Lloyd’s & London market – review of the year: Troubled times

In the annals of history, 2010 is more likely to be remembered for its losses than its gains. Although the hurricane season was unexceptional, extraordinary catastrophic losses in the first half of the year hit the Lloyd's and London markets hard. The previous year had looked like it would produce heavy consolidation with Chaucer and Brit, and indeed Chaucer and novae, examples of companies that explored tie-ups.

But although the UK began to emerge from recession, the economy remained distinctly sluggish and European countries, including Greece, Spain and Ireland, waivered on the brink of collapse.

In the insurance market, which weathered the downturn remarkably well compared to other financial services, investment returns remained low and rate rises patchy at best, making 2010 a year ripe for mergers and acquisitions. The impending regulatory changes surrounding the introduction of Solvency II, as well as uncertainty over the future regulation of UK financial services with the break-up of the financial services authority, also point to the likelihood of a shrinking market.

Big deal
What surely became the Lloyd's and London market story of the year was the future of Brit Insurance and its eventual agreed sale to two private investors. The deal is yet to be completed but looks on track to be finalised within weeks.

Speculation surrounding Brit's future was confirmed in July when its board said it was not prepared to engage with US-based private equity house Apollo Global Management on the grounds that its bid of £10.30 per share in cash understated its value. Despite analysts at Jefferies International offering odds of a sale at 50:50, the PE house returned with a better offer later that month of £10.75, which was largely seen as a good deal for Brit.

Although the insurer could benefit from favourable tax conditions since redomiciling to the Netherlands last year, Jefferies warned about Brit's "bias to liability reserves" and its exposure to the downturn as a result of focusing on its UK commercial lines and SME opportunities - such as growing its Brit Lite
micro-SME brand in a bid to rebalance its catastrophe exposure.

A deal was finally agreed in October between the insurer and Achilles - a new company incorporating Apollo Management and CVC Capital Partners, that looks set to see the insurer's shareholders receive up to £11 per Brit share.

But it wasn't just Brit that was catching the eye of external suitors-in January analysts at shore Capital picked out Chaucer, Omega, Novae and Lancashire as insurers vulnerable to bid propositions.

Meanwhile a report by broker Willis observed: "With the background of a continued softening, together with replenished capital bases, the mergers and acquisitions, and capital management trend, which emerged in the second half of 2009 will likely accelerate during the first half of 2010."

Leaving London?
Chaucer began 2010 under the new leadership of Bob Stuchbery following the retirement of Ewen Gilmour, but with a somewhat uncertain outlook having been subject to M&A speculation and a question mark over how long investor Pamplona will remain onboard.

Within three weeks the new CEO was reported to have expressed interest in leaving London to reduce the tax bill. However, to date, along with Amlin and novae, it has not followed the other Lloyd's operations out the door of UK Plc.

Amlin started the year having closed the acquisition of Fortis group's Benelux-based corporate insurance operations, which contributed to the Lloyd's insurer reporting a record pre-tax profit in 2009 of £509.1m - up from £121.6m in 2008.

In January Beazley opened an office in Oslo to focus on its energy business, and in February it unveiled plans for a new team in London focusing on insuring contingent risks that can otherwise impede M&A transactions.

Perhaps this got it thinking because only six months later it was looking for some M&A of its own.

Natural catastrophe hits
If 2009 had been a year of low catastrophe activity, this was brought to an abrupt end in the last weekend of February when the market shook with the force of Chile's largest earthquake in decades.

That weekend also saw the European windstorm Xynthia, with many of the same players, such as Amlin, Beazley, hardy and the reinsurers, taking sizeable hits. Some estimates put the insured market loss at upwards of $8bn (£5.1bn) for the Chilean earthquake, and $3bn for windstorm Xynthia.

If the expectation was that these losses would cause an uptick in rates, the reality was disappointing for insurers. Rate increases were localised and did not spread beyond reinsurance and property.

For torus, Febuary brought an additional equity investment of $185m to support the continued expansion of its specialty insurance and reinsurance businesses with $150m of equity capital provided by PE firm Corsair Capital. the balance will come from private equity funds managed by existing investor first Reserve Corporation.

April saw the arrival of a new player in the Lloyd's market - as White Oak Underwriting Agency commenced underwriting, initially targeting the automobile and mobile equipment industries having entered a consortium arrangement with its capacity provider Hiscox syndicate 3624.

Beazley took measures to address an ongoing issue for insurers subject to currency rate fluctuations by switching its reporting currency to US dollars commenting: "Reporting in US dollars will significantly reduce the future volatility of Beazley's reported earnings due to foreign exchange movements."

Also in April, Amlin took a 25% stake in a new managing general agent launched by Charles Manchester; a month later the insurer announced plans to establish a reinsurance company in Switzerland; and in July it offered capacity to Dual Corporate Risks' new property and casualty division.

