Large Lloyd’s insurers are the most likely bargains after the Chaucer sale, but not all are open to a deal

Now that Chaucer looks highly likely to be taken over by US insurer Hanover Insurance Group, the question on many observers’ lips is which Lloyd’s insurer will be next to be snapped up.

A number of the remaining large listed insurers are potential targets, based on the fact that their shares are trading either at a discount or marginal premium to net tangible asset value (NTAV) per share.

The most obvious bargains are Novae, Omega and Catlin, with Beazley and Hardy both trading at a very slim margin above NTAV.

However, of the bunch, analysts’ favourite for the next takeover is Novae. Some feel the firm itself would welcome an approach. “The company that is obviously open to a deal is Novae,” says Collins Stewart analyst Ben Cohen.

Panmure Gordon analyst Barrie Cornes agrees. “I don’t think shareholders would be that unhappy to be taken out at Novae and get something like net tangible asset value,” he says.

Shaping up for a sale

Novae is currently trading at 0.85 times its full-year 2010 NTAV per share. The company has been weakened in the eyes of the stock market in recent years, both by its low returns on equity and the large amount of casualty business on its books dating back to the days when it was known as SBV Syndicates.

However, it has since overhauled its structure, closing its FSA-registered insurance arm and transferring the liabilities into Lloyd’s – thus freeing up the regulatory capital locked in the registered entity and improving future returns on equity. The company also put its past behind it in February this year by closing run-off syndicates 1007 and 1241.

“Novae is the obvious candidate since it trades on a relatively discounted valuation and the management team has pushed through significant restructuring,” says Oriel Securities analyst Thomas Dorner.

There is also potential for growth at Novae. Catastrophe reinsurance rates in loss-affected areas are rising, and there appears to be more demand emerging for both reinsurance and retrocession, which could boost its fledgling Novae Re division.

But who would buy? The apparent bidding war for Chaucer involved, among others, Guy Hands’ private equity firm, Terra Firma, and a joint venture between investment bank Goldman Sachs and US private equity firm TPG.

“It looks like the number of potential buyers has increased since private equity has shown interest in the sector,” says Dorner, referring to Brit’s takeover by private equity consortium Achilles earlier this year. He adds that other likely buyers are Bermudian operations looking for a London market presence. “Lloyd’s continues to present an attractive platform from which to access specialist insurance business,” he says.

Not as attractive

Beyond Novae, the pickings look slim. Omega is trading at the deepest discount to net tangible assets. However, having received an offer from unlisted Lloyd’s player Canopius, all has gone quiet. The company was the only one of its peers to make a loss for the full year of 2010.

While trading at a discount, Catlin seems likely to defend its independence. “Catlin trades at a fairly low multiple, but I don’t think the board is interested in selling,” Cohen says. Beazley is of a similar mind to Catlin, and Hardy steadfastly rebuffed repeated takeover attempts from Beazley last year.

As Hardy demonstrated, just because a company is trading relatively cheaply does not mean boards and shareholders will be willing to let the company go for that value.

“Unless the company has had difficulties like Chaucer or traded at a low multiple for a very long time like Brit,” Cohen adds, “there is a difference between negotiations going on and arriving at a compromise valuation.”