Third-quarter performance bodes well for year-end
Shareholders in Lloyd’s insurer Brit have a reasonable chance of receiving the extra 25p-a-share available in the Apollo/CVC consortium’s offer for the firm, according to equity analysts.
“There is probably at least a two-thirds chance that you will get the 25p and a very high chance that you will get the 10p-15p of the 25p,” said Collins Stewart analyst Ben Cohen. “Refining it beyond that is very difficult. It could turn on variables such as bond yields and underwriting performance, which are both difficult to forecast.”
Brit announced this morning that it had agreed terms of the offer with Achilles, a firm set up by Apollo and CVC for the acquisition. Under the terms of the deal, Brit shareholders will receive £10.75 a share, plus an additional sum, or contingent value payment (CVP), of up to 25p a share to the extent that Brit’s year-end net tangible assets exceed £10.75 a share.
Cohen said that Brit’s interim management, also released today, contained positive signs about the company’s ability to earn all or part of the CVP. “The third-quarter result looks to have been quite good, particularly in terms of investment return, so receiving the CVP is probably a bit more likely than before,” Cohen said. “The investment return was pretty strong: 2.9% for the year to date, compared with 1.6% in the first half. There have also been reserve releases in the third quarter, so as a whole it looks fairly good.”
The low level of hurricane activity this season also bodes well for Brit’s year-end results, and thus its prospects of receiving the additional 25p a share. “Given the lack of hurricanes in the North Atlantic, there is a good chance that the CVP will be earned,” KBC Peel Hunt analyst Mark Williamson said. He added that while Brit is not the largest property-catastrophe underwriter, its reinsurance division accounts for 24% of its premium.
But Panmure Gordon analyst Barrie Cornes feels it is too soon to say whether the CVP will be earned. “I don’t think we have got enough information in the third-quarter interim management statement to form a strong opinion as to whether or not the book value will rise at year-end,” he said. “A good chunk will depend on the investment markets between now and then.”
While the deal is almost a foregone conclusion, risks remain. Jefferies analyst Nicholas Pope wrote in a research note that Achilles’ requirement for 95% shareholder acceptance of the deal was very high, although he added that Achilles could opt to waive or reduce it.
But Williamson believes this is unlikely to upset the deal. “I would never say 'never' but I would be very surprised given that is a recommended offer and one would have expected some shareholder consultation,” he said. “I can’t rule it out, but the risk is negligible.”
