will provide value far in excess of the proposed transaction.

Our first-quarter results reflect the significant progress we have already made in executing our strategy. We delivered an annualised return on equity (ROE) of 14.8 percent for the quarter, the highest quarterly ROE since 2010, and we are strongly positioned to achieve our stated goals as the returns from our investments in the business continue to grow. Following our strong first-quarter performance, the Endurance “proposal” represents an even lower multiple of book value per share.

Q: Aspen has stated that a combination with Endurance would be a bad strategic fit. Why is this so and what characteristics would a company need to be a good strategic fit for Aspen in your view? Would you welcome other offers?

A. We would anticipate significant dis-synergies from a combination with Endurance. Not least among these would be a material loss of business — and corresponding revenues — due to the considerable business and client overlap in both the reinsurance and insurance segments of the two companies. From what we are hearing from brokers, underwriters, clients and others in the market, we would expect a significant loss of business from those who are simply unwilling to do business with Endurance. Furthermore, there is a very real risk that we lose talented employees due to Endurance's top-down corporate culture, which is very different from ours. This transaction would be destabilising, disruptive and value destroying, and we are confident that our current strategy will deliver superior value.

We don't think it's helpful to speculate on potential combinations with other companies. Our board takes very seriously its fiduciary obligation to review all credible offers that have the potential to create superior shareholder value. Our focus is on continuing to execute our plan and on building value for our shareholders, clients and business partners.

Q. One of Mr Charman's arguments in favour of a merger is that ‘bigger is better' from the client and broker viewpoint, and that the industry needs more consolidation to better meet the needs of its customer base. Do you agree with this opinion and at its current size, can Aspen continue to compete strongly in this environment?

A. We have the capital, scale and underwriting expertise to remain an important player in this industry. Scale for the sake of scale is no substitute for these attributes and is not a reason to pursue a business combination with Endurance. A company is able to generate attractive long-term returns on capital only if it is utilised by those with strong underwriting expertise — and we have leading underwriting capabilities in a broad range of lines, giving us a strong overall competitive position. Our success in the January 1 renewal season, where we were one of the clear winners of the so called “battle of the signings”, shows the strength of our client relationships and excellent service, which gives us access to the most sought-after risks.

Q. Aspen has said it is in litigation regarding the poaching of staff by Endurance. How many employees does this litigation concern? Have you taken any steps to guard against more employees leaving?

A. While we can't comment specifically on matters under litigation, I can say that we have some of the best underwriters in the industry and a corporate culture that respects and trusts them and gives them the autonomy, within a clear and strong framework, to do their jobs well. They appreciate and enjoy this culture and work environment. We are not a top-down, “command and control” type organisation. I think the best thing we can do is to ensure that our people continue to know that they are respected and highly valued.

Q. Aspen says that the overwhelming consensus among shareholders is that the board was correct to reject the Endurance offer. Endurance says shareholders it has spoken with support the strategic case for the combination and agree it would bring financial benefits. Does this mean that the sticking point is the size of the offer, or do you dispute what Endurance has said on this?

A. We cannot comment on any shareholder dialogue that Endurance might have had or be having. We can only say that in our talks with shareholders we have found overwhelming consensus for our rejection of Endurance's proposal.

Q. What do you think the future holds for Bermuda as an insurance and reinsurance market, and what can it do better to strengthen its competitiveness as a jurisdiction?

A. We think that Bermuda will continue to have a leading role in the global insurance and reinsurance markets. Although there are a number of other newer jurisdictions aiming to attract business, Bermuda is a very well established market which continues to evolve in line with market dynamics.

The jurisdiction's regulatory environment, lower operational barriers, concentration of underwriting talent and capital resources are hard to beat. While local markets have grown up to service certain types of less complex risks, Bermuda remains the preference of many and is driving the rise of alternative reinsurance, with insurers and reinsurers looking to provide additional capacity.

Aspen is a major player in Bermuda and we have a proud history here. We have built successfully over the years from a Property Cat base to offer an increasing number of insurance lines in the local market. We are also very active in the local community and sponsor important local causes. We are fully committed to the Bermuda market.

Aspen CEO Chris O'Kane

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Published May 05, 2014 at 9:00 am (Updated May 04, 2014 at 8:31 pm)

Aspen’s O’Kane: Merger with Endurance would lead to ‘material loss of business’

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