Positive trading results this year mean Chaucer can underwrite to a better return on equity

It’s official, it’s over. Following months of speculation and offers from a number of potential suitors such as Novae and Brit, Chaucer has confirmed that discussions with all parties have been terminated. Brit held on for as long as it could but last week talks broke down with Chaucer and Brit withdrew its takeover proposal.

Initially Brit had announced it was interested in acquiring Chaucer by offering 0.23 new Brit ordinary shares for each existing Chaucer share. The proposal was conditional to a recommendation by the Chaucer board but this was firmly rejected.

But analysts were unanimous in their opinion that the “marriage” between Chaucer and Brit would never have worked.

At 40p it was not in the best interest of Chaucer shareholders to say “yes” to any deal because Chaucer is doing well this year thanks to a huge gain made on its investment portfolio that is imparting stability onto its balance sheet. “Being offered 20% – 25% discount to book value shareholders would have said no,” said Rakshit Ranjan analyst of Noble Group.

“Had Brit increased the offer, the amount of dilution of the share price for Brit would have been massive. Hence increasing the offer price would not have made sense.”

Barrie Cornes, equity analyst at Panmure Gordon & Co believed that at the end of the day the price was not right. “A deal would have only happened at the correct price and you are left wondering whether it was right, but it was as far Brit was prepared to go. From Chaucer shareholders’ point of view it’s unfortunate that the price did not go higher, but it would have been wrong to accept it at that level, so you had a bit of a stand off.”

So what next for Chaucer and Brit following the collapse of their talks? Chaucer, believe analysts, is capable of carrying on without the need for a either a partner or owner because compared to a year ago trading is looking more positive.

In a statement issued when Brit confirmed its interest, Chaucer announced a £50m increase of capacity on its Lloyd’s Syndicate 1084 for 2009 and 2010. “We have increased the underwriting capacity of Syndicate 1084 in response to positive market conditions, particularly in property, motor and energy markets,” said the insurer. It added that it was also enjoying average rate rises of more than 6%.

Chaucer has also made inroads in winding down its hedge fund exposure, which had concerned shareholders and investors previously. Its aim is to de-risk its hedge fund exposure from 7.7% to less than 4% by year end. “Chaucer will simply have to underwrite its way to a better return on equity and the investment performance appears to be improving. I anticipate that over a period of time those issues will fall away with the NAV and the value of the shares increasing. That’s the way forward,” added Cornes.

Other potential buyers are unlikely to come forward at this point, but analysts are still divided on the issue.

In the past Amlin and Novae have shown interest but analysts believe it won’t happen again. “I think it’s unlikely at this point in time. The trading and investment environment is improving. If someone had wanted Chaucer they would have come forward in the past couple of weeks,” said Cornes.

“Not very long ago Novae was trying to buy it [Chaucer] themselves. It could always re-emerge, you never know. Whether that’s likely though is uncertain, but I doubt it will happen. For a start Novae’s paper is valued very poorly at 26% discount to asset value which is 10 points worse than Chaucer, which is unfair with it being at 16% discount. Brit will not come back with a cash offer.”

And what of Brit’s future? Clearly Dane Douetil, chief executive of Brit, wants to expand the business. According to Coyne, Brit made an offer for Fortis and has lost out to Chaucer too. In terms of acquisitions, there now appear fewer options.

“Brit obviously wants to grow. It allegedly offered to pay €100m less than what Amlin paid for Fortis. What Brit can do now is buy teams of people from other underwriters, which means you grow more slowly but that’s better route anyway. It’s not what Dane wants to do but he may not have another option,” says Coyne.