For Whose Merger the Bell Tolls?

Buyouts and mergers appear to be heating up at Lloyd's of London. Is that because of weakness at the venerable insurance market, or because of its unique strengths?

By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance?

As many as 40 companies in the Lloyd's of London market are currently looking to sell or merge, according to Tony Ursano of Willis, cited in a recent article in the Telegraph.

He pointed to weaknesses in the market--low return on capital, trading at a discount, heavy regulation, volatile earnings--as reason for potential "very radical changes" at the London insurance marketplace.

While we're at it, throw in the enormous bill that Lloyd's underwriters are facing from recent catastrophe losses: as much as $3.9 billion (2.4 billion British pounds). For 2010, the market as a whole saw a 43 percent reduction in pretax profit, according to Aon Benfield's Lloyd's update report. Investment returns fell by 29 percent, while the market buoyed its books with a $1.6 billion (1 billion pounds) prior-year reserve release.

Yet let's see the positive. In 2010, Lloyd's has a 99.2 percent combined ratio--i.e., a profitable underwriting record. Capital and reserves remained stable at $29.7 billion (18.2 billion pounds). So even if underwriting isn't profitable this year, there's plenty in the piggy bank.

John Eltham, head of North American broker business for London broker Miller Insurance Services Ltd., stressed the positive when he explained why mergers-and-acquisitions activity could be on the rise.

Eltham reckons that perhaps even more than 40 Lloyd's firms could be eying mergers-and- acquisitions activity if you include brokers with underwriters.

One positive are the unique Lloyd's strengths.

One is a "specialist approach" to risk, either as superior content or in the delivery of such content. Lloyd's isn't necessarily about getting a product cheaper but getting a product that you really want, Eltham told Risk & Insurance?.

Other reasons are the Lloyd's brand name and the agility and innovativeness afforded by the market.

"Typically, a Lloyd's vehicle is more agile and able to respond to trends and changing risks quicker than a large stock company," Eltham said. He related the story of a conversation he had with a CEO at a major company that also has a syndicate, how the CEO told him that the agility, the volume and the ability to trade in London far exceeded how the insurer has to run things for its normal deployment of capital.

Large insurance players, private-equity houses and trade buyers believe in these strengths, as do players already in the market.

"Lloyd's itself wants to outperform the market cycle, and it believes it's positioned to do so," Eltham said.

Recently, Apollo Management and CVC Capital Partners acquired Brit Insurance. The Hanover is taking over Chaucer. Omega Insurance and Novae are in merger talks. And Ryan Specialty Group entered into a definitive agreement to acquire Jubilee Group Holdings Ltd.

On why his brokerage firm acquired the London underwriter, Patrick G. Ryan told us in an email:

"RSG's management have been strong supporters of Lloyd's over the years through all types of market conditions and will continue to be so in the future. To that end, it is a natural extension of our core strategy to want to have direct access to the Lloyds marketplace. With the acquisition of Jubilee, when completed, we will be in a position to bring accretive business to the London market while at the same time participate in the underwriting results of that business, as well as business produced by others and supported by Jubilee.

"In like context, it provides RSG flexibility to support our managing general agent/managing general underwriter facilities with shoulder-to-shoulder risk sharing with our underwriting partners (skin in the game). As we expand internationally, ownership of Jubilee gives us access to underwriting capacity that is A rated and licensed worldwide, significantly enhancing our existing and emerging managing general agent/managing general underwriter facilities' abilities to expand or start up in countries beyond the United States."

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