Offer of 65p a share is ‘reasonable’ in face of falling NTA and expected further losses
Buying Omega will bulk up Canopius and enable it to compete better, according to executive chairman Michael Watson (pictured above).
Watson, who has been trying to buy Omega since September 2010, has offered 65p a share for the troubled Lloyd’s insurer, valuing it at £158.7m.
Canopius’s bid came in a week when natural disasters led Lloyd’s as a whole to announce a £516m loss in 2011 (2010: £1.26bn profit).
“Omega is fundamentally a decent underwriting franchise but it lacks scale,” Watson told Insurance Times after the offer was announced. “In general, diversified Lloyd’s businesses like Canopius will fare better with added scale and Omega would undoubtedly help us achieve that.”
Watson said the price reflected what Omega is worth to his company rather than its intrinsic value.
Analysts described Canopius’s offer as fair despite the fact that it was a 14% discount to Omega’s 2011 tangible asset value.
The offer follows closely on US insurer CNA’s bid for loss-making Lloyd’s insurer Hardy. In contrast to Canopius’s Omega offer, CNA’s 280p-a-share offer for Hardy represents a premium of 1.55 times the company’s 2011 net tangible asset (NTA) value of 183.5p a share.
The heightened Lloyd’s M&A activity comes as the market as a whole revealed its first loss since 2005, following the second-worst year for natural catastrophes on record.
Omega reported a 2011 NTA of 76p a share. One analyst, who asked not to be named, estimates that this has deteriorated to 72p, actually making Canopius’s offer a 10% discount.
Several analysts have predicted Omega will follow 2011’s £89.2m loss with another loss in 2012, further eroding its NTA value.
One analyst said: “Taking a discount to NTA today probably is reasonable given that NTA is likely to decrease further this year.
“The company is not performing well at the moment. There is a lot of work to do in terms of generating better underwriting profits and therefore I don’t think a buyer is going to want to pay a premium to NTA.”
Watson could face competition from Bermuda-based run-off buyer Catalina Holdings for Omega. But some believe shareholders would baulk at such approaches.
Shore Capital analyst Eamonn Flanagan said in a research note: “We think it unlikely that the shareholders would welcome such an approach, given the upside potential that we believe exists within the stock as the restructuring and repositioning, carried out by management, is ongoing.”
Hardy and Omega’s for-sale status has largely been driven by their catastrophe losses.
The market paid £4.6bn in claims from the earthquakes in Japan and New Zealand, storms in the USA and floods in Thailand and Australia.
At last week’s annual results briefing, Lloyd’s chief executive Richard Ward called for an increase in rates in response to the $107bn (£67bn) in claims incurred by the sector, as estimated by Aon Benfield.
Despite the insurance industry suffering its most costly year since 2005 due to an unprecedented level of natural catastrophes, rates have hardly risen.
And Ward believes it will take an unexpected event to turn the market.
“When you see how the Lloyd’s market has absorbed its largest claims ever - £13bn - people are talking about a few percentage points here or there in terms of rate increases,” he said. “Back in 2005 it was a different story and certainly back in 2001 it was too.”
Lloyd’s combined ratio deteriorated to 106.8% (2010: 93.3%) - its highest level for at least five years. However, it was in line with its competitors in the USA, Europe and Bermuda markets.
Lloyd’s gross written premium rose 4% to £23.5bn (2010: £22.6bn), including rate increases and business moving into the market, and investment return was down 24% year on year at £955m (2010: £2.2bn) in a low interest rate environment.
Operating expenses were up 8.4%, at £6.44bn, in 2011 (2010: £5.94bn).
Lloyd’s executives received pay hikes of up to 20% for 2012, with Ward’s basic pay rising to £668,000 from £556,000, but his potential bonus was cut to 100% of his salary from 150%. Last year he received £1.4m including salary and bonus.