Surplus capital and sound growth strategy make Lloyd’s insurer a sensible target, despite a turbulent 12 months

Canopius’ proposed cash and unquoted shares takeover offer, confirmed today, is the latest twist in the tumultuous story of Omega Insurance Holdings.

The Bermuda-based, London-listed Lloyd’s insurer hit the headlines at the beginning of last year after a boardroom dispute led to an overhaul of Omega’s board and saw Richard Pexton installed as chief executive, replacing Richard Tolliday.

Asset management firm Invesco Perpetual, Omega’s largest shareholder with a 29% stake in the firm, was said to have been a major influence behind the changes, although the company denied that it had selected the six new board members that were eventually voted in, or that it pushed shareholders to vote for them.

The company was also hit harder than many of its peers in the Lloyd’s market by catastrophe losses. In the first half of 2010 it made a pre-tax loss of $34.2m (£22m), and had to strengthen reserves by $12m at a time when most of its peers were unveiling substantial reserve releases.

A further shock came just before Canopius’ proposed offer: last week the company revealed that its losses from September’s earthquake in New Zealand, at $16.8m, would be almost three times the initial estimate of $6.2m.

A good fit

Yet analysts say the ups and downs of the past 12 months, and the resulting depressed share price valuation, belie a high-quality business that could make a good fit for the ever-ambitious Canopius – or other would-be suitors.

“Omega may not be everybody’s cup of tea at the moment but fundamentally the business is still sound,” says Eamonn Flanagan, analyst at stockbroker Shore Capital. While lukewarm about Omega’s “okay” underwriting prowess, Flanagan praises the company’s international platforms – it has operations in the US and Bermuda.

He also points to Omega’s surplus capital as a positive for a buyer, particularly in light of the forthcoming Solvency II capital regime, which is expected to result in higher capital requirements. Omega raised £130m by issuing new stock at £1.40 a share. “A lot of that is unutilised,” says Flanagan. “That level of surplus capital must leave it as a prize target for somebody who thinks: ‘We are okay for Solvency II but having the surplus capital of Omega would push us over the line very nicely.’”

Intelligent growth strategy

While Flanagan is ambivalent about Omega’s underwriting, others cite it as a positive. “Omega has been managing Syndicate 958 since 1980 and it has got an unbroken record of profitability over that period,” says Martyn King, research analyst at Edison Investment Research. “Notwithstanding the problems it had in 2010 with Chile, New Zealand and Deepwater Horizon, Omega has got a very good track record of underwriting.”

He adds that the company has also approached the growth of its business intelligently. “Omega has expanded by progressively increasing their ownership of syndicate capital, so increasing their exposure to a book of business that they know and is well diversified,” says King. “When going into Bermuda and the US they have used existing agent relationships and have been able to pick up a similar type of business but that wouldn’t find its way to the syndicate in London.”

Furthermore, as Omega writes short-tail business, its book is unlikely to contain any of the nasty surprises that might lurk in the business of a more casualty-focused insurer.

Further twists to come?

That is not to say an acquisition would be plain sailing for Canopius. Its proposed offer includes unlisted stock, which could deter some shareholders. “It may be that a number of the shareholders are physically unable to hold unquoted stocks in the funds the Omega shares sit in.”

Equally, as Canopius is privately owned, less information about the company exists in the public domain, which could make valuing its shares a challenge.

Whatever the benefits or drawbacks of the deal, much will depend on Invesco’s willingness to sell its stake. If Omega’s recent history is anything to go by, Invesco’s stance could have a big bearing on the insurer’s future.