Merger Push By Endurance Board Member Comes As Surprise

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February 26, 2010 Friday

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Merger push by Endurance board member comes as surprise

Jacob Geiger

One industry observer characterized the filings by Richard Perry, a director and the company’s largest shareholder, as a “shot across the bow” of the new management team.

The decision by Endurance Specialty Holdings Ltd. board member Richard Perry to publicly urge the company to pursue a merger or other transaction caught analysts, investors and a leading proxy firm by surprise.

Perry is one the company’s largest shareholders, holding 12.6% of the common shares outstanding, and has been on Endurance’s board since its founding in 2001. The amended ownership filing released after markets closed Feb. 22 expressed concern that incoming CEO David Cash and President William Jewett will not put the company in a position to “capitalize on industry consolidation opportunities and thereby improve shareholder value.”

Perry also shed rare light on the internal disagreements of a corporate board as he expressed unhappiness with the decision by fellow board members to elect retiring CEO Kenneth LeStrange to the role of nonexecutive chairman, effective March 1.

“That’s highly unusual, as boards usually try to present, at least to the public, a consensus approach,” Robert McCormick told SNL. McCormick, chief policy officer of proxy firm Glass Lewis, said Perry’s decision to meet with other shareholders might signal a “shot across the bow” of the new management team.

A portfolio manager at one large institutional owner of Endurance’s shares said Perry’s move caught his company by surprise. He said Perry had not yet been in touch with them.

“If the intent is to rattle the new management’s cage and say, ‘Don’t be content to husband capital and buy back a little stock,’ that’s OK,” the portfolio manager told SNL, but he noted that Perry’s proposals are somewhat “amorphous.” The source asked that his name not be used because his company does not comment publicly on the companies in which it owns stock.

The manager said he has been content to let Endurance hold high levels of capital through the 2009 catastrophe season but was hoping the company would deploy that capital or begin aggressive share buybacks now that the season had turned out to be a mild one.

Cash, who serves as Endurance’s chief underwriting officer, said at a Feb. 23 industry conference that he hopes his tenure as CEO will see aggressive share buybacks.

“I hope to be CEO for a long time, and I hope that in 10 years time, I’ll look back and there will be 25% fewer outstanding shares than there are today,” Cash said, adding that the company will aim to steadily buy back stock rather than purchasing shares in a “jerky” fashion.

When asked about Perry’s statements, Cash said the company knew the filing was coming but said he would not offer any further comments. A spokeswoman for Perry Capital also declined additional comment when contacted by SNL.

William Bolinder, Endurance’s lead independent director, was unavailable for comment, a person answering the phone at his home said.

McCormick noted that shareholders are becoming increasingly interested in seeing the role of chairman separated from that of CEO. But having a former CEO serve as chairman can create uncertainty about who is really in charge, he said, especially when the new CEO is a former subordinate of the chairman.

Michael Paisan, an equity analyst at Stifel Nicolaus & Co., said many investors lost some faith in LeStrange as his company failed to grow at the same rate as competitors AXIS Capital Holdings Ltd. and Arch Capital Group Ltd. At the same time, however, Paisan said he thinks Cash enjoys high regard among investors and will be unlikely to support a major merger that could cost him control of the company.

The real risk with Perry’s proposals, Paisan said, is destroying value through a botched defensive merger.

“The graveyard is littered with value-destroying M&A activity,” he told SNL. “Perry wants a merger before all of the good companies are gone, but Cash doesn’t want to play defense.”

Still, the analyst noted that Wall Street’s prevailing wisdom for insurers these days is that bigger remains better. If the company wishes to grow with mergers, Paisan said bolt-on deals like the company’s 2002 acquisition of reinsurance business from Trenwick Group Ltd. unit LaSalle Re Holdings Ltd. make more sense. Another deal he cited was Endurance’s 2003 acquisition of certain renewal rights from HartRe LC, a unit of The Hartford Financial Services Group Inc.

“Over the past year, every company has gotten a more inflated value of its net worth as markets recovered. The last thing you want to do is overpay,” Paisan told SNL. “Instead, you can go hire teams for scale or do bolt-on deals that add products to your portfolio.”

March 4, 2010