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Sompo expands US footprint with US$6.3B deal for Endurance Specialty

Sompo HoldingsInc.'s acquisition of Endurance Specialty Holdings Ltd. for about US$6.30 billionwill help the Japanese company grow its overseas presence and compete with bigglobal players.

The deal for Endurance, Sompo's largest to date, willprovide the Japanese insurer with an operating base in the U.S.

Amid Japan's aging population and a stagnant economy, largedomestic insurers have accelerated overseas M&A activity in developedeconomies since 2014 for better growth potential. Similarly, Sompo said in anOct. 5 statement that it is looking to grow earnings by shifting resources towardits overseas business.

"We expect Endurance to contribute about ¥40 billion tonet profit in fiscal 2018," Sompo Group CFO Shinji Tsuji said during acall discussing the deal. Following the acquisition, income from the overseasinsurance business would jump to 27% of Sompo's total group income from 12%,the company said in a statement.

Bermuda-based Endurance is a global specialty insurer thatunderwrites a variety of insurance such as crop insurance, with operations inthe U.S., the U.K., Bermuda and other regions. Management at Endurance willcontinue to operate the business after the acquisition.

"This seems a good buy in my first impression.Endurance is a specialty insurer that possesses expertise at niche markets,which tends to be able to produce relatively sound and stable margins throughcycles," said Teruki Morinaga, a director and insurance industry analystat Fitch Ratings.

The price tag for Endurance appears "fairlymodest" at 1.4x book, David Threadgold, an analyst at Keefe Bruyette &Woods, said in a same-day note. The Endurance deal looks like "a solid,earnings enhancing purchase of a quality business," he said.

While Sompo's shares have recently underperformed relativeto peers, the deal may allow the shares to regain lost ground, Threadgold added.KBW has upped its rating on Sompo to "outperform."

With regard to future M&A moves, Tsuji said thecompany's attention will be focused on folding Endurance into the group."We still have a certain amount of cash, but we aim to focus our effortson post-merger integration rather than go out and look for new acquisitiontargets, because this is our first supersized M&A deal," he said.

Sompo's rivals at home have also made big overseasacquisitions. Tokio Marine HoldingsInc. in October 2015 completed its US$7.50 billion purchase of U.S.-based HCCInsurance Holdings Inc. MitsuiSumitomo Insurance Co. Ltd., a unit of MS&AD Insurance Group Holdings Inc., in Februaryclosed itsacquisition of MS AmlinPlc in the U.K. for £3.47 billion.

Sompo itself bought Canopius Group, a Lloyd's insurer in the U.K., for £594million in 2014. The company later to increase its stake in Frenchreinsurer SCOR SE,but in December 2015 decided not to proceed with the plan due to SCOR'sunwillingness.