Switzerland was a popular location for Lloyd's and London market underwriters in 2010, with Novae opening a reinsurance operation there in March and Catlin doing the same at the end of the year. While, in July, Chaucer opened a new office in Buenos Aires, Argentina.

March brought change at QBE Europe, when it restructured into four product underwriting divisions: casualty and motor; property; marine and energy; and reinsurance and specialist. It also rolled its three distribution channels into one division, headed up by Terry Whittaker.

Despite irritating rumours that its CEO Frank O'Halloran was to be replaced by former Aon boss Peter Harmer, 2010 was a good year for QBE, which enjoyed a handful of acquisitions including the US insurance operations of Renaissance Re.

Deadly explosion
Yet more catastrophe was to hit the insurance market when on 20 April a deadly explosion at the Deepwater Horizon drilling platform in the Gulf of Mexico resulted in the region's largest ever oil disaster. Market losses were estimated at between $2bn and $6bn.

Chaucer alone estimated losses of $25m due to the explosion. The insurer also claimed that energy rates had hardened in response to this loss, and Catlin later reversed an earlier decision to withdraw from the offshore energy market.

Stephen Catlin, chief executive, said at the time: "We were decreasing our portfolio earlier in the year because we were very unhappy with the pricing. But after [the oil spill] the market changed almost immediately.

People are going to have to buy bigger limits and it will increase demand." However, others observed that the hardening of rates was less than spectacular.

In May, almost a decade after its failed bid for Hiscox US, Chubb become the latest corporate player to bid for Lloyd's entry. And in June, Hiscox announced it was exiting the unprofitable UK solicitors' professional indemnity market, closely followed by Catlin. Hiscox then secured a $750m syndicated
three-year revolving credit and letter of credit facility.

In July, Canopius Group acquired the business of KGM Underwriting Agencies, including Syndicate 260, together with approximately 60% of Syndicate 260's capacity. Chairman Michael Watson, said: "Its motor business complements and diversifies our existing underwriting portfolio and builds our specialist capabilities."

Later in the year, however, a poor claims performance prompted a strategic review of KGM's motor home market and it closed its doors to new business.

In August, Dual International chief executive Bob VanGieson said the underwriting agency had agreed a deal with Hiscox for the insurer's syndicate 3624 to provide a quarter of Dual's capacity on its main binder book, which offers PI, directors' and officers' liability and

financial lines cover. Dual's long-term partner Arch Syndicate 2012 continues to provide the other 75% of capacity.

Tim Carroll, former underwriting director at Canopius Managing Agents, joined Chaucer Holdings as a non-executive director in September.

And, in October, broker Besso Group launched a managing general agent named Gladstone Underwriting, to provide an online commercial underwriting facility with backing by Novae Syndicates.

Amlin redomiciled its wholly-owned subsidiary Amlin Bermuda from Bermuda to Switzerland and, during the same month, the other significant bid of the year kicked off. Beazley confirmed that its offer to Hardy of 300p per share valuing the latter at £158.4m had been rejected.

Beazley expressed disappointment at being rebuffed but said it was "committed to establishing a constructive dialogue with Hardy's board and shareholders", while observers braced themselves for some to-ing and fro-ing as witnessed during the summer in the Brit saga.

The Ireland-domiciled insurer stressed the proposal represented a 36% premium to the closing Hardy share price on 5 October, the last day prior to the submission of the proposal to Hardy's board. But its target sniffilly retorted that Beazley's proposal "substantially undervalues the company" adding it "had no hesitation in rejecting the proposal".

Hardy CEO Barbara Merry added: "The board views the proposal as an attempt to acquire the company opportunistically when valuations of listed Lloyd's companies are at a cyclical low, and to exploit the impact on Hardy of a series of exceptional international property treaty losses."

When a second offer of 330p per share was rejected in November, Ms Merry said Hardy was still open to talks. But Beazley responded by saying its latest offer valued Hardy shares at "a level higher than that at which its shares have ever traded" and seemed to back off with several analysts suggesting Hardy may have been rash in not recommending its shareholders consider the price.

Later that month Hardy announced it had secured third party capital support for syndicate 382 to support a 7.5% capacity participation in 2011, as well as plans to initiate a share buy-back programme.

Last month Chaucer announced plans to ramp up its direct personal lines offering in order to "optimise the underwriting return within the parameters of our given risk appetite". The insurer said this involves balancing its exposure to catastrophe business, which is capable of delivering high returns but with high volatility, with the more consistent returns from non-correlated and less volatile classes, notably UK motor.

The year finished on a high note for Barbican, which took over the management of its Whittington-backed turnkey operation.

Analyst Collins Stewart believes there are still underwriting profits to be made in reinsurance and energy as well as UK household and motor. And with several M&A options still rumbling on, maybe 2011 will be the year for that long-predicted consolidation.