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Bain ownership will allow Esure to expand digital capacities, insurer's CEO says

Bain Capital "will be good owners" of Esure Group PLC and will allow the U.K. insurer to invest more in digital capabilities, according to the latter's interim CEO, Darren Ogden.

Ogden also told S&P Global Market Intelligence in an interview that, like Chairman Peter Wood, he plans to remain at the company after the deal goes through, although Esure's external search for a permanent CEO will continue.

Bain has offered £1.21 billion, or 280 pence per share, for Esure, which the insurer's board has recommended. Analysts said the offer, a 37% premium on the Aug. 10 closing price of 204 pence a share, was a good deal for shareholders, and Berenberg analyst Iain Pearce in an Aug. 14 research note described the takeover as "somewhat a lucky escape" for shareholders given the "poor nature" of Esure's first-half 2018 earnings.

Pretax profits fell to £36.1 million in the half, down from £45.1 million a year before.

Digital push

Ogden said in an interview that Esure has been investing in and employing technology, such as using artificial intelligence to determine from pictures whether crashed cars are repairable or a total loss.

"As a private company and working with an organization like Bain, we really believe that can allow us to push on even further," he said.

He added that taking Esure private would allow it to make long-term decisions more easily. In the public space, companies have certain short-term delivery targets that "can compromise some of your thoughts around a long-term position," he said.

Ogden was Esure's CFO until he replaced departing CEO Stuart Vann on an interim basis in January. Ogden said he intends to stay with Esure following Bain's acquisition, but that the plan was still to hire a new CEO from outside the business to bring in a "different type of leader" amid the increasing digitization of insurance.

"That is very much an external candidate, and that is very much where we are still looking," he said.

Bain's offer is below the 290 pence that Esure's shares first priced at in its March 2013 initial public offering. But Ogden said the company now is not directly comparable to what it was then, pointing out that it had returned "just under" £300 million to shareholders in dividends over its time as a listed company and that it had bought the remainder of, and then spun off, price comparison site GoCompare.com Group PLC into a separate listed company.

"You can't forget both the dividends investors have had, but more importantly the value we have created as part of that demerger of GoCompare," Ogden said.

'Attractive' valuation

Analysts reacted positively to Bain's offer price for Esure. UBS' Jonny Urwin said the 280 pence valued the insurer at 14x estimated 2019 earnings per share.

"Given the headwinds facing the smaller challenger U.K. motor companies in a subdued pricing environment, we see this as an attractive valuation multiple," he wrote in a research note.

Shore Capital's Paul De'Ath noted that Esure's shares had traded above the offer price in September 2017 but that the subsequent price fall, coupled with a "weakening" market view of U.K. motor insurers, suggest that "investors will be willing to take the money offered."

Analysts were not impressed with Esure's first-half 2018 results. Its £36.1 million profit before tax, £30.8 million profit after tax and combined ratio of 100.9% were all worse than expected. But De'Ath said the weaker-than-expected performance "makes the 280 pence offer price more attractive."

Less clear is why a private equity firm would want to buy into the highly competitive, challenged U.K. motor market. But Berenberg's Pearce said Bain's interest may have been influenced by Esure's low valuation.

"It is very hard to make a rationale for why would Bain do this other than it was just too cheap," Pearce said.