Six Degrees of John Charman: Sompo Acquires Aspen

With last week’s news that Aspen agreed to be acquired by Sompo for $3.5B, I thought it was worth doing a brief retrospective on the Aspen saga and how they ended up here along with the delicious irony of Sompo being the ultimate acquirer.

The recent sale was actually Aspen’s second time being acquired, as many of you know. The original Aspen ran a failed auction back in 2018 which ultimately led to Apollo being able to buy it as a distressed asset.

Apollo brought in Marc Cloutier, formerly of Brit, who did an admirable job cleaning up the mess Apollo inherited and was able to bring the company back to public markets earlier this year.

With the IPO not doing as well as Apollo presumably hoped for and Sompo’s pockets on fire with newly freed up capital, an eager seller and an eager buyer led to an easy match.

But this story only scratches the surface. How did Aspen end up in such a distressed position? That requires a visit to the history book.

A Year Late and A Platform Short

For those unfamiliar, Aspen was always the little sister of the Bermuda class of 2001. In fact, it didn’t even launch until a full year after all the other startups.

It was created by the Lloyd’s Syndicate Wellington, which earlier lost its leader, Tony Taylor, to found Montpelier Re. So Wellington was late to the party and then brought its second choice, Chris O’Kane, to lead its new Bermuda investment.

With that inauspicious start, it is not surprising that Aspen never really established much of a foothold as a leader in Bermuda. It had to settle for secondhand placements and sought growth in some of the more challenging markets, particularly in US wholesale insurance.

Thus, it always traded at a lower multiple than its peers and struggled to match their underwriting returns.

This is where John Charman enters the story.

The Endurance Sinking

In 2013, John Charman famously engineered a palace coup where he became CEO of Endurance. Charman made very clear he thought Endurance (which was another of the weaker sisters of the class of 2001) needed to grow its way to success.

Not the wisest idea for an insurer in largely syndicated lines, but that was the plan. Of course, John wasn’t only interested in organic growth. He was also keen on acquisitions.

The problem was he didn’t have a multiple or the size necessary to buy some of his preferred targets so he instead turned his sights to Aspen, perceiving them as wounded.

In 2014, Endurance launched a hostile offer for Aspen at $47.50 (equivalent to $3.2B and 1.X book value). This was a premium of about 20% to the stock price at the time.

Any rational CEO fulfilling his fiduciary duty would have agreed this was the best option for shareholders. However, sometimes business gets personal. And Chris O’Kane had two problems.

First, he didn’t want to sell. He liked being CEO and didn’t want to give it up. Second, he most certainly did not want to sell John Charman.

So O’Kane vowed to stay independent, or at least find another buyer. The problem was nobody else wanted to pay close to what Charman offered.

Both sides dug their trenches and probably would have remained there for years if a shareholder vote did not force a resolution. Fortunately for O’Kane, the vote went his way and he got to keep his company.

A Tale of Two Sales

Unfortunately, for shareholders, Chris O’Kane got to keep his company. The stock languished behind peers over the next few years until Aspen decided in 2018 they were finally ready to sell.

The problem was there were no buyers to be found. Valuations had fallen for Bermuda entities and Aspen’s results had begun to deteriorate (more accurately, they had deteriorated many years prior but Aspen finally admitted to the poor underwriting decisions).

Why didn’t Endurance try again? Too late. Two years earlier, Endurance sold to Sompo(!) for $6.3B, or $93/share, a 40% premium to the stock price and a 50% premium to book. It was arguably the most successful exit of the century in Bermuda (yes, Validus got a higher multiple, but was also worth more).

After a long search, Aspen finally sold out to Apollo for $42.75, or $2.6B, 1.1X the new lower book. Yes, you read that correctly. The price per share was 10% below the Endurance offer and the book value declined over the intervening four years.

Even the latest sale to Sompo was for only $3.5B, so just 10% above the valuation Aspen was offered 11 years earlier. That’s not even a 1% annualized return!

So Charman proved to be a much more astute seller than O’Kane. In hindsight, it was likely for the best that Endurance failed in its pursuit of Aspen. Maybe they could have improved Aspen, but it’s just as likely it would have prevented them from being acquired by Sompo.

Full Circle

So, as you’ve probably figured out by now, because Sompo owns Endurance and will soon own Aspen, that means the two will finally come together!

I’m sure somewhere John Charman is smiling over a bowl of his mom’s minestrone soup (bonus if you get that reference!). He retired in 2022 so he was not involved in the decision to acquire Aspen this time, but surely his imprint remains on Endurance.

Oh, and before anyone points it out, yes it’s more like two degrees of John Charman, not six, but that isn’t as good a reference for a title, now is it?

The takeaway is none of this happens – Sompo buying Endurance, Sompo buying Aspen, Apollo buying Aspen – if Charman didn’t try (and fail) to acquire Aspen many years ago.

Postscript: The Principal-Agent Failure

But if you think I’m going to end the story there, I’m afraid I’m going to let you down. There is one more thing that had to happen for all these events to play out the way they did.

Chris O’Kane had to put his own interests before his shareholders when faced with the choice to accept a hostile offer he was personally against (and aghast at).

To be clear, I’m not suggesting a CEO should always accept a hostile offer. Most of the time they shouldn’t, in fact. But this was one of the obvious times where it was pretty clear there was no compelling alternative for Aspen that would be better than Endurance’s offer.

The right decision was to swallow hard, tell your employees that this was sadly the best option on the table, and move on to your next act.

In the long run, the employees weren’t better off, the shareholders were worse off, and O’Kane damaged his reputation by sticking it out.

This is my periodic reminder that the greatest conflict we face as a society is misaligned incentives between principals and agents, whether it be CEOs and shareholders, voters and politicians, the policyholder and the insurance agent, etc.

If people did what they promised to do in their role as a principal, we would have a lot fewer problems in the world. Instead, people often put personal interest ahead of their constituents.

Chris O’Kane didn’t want to sell John Charman. I don’t begrudge him that. He had plenty of reasons to feel that way.

But he didn’t own Aspen. The shareholders did! Thus, Chris needed to “get over his feelings” and do what was best for shareholders. If you’re another CEO reading this, this is a friendly reminder you too need to put your shareholders’ interests before your own.