Amlin’s FCI purchase under fire after change of strategy

Amlin’s acquisition of Fortis Corporate Insurance (FCI) has received mixed reviews from analysts.

Execution Ltd analyst Joy Ferneyhough criticised the Lloyd’s insurer for diverting from its strategy following the acquisition. “Its stated intention was to buy a non-catastrophe business to diversify its earnings, which would allow it to write more catastrophe. What I find bemusing is that it has completed stage one, which is to buy the diversified group. But then its comments were that it will not write any more catastrophe business for 2009. It says it could potentially write more in 2010 and 2011 but it’s not the firm statements that we’ve heard from it previously with respect of why it would do a deal of this nature.”

Ferneyhough speculated that Amlin felt it needed to turn FCI into a more profitable business before writing more catastrophe but felt this could be done simultaneously.

“I think it could do both in tandem and as a shareholder there would be more benefit if it did as it is paying 1.4 times book value. The company [FCI] is probably only going to make 7% – 8% return on equity this year, it says that its target ROE for the group once it’s restructured will be 15%. So they are paying for the restructured earnings ahead of time. I would accept it better if it paid a bargain basement price but it hasn’t so it needs to be writing the extra cat to justify making the acquisition in the first place.”

But according to a source familiar with the deal Amlin is set to increase its cat business. “Amlin has made it clear that it will rebalance its portfolio by procuring more attritional business. The FCI book is property and casualty and once it has been integrated it will allow Amlin to write more cat-exposed business.”

However, Rakshit Ranjan, analyst at Noble Group, felt confident about the deal: “One of the concerns was that FCI only generated a return on investment of 2% in 2006 and 2007, despite 27% of its portfolio being in equities at the end of 2007. However, we believe that FCI’s sub-30% capital requirements, as a proportion of GWP, will help the group to generate a ROE above 15% and be ROE enhancing for the group from 2010.”

Meanwhile, AM Best felt the acquisition would help improve Amlin plc’s business portfolio in continental Europe and the geographic diversification of the group’s underwriting portfolio. But the rating agency still placed Amlin Plc under review with negative implications following its announcement that it would acquire FCI. “The ratings have been placed under review because we need to evaluate the purchase of Fortis on the financial strength of the Amlin,” said Colin Towell, analyst at AM Best.

Amlin bought FCI for €350m from the Dutch government. The deal will be funded by cash and a placing of 23.5 million shares at a 4% discount.

A spokesman from Amlin said further acquisitions were possible: “We are interested in good quality opportunities, the door isn’t shut.”