Price a Sticking Point for Bermuda Insurers Looking to Buy Entry into Lloyd’s Market

By | July 23, 2008

A handful of Bermuda insurers see an opportunity to expand their horizons by entering the Lloyd’s of London insurance market, but their interest of late has waned as prices of potential target companies have risen.

The dearth of activity is in stark contrast to last year when a wave of companies bought into the London market by acquiring member companies, known as syndicates.

To be sure, the window may only have shut temporarily since the catalyst for the earlier deals remains — namely the benefits that being part of Lloyd’s offers.

Among them, the ability to piggyback on to the market’s high financial strength rating, access a network spanning 200 territories and countries around the world, and move into different lines of business.

But until prices come down, most executives say they will stay on the sidelines.

“A number of Lloyd’s entities have marketed themselves, and we have looked, but they have been very rich,” Marston Becker, chief executive of Bermuda insurer Max Capital Group told Reuters.

Flagstone Reinsurance and IPC Holdings are among others who are keen to break into Lloyd’s. But again, price has been a sticking point, with Flagstone calling them “frothy.”

WHAT’S IN A NUMBER?

Those who spoke with Reuters said Lloyd’s players are seeking prices in the range of 1.8 times tangible book value, or higher, a figure hard to justify to shareholders.

Lloyd’s Chief Executive Richard Ward told Reuters the market can command a certain price because of the multiple benefits that come with being in the market.

“It is the market rate,” he said, adding that Lloyd’s is not directly involved in negotiations. “This interest we are having from overseas insurance companies does not surprise me, and I am sure it will continue,” said Ward in a recent interview.

By becoming a member of the Lloyd’s market, insurers can quickly move into selling multiple types of coverage across all the regions where it is licensed. Lloyd’s syndicates also operate under the market’s strong “A” financial rating, a boost to business prospects, and have the security of Lloyd’s central fund, where capital is pooled as security for Lloyd’s policies.

Although business can be done electronically, Lloyd’s is still a hive of activity, with about 4,000 people visiting the market in London on a daily basis — many to see brokers about finding coverage for a range of risks from one of the market’s 80 syndicates.

Lloyd’s, launched in the 1600s from a London coffee shop, today offers insurance on a wide range of perils, from oil rigs to celebrity body parts.

The market, which is in the midst of a three-year make-over, has come a long way since a rough patch a few years ago when it was criticized for its outmoded business practices.

Some of its largest members grew so disgruntled they set up large operations outside the market, mainly in Bermuda, the Mid-Atlantic island that has grown into the fourth-largest global insurance market.

But by last year, it looked as if the tables had turned. Bermuda insurers such as Validus Holdings and closely held Ariel Holdings enlarged their operations overnight by buying into the Lloyd’s market.

“Lloyd’s is going through a flowering period — they came back from almost bankruptcy and now everyone wants to join,” said Don Kramer, chief executive of Ariel. Last year Kramer closed an all-cash deal worth close to $400 million for Lloyd’s-based Atrium Underwriting.

But since Argo Group bought Heritage Underwriting Agency about three months ago, deals have come to a standstill.

While many deals in other industries have floundered because financing has been constrained by tighter credit markets, insurers have cash because of blockbuster profits over the past two years.

PATH TO DIVERSITY

Buying your way into the Lloyd’s market is not the only way to get a foothold. Bermuda-based Montpelier Re, for one, last year set up its own Lloyd’s syndicate from scratch.

But those who are currently looking say buying instead of starting a syndicate is the preferred route because it can be quicker and cuts out the hassle of finding specialist staff, a persistent problem for the industry.

Even then you sometimes get less than you bargained for, as one recent buyer discovered when a group of senior managers decided to leave en masse after the sale closed.

“The only thing you pay the premium for is franchise and people,” said IPC Re Chief Executive James Bryce, who has pored over “virtually every transaction.”

“Quite frankly, either the price was too high, or it did not fit — we are looking for diversity, not to do more of what we already do,” said Bryce.

IPC Re, which has specialized in selling property-catastrophe reinsurance since it first opened its doors 15 years ago, is now looking to add some other lines of business, and maybe expand into selling some insurance.

Reinsurers offer backup cover to insurers, thereby spreading the risk of losses among several carriers.

“Specialty is no longer the flavor, and that is going to be reflected in our rating, and our share price,” said Bryce, of why IPC now wants to branch out. “Increasing shareholder value is driving us to look at options.”

Lloyd’s fits the bill better than any other option. “It has gone from teetering on the brink of disappearing to being the storybook on the global stage,” said Bryce.

Time is not necessarily on everyone’s side. Insurance rates are in a period of decline, leaving companies scrambling to find alternative ways to boost income while maintaining underwriting standards.

But those who see Lloyd’s as the bright hope also see market conditions ultimately working in their favor.

“My guess is as the market softens those multiples will come down — we are optimistic that at some point we will make a match,” said Max Capital’s Becker.

(Editing by Brian Moss)

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