Endurance Responds To Aspen Board Position
Endurance Specialty Holdings Ltd yesterday [June 17] said that Aspen Insurance Holdings Limited’s “combative response” to the commencement of an exchange offer by Endurance confirms the importance of the actions it is taking to give Aspen shareholders a voice in order to make their views known, to urge Aspen to come to the negotiating table, and to hold the Aspen board accountable for its actions.
A statement from the Company said, “On June 9, 2014, Endurance commenced an exchange offer for all of the outstanding Aspen common shares for $49.50 per share in cash and Endurance common shares, calculated based on the closing price per Endurance common share on April 11, 2014, the last trading day prior to Endurance’s announcement of its initial proposal to acquire Aspen for $47.50 per share.”
John R. Charman, Endurance’s Chairman and Chief Executive Officer, said, “We know from our extensive engagement with Aspen shareholders that many have been frustrated by the dismissive and entrenched response of Aspen’s board and management to the significant opportunity for value creation that Endurance has proposed.
“The announcement made by Aspen today in response to our transaction proposal and exchange offer is simply more of the same – a self-interested cadre of Aspen insiders taking every action in their power to deny their own shareholders, the true owners of the company, the opportunity to realize the compelling value we have proposed.
“Perhaps it should come as no surprise that Aspen’s board and management are not aligned with the best interests of their shareholders given they collectively own less than 1.2 percent of Aspen,” Mr. Charman continued.
“Despite the heated rhetoric Aspen has directed at Endurance, Aspen’s board and management have presented no credible plan to deliver value that can compete with what we are offering, which represents a 19.5 percent premium over Aspen’s previous all-time high share price and at a 1.16x multiple of March 31, 2014 book value is a 13.8 percent premium over Aspen’s highest previous book value multiple [1.02x] over the past five years.
“What Aspen’s board and management have failed to achieve for ten years, we are prepared to deliver today.
“We urge Aspen shareholders to speak forcefully by supporting our two shareholder proposals – calling for a special general meeting to increase the size of the Aspen board, which will lead to a majority of Aspen’s directors standing for election at its 2015 annual general meeting, and endorsing the pursuit of a court-sanctioned scheme of arrangement.
“We are truly committed to pursuing these and any other actions and are determined to see them through in order to provide Aspen shareholders the ability to realize the highly attractive premium our proposal represents,” Mr. Charman said.
“Endurance believes that the assertions Aspen made today in its filings with the U.S. Securities and Exchange Commission [SEC] are misguided, reflect misstatements in order to further the Aspen board and management’s entrenching agenda, and are misleading to shareholders.
“Among others:
The Value of the Endurance Share Consideration
- Unable to deny the unique and significant value offered by the 40 percent cash component of Endurance’s proposal, Aspen casts baseless assertions regarding the quality of Endurance’s shares.
- Aspen has offered no tangible evidence to support its assertions regarding the valuation represented by Endurance’s proposal or the upside potential offered by the Endurance common share component of the consideration.
- While Aspen’s lengthy filings today cite the receipt of a so-called inadequacy opinion from Aspen’s financial advisor, the documents are conspicuously devoid of any substantive disclosure of the financial rationale or metrics used by Aspen’s financial advisor to reach that position, which we firmly believe is unsupportable.
- Endurance finds Aspen’s statements regarding the value of Endurance’s shares particularly misleading given Endurance’s consistent outperformance of Aspen over the past five years For example:
- Endurance has had a significantly higher total return to shareholders for the five years preceding the announcement of Endurance’s initial proposal on April 11, 2014 – 124 percent for Endurance versus a much lower 83 percent for Aspen
- Endurance has achieved meaningfully higher diluted book value per share growth [including dividends] – 13.0 percent CAGR for Endurance versus a much lower 9.4 percent CAGR for Aspen
- Endurance has attained higher underwriting profitability – 95.6percent average combined ratio for Endurance versus a higher 96.7 percent for Aspen
- Endurance has been more efficient than Aspen, having managed to an average expense ratio of 29.0 percent – versus a much higher 33.5 percent for Aspen
- Based on Endurance’s closing share price on June 16, 2014, and assuming a consideration mix of 40 percent cash and 60 percent Endurance common shares, Endurance’s proposal would value Aspen at $48.12 per share.
- The specialized businesses of Endurance and Aspen are highly complementary, and Endurance believes strongly that the two companies can accomplish significantly more together than either can on its own. The businesses that Endurance brings to the combined company, such as Endurance’s market-leading agriculture insurance business and its catastrophe reinsurance business, complement Aspen’s strong franchises at Lloyd’s, resulting in an attractive diversified platform across products and geographies.
- Contrary to Aspen’s misguided assertions, Endurance’s agriculture insurance business, since it was acquired in late 2007, has generated $80 million of profit, highly attractive returns on equity and steady policy count growth.
