KBW has picked both Chaucer and Advent as potential acquisition targets

Analyst Keefe, Bruyette and Woods (KBW) believes the Lloyd’s market will remain a target for continued merger and acquisition (M&A) activity in 2008.

Looking at the year ahead, it said: “We see the Lloyd’s sector as offering considerable strategic attractions to international insurers, as evidenced by increasing M&A activity. As high profits boost balance sheets and competition slows growth, we see this set to continue.”

According to KBW, the improved return on equity gained by Validus Re, following its purchase of Talbot should impress cash-rich Bermudans. A Lloyd’s Syndicate also holds advantages should it be part-capitalised by Names: this allows an acquirer to spread its costs, and growth is made easier as Names can be bought out in the future.

Also, the attractiveness of specialist risks over standard risks and tight regulation of the market by the Lloyd’s franchise board were noted as positives. KBW has picked both Chaucer and Advent as potential acquisition targets.

The analyst said Chaucer’s small size and set up makes it attractive to an international insurer, pointing to its small market capitalisation (around £313m), diversified business, efficient capital structure and full ownership of its main syndicate.

Analyst KBC Peel Hunt also favours the stock because Chaucer offers exposure to rare insurance classes – in particular nuclear.

And, of course, the government’s recent announcement to forge ahead with nuclear power could open up a great deal of new business for Chaucer – should it fend off the competition.

KBW rates Chaucer at ‘outperform’ with a target price of 120p, while KBC gives a target price of 130p.

Chaucer shares were trading at 103.5p as Insurance Times went to press.

Advent may not attract diversifying Bermudans because of its property-catastrophe specialism, says KBW, but due diligence is relatively simple and the presence of a large shareholder may make M&A easier.

KBW rates Advent at ‘outperform’ with a target price of 29p.

Advent shares were trading at 24.5p as Insurance Times went to press.