Hardy on defensive to thwart Beazley offer, say analysts

Hardy Underwriting’s decision to seek third-party capital, buy back shares and disclose surplus reserves is an attempt to fend off rival Lloyd’s insurer Beazley’s bid for the firm, according to analysts. The move has also “surprised” Beazley.

Hardy’s board rejected Beazley’s 330p-a-share offer for the firm on 12 November, having already knocked back a 300p-a-share bid a month before.

“Hardy’s announcement last week on raising third-party capital and initiating a buy-back if the offer is removed is a defence strategy,” said Oriel Securities analyst Thomas Dorner, while Panmure Gordon analyst Barrie Cornes added: “It seems too much of a coincidence that they would come out with something like that so soon after the Beazley approaches.”

Beazley chief executive Andrew Horton agreed that Hardy’s announcement was a defensive move. “We continue to be disappointed by Hardy’s failure to engage on our 330p proposal,” he said. “We are surprised by their plan to initiate a buy-back programme, which appears to be prompted by concerns over what will happen to their share price in the event we withdraw our proposal. Initiating a dialogue with us would be a much more constructive step.”

However, Hardy chief executive Barbara Merry described last week’s announcement as “very much a business-as-usual statement”, adding that the third-party capital and share buy-back announcements were driven by having to file documents with Lloyd’s. Merry conceded that Beazley’s offer “was not helpful” to putting the new initiatives in place.

Horton previously said Beazley would walk away if Hardy continued to refuse to discuss the offer, although has not indicated how long it will wait.

Hardy announced on 26 November that it had secured third-party capital for its Lloyd’s Syndicate 382, for the 2011 year of account. It also revealed that, assuming Beazley’s 330p-a-share offer for the firm was withdrawn, it would buy back shares under the authority it received at May’s annual general meeting. At the time, it said it had no specific buy-back plans.

Hardy also announced it would be disclosing the extent to which its reserves exceeded actuarial best estimates, starting with its full-year 2010 results.

The three announcements are designed to benefit shareholders: Hardy said the external capacity for Syndicate 382 would allow it to take opportunities to grow its insurance and reinsurance business without needing to raise additional equity capital, while the share buy-back would return capital to shareholders and the disclosures could reveal additional value in the business. “I think Hardy is hoping to substantiate that the net tangible assets are higher than they currently appear because Hardy has been reserving very prudently,” Dorner said.

However, while acknowledging that Hardy’s announcements are clearly positive for shareholders, Cornes added that it is unclear whether they would work as a defensive strategy. “Our view is that this hasn’t finished, even if the Beazley approach ends at 330p,” he said. “We think there is a good chance that we will see more activity in respect of Hardy.”