- Aspen’s mischaracterization of Endurance’s underwriting performance through a myopic focus on a single distorted underwriting ratio metric conveniently ignores the fact that Endurance has achieved a superior combined ratio to Aspen over the past five years and fails to take into account a host of critical factors, including the following:
- Endurance has taken a prudent approach with respect to its reserving. The majority of Endurance’s reserve releases have come from its short tail lines and 74 percent of Endurance’s casualty and professional lines reserves are IBNR. Endurance has been a leader in the industry in transparency with respect to the publication of its global loss reserve triangles, while Aspen has lagged in its own public reserve disclosure.
- To ignore catastrophe losses as Aspen has done obscures the key underwriting of catastrophe exposures, an area where Endurance is recognized as an industry leader.
- By eliminating expenses from the comparison, Aspen conveniently disregards Endurance’s greater efficiency as manifested in its lower expense ratio than Aspen over the past five years.
- In sharp contrast to the misguided assertions by Aspen’s board and management, the success Endurance has had in attracting significant industry-leading talent to both its insurance and reinsurance businesses over the last year is a testament to the attractive underwriting and management franchise and culture that has been built since John Charman became Endurance’s Chairman and Chief Executive Officer.
The Certainty of the Cash Component of the Consideration
- The fully committed $1.0 billion bridge loan facility provided by Morgan Stanley represents a traditional and well-accepted means of financing the cash portion of a merger and acquisition transaction, whether negotiated or unsolicited.
- Given its investment grade rating, Endurance is confident it can access the capital markets to achieve the permanent financing plan it has set forth.
- Aspen is attempting to mislead shareholders regarding Endurance’s cash position, as Endurance has the ability to access up to $780 million in cash immediately from its Bermuda subsidiary without prior regulatory approval.
- Endurance’s proposal – including the exchange offer – is not subject to a financing condition.
Transaction Synergies
- Endurance expects the combined company to generate synergies exceeding $100 million annually, resulting in return on equity and earnings per share accretion in 2015. These synergies will include cost savings, underwriting improvements, capital efficiencies, and enhanced capital management opportunities.
- Endurance believes cost savings of 10 percent – 15 percent of the annualized combined general and administrative expense base represent a reasonable estimate of potential cost saving synergies [$66 million to $99 million], consistent with industry practices and transactions of the size and type proposed by Endurance.
- In addition, Endurance expects to be able to achieve a 1 percent improvement in the expected loss ratio of the combined company which would result in further synergies of over $40 million.
- Contrary to Aspen’s unsubstantiated assertions, clients and brokers of both companies support our proposed transaction and see it as a welcome response to the sector’s need for increased scale, market presence, and diversification.
Conditions to the Exchange Offer
- Endurance believes the conditions of the Exchange Offer are customary for a typical merger or acquisition.
- Aspen shareholders should understand that the principal impediment to their ability to realize the compelling value inherent in Endurance’s increased proposal is Aspen’s board and management and their refusal to engage in any way. Endurance is confident that the conditions to the exchange offer would be satisfied if Aspen’s board and management enter into constructive discussions with us without further delay.
Steps Being Taken by Endurance to Expedite the Transaction
- Requesting Aspen shareholders to exercise their long recognized right to vote on matters of great significance to the company is neither a “coercive” nor “desperate” action.
- Aspen’s criticisms of Endurance’s actions are just more hollow rhetoric designed to misdirect Aspen shareholders from the efforts of Aspen’s board to disenfranchise its shareholders.
- Ironically, Aspen has demonstrated poor governance practices, including its classified board, poison pill, restrictive bye-law provisions, small insider share ownership and specious arguments seeking to disenfranchise its shareholders and deny them a voice in the future of their company.
- The entrenched position of Aspen’s board and management has left Endurance no choice but to engage directly with Aspen’s shareholders to give them a voice in the future direction of Aspen.
“We firmly believe that a combination of Endurance and Aspen makes eminent strategic and financial sense, creating a company with increased scale, an attractive diversified platform across products and geographies, and greater market presence and relevance.
“Our proposal offers Aspen’s shareholders a highly attractive upfront premium and the ability to participate in a stronger and more profitable company. Aspen shareholders deserve a Board and management team that does not willfully ignore the compelling benefits of our proposal and should use the opportunities Endurance has presented to them to make their opinions known on this value-enhancing combination,” Mr. Charman concluded.
“Shortly, Endurance will be sending a solicitation statement to Aspen shareholders. By submitting the white authorization and consent card, Aspen shareholders can requisition a special general meeting of shareholders in connection with a proposal to increase the size of Aspen’s board of directors from 12 to 19 directors and authorize support for the proposal of a Scheme of Arrangement by Endurance.
“Shareholder questions regarding Endurance’s solicitation, Endurance’s exchange offer, or requests for related documents should be directed to Georgeson Inc., 480 Washington Boulevard, 26th Floor, Jersey City, NJ 07310; shareholders, banks and brokerage firms please call toll-free at [877] 278-9672.
“For additional information about Endurance’s increased proposal to acquire Aspen, including a slide presentation for investors, please visit online.
“Endurance’s financial advisors in connection with the proposed transaction are Morgan Stanley & Co. LLC and Jefferies LLC, and its legal counsel is Skadden, Arps, Slate, Meagher & Flom LLP and ASW Law Limited.”
