LONDON - A buyout of esure depends on avoiding potholes. Bain Capital has offered 1.2 billion pounds to take the UK insurer private. To justify the price, the private equity firm will need to ramp up the company’s digital credentials.

Bain’s offer of 280 pence a share in cash is a 37 percent premium to esure’s closing share price last Friday and a third higher than the price at which it listed in 2012. That looks generous. The company’s pre-tax profit dropped by a fifth in the first half of the year as bad weather pushed up claims on motor and housing policies, even as gross premium income rose 12 percent. Little wonder that owners of almost half the shares – including Chairman Peter Wood – have accepted the bid. Bain’s offer values esure at 12 times expected earnings for 2019, according to Thomson Reuters I/B/E/S. Larger rival Direct Line Insurance Group trades on a multiple of just under 11.

Like many insurers, the company behind brands such as Sheilas’ Wheels is grappling with a market where the average cost of protecting a car fell 11 percent in the twelve months to June, according to comparison website Confused.com. That makes an ability to assess risk precisely even more important. Boosting investment in machine learning would be one way to help esure better gauge the chances of car crashes, break-ins, or flooding, while reducing the need for large call centres.

Bain can argue that UK insurance is at a low point in the cycle. Modern cars are proving costlier to repair and weather patterns are more extreme. That pushes up claims, which should in turn lead to a repricing of policies. But increasing competition - not to mention long-term uncertainty about how insurance adapts to driverless cars - makes this investment anything but an easy ride.

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CONTEXT NEWS

- British insurer esure Group on Aug. 14 accepted an offer from a vehicle led by Bain Capital Private Equity valuing the company at 1.21 billion pounds in cash.

- The insurer’s two biggest shareholders, Chairman Peter Wood and Toscafund Asset Management, supported the deal, which is worth 280 pence per share. Together they own 47.7 percent of esure’s shares. The offer represents a premium of 37 percent to esure’s closing share price of 204 pence on Aug. 10.

- The insurance company was founded by Wood and Halifax in 2001. After a management buyout in 2010, it listed on the London Stock Exchange two years later at 212 pence per share. Esure listed its comparison website, Gocompare.com on the London Stock Exchange in 2016. Wood has agreed to continue as chairman following the completion of the deal.

- The company reported a pre-tax profit to 36.1 million pounds for the six months to June, down 20 percent on the same period last year, as a result of bad weather.

- Shares in esure were up 3.8 percent at 277 pence by 0730 GMT on Aug. 14.

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(Editing by Peter Thal Larsen and Karen Kwok)

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