Fosh argues for narrower gap between medium and large Lloyd’s operators
Mid-tier Lloyd’s insurers are too small and the market needs consolidating, according to Novae chief executive Matthew Fosh.
Fosh’s company has long been the favourite among analysts for a takeover now that Chaucer has been snapped up by US insurance group Hanover. But, in a further twist this week, Novae confirmed that it is looking over the books of rival insurer Omega.
“These businesses are sub-scale,” Fosh told Insurance Times last week. He argued that 10 years ago many of the big names in Lloyd’s were the same size but that some firms pulled away from the pack, leaving the mid tier wanting.
“What you have seen in the past five years is a separation of the bulge-bracket of Amlin, Catlin, Hiscox and Lancashire from the next tier of Novae, Omega, Hardy, Chaucer and Canopius,” said Fosh. “That tier needs to be five times the size.”
The listed companies in particular need to be bigger to make them more appealing to stock market investors, Fosh argued.
“Scale matters in this business,” he said. “Yes, you can be a skilful niche underwriter of certain individual classes but that doesn’t lend itself well to the public market nor the advantages the public markets bring you, such as access to capital and M&A ability.”
Despite Novae’s recent interest in Omega, Fosh’s company may still emerge as a takeover target if no deal materialises.
Some feel that because of Novae’s low stock market valuation – which is currently 0.83 times 2010 net tangible assets a share – Omega is one of the few options Novae has to be predator rather than prey.
Collins Stewart analyst Ben Cohen said: “My sense is that Novae management wants to do something, and you can’t sit around waiting to be bid for.
“I guess they would look at this as one of the few deals that might be doable for them in terms of size and relative ratings, because Omega’s rating is also depressed, with the idea presumably to create a larger, more liquid combined entity.”
Nevertheless, there is some doubt about whether a Novae merger with Omega will materialise. Although Omega’s predominantly short-tail book is potentially attractive to its would-be suitor, Novae has only just got itself back on a firm footing and it may feel that fixing up Omega is too much work.
Omega made a loss of $42.8m (£23m) in 2010 – it was the only one of its peers to make a loss.
The firm also experienced a torrid year in 2010 for other reasons – its board was overhauled and its former chief executive, Richard Tolliday, was replaced by Richard Pexton in March last year.
While acknowledging that it would be up to shareholders to decide on whether Novae was bought, Fosh said he was determined the company should not be sold cheaply.
Since joining the insurer in 2003, he has turned the company round, putting a lid on losses emanating from US casualty business in the 1990s and returning excess capital to shareholders to improve its return on equity. “I have not worked here eight years with my colleagues, for 12 hours a day, to fix something that someone said was unfixable just to give it to someone else for one times book value ,” he said.
“If someone wants to come in and pay my shareholders a substantial premium for the patience they have shown for eight years in building this business, then I’m sure they’d want a conversation.”
He added: “Until that happens, my focus is to generate returns for my shareholders and deliver to them a valuation in the stock market that is up there with the best.”
Novae declined to comment on its due diligence of Omega.
It is one of several firms considering the firm. Canopius confirmed its interest in January, and news reports have linked US firm Adelphi and Lloyd’s insurer Barbican to Omega.