1 October 2015 Insurance

Lancashire-Novae tipped for bids in M&A frenzy

The Lloyd’s market will likely see more mergers and acquisitions (M&A) activity as it heads into 2016, according to Haitong Research, which tips Lancashire and Novae as two companies likely to solicit interest from potential acquirers.

Haitong noted that Sumitomo Insurance’s recent acquisition of Amlin highlights the attraction of Lloyd’s businesses as investors.

This is partly because the re/insurance sector is largely uncorrelated to the wider economic environment as its performance is traditionally driven by the insurance cycle, the report said.

According to Haitong, recent M&A activity is driving sector valuations, rather than the insurance cycle. The report predicts that M&A activity will continue if losses remain scarce, along with strong yields, both of which are relatively independent of China’s slowdown and its impact on the global economy.

“Regardless of sector M&A, we think Lloyd’s insurers represent a relative safe haven versus more traditional cyclical stocks amid the current turbulent market backdrop,” the report said.

“Each stock under coverage holds appeal in the current market in our view, with those focused more on reinsurance perhaps more likely to be bid targets and those with greater focus on smaller specialty business lines having greater room for profitable growth.

“We see two scenarios going forward: one, if losses remain below average, consolidation is likely to continue; or two, if we suddenly see a large loss, pressure on rates will lessen. We believe both scenarios would have positive outcomes for investors.”

Looking at potential future mergers the Haitong report said that Lancashire and Novae are most likely to attract bids given current valuations and market conditions for the sectors where they specialise.

The report added that while Beazley and Hiscox command higher valuations given their more diversified and specialist holdings, the Amlin deal showed the extent of the attractiveness of Lloyd’s vehicles to international acquirers.

According to Haitong the interim 2015 reporting season has so far highlighted consistent, robust results from the Lloyd’s sector, despite continued widespread pressure on underwriting rates and the prolonged low investment yield environment. However, the report added the caveat that underwriting returns are being helped by an unusually long run of low catastrophe activity, which is masking the extent of the deterioration in underwriting rates.

The Haitong report also claimed that alternative capital was here to stay, although the amount coming in might decrease in the event of interest rates increasing, thus making the reinsurance market less attractive, or if there is a significant catastrophe that might mean substantial payouts to claimants.

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