Canopius has company

The new firms that have expressed an interest in buying Lloyd’s insurer Omega Insurance Holdings could present a more attractive proposition to shareholders than the previous bid by rival firm Canopius, according to some observers.

But any deal could be complicated by the as-yet-unknown impact of the 11 March Japanese earthquake, as well as some vagaries of Omega’s structure.

Canopius’s bid for Omega, which Omega confirmed on 10 January, appeared to have hit a stalemate. There had been complete silence from both camps since the 10 January announcement from both camps and Omega’s largest shareholder, asset management firm Invesco Perpetual.

When the silence was broken by Omega announcing a full-year loss of $48.2m (£29.7m) – making it the only listed Lloyd’s firm to post a loss for the year – there were some fears that all best were off.

Outside interest

But Omega’s announcement last Friday that it had received “further approaches” in addition to the one from Canopius showed that the losses had done little to deter prospective buyers.

The company has not confirmed who the “further approaches” have come from, although press speculation indicates it has come from US firms.

One approach, according to the Telegraph, has come from US-listed composite insurer Delphi Financial Group, and another unnamed US firm was thought to be interested.

One drawback of the Canopius offer was that it was part cash and part unlisted shares. Some contended that Omega’s asset management shareholders’ mandates would preclude them from holding unlisted stock, making the deal unpalatable.

From across the pond

However, a US firm may not offer stock as part of the deal, making it more digestible for Omega’s owners.

“If the speculation is right that there is a couple of US players looking at Omega, their starting point might be a bit stronger,” says Shore Capital analyst Eamonn Flanagan.

“They would know that US stock would not be of interest to UK institutions and may well be able to put forward an all cash bid. The feeling at the moment may be that the deal has swung towards the other trade buyers rather than Canopius.”

However, Flanagan adds that as a fellow Lloyd’s insurer, Canopius may feel it could pay more than a US suitor because of the greater synergies it could achieve through a merger with Omega.

It's complicated

There are also further complications for a would-be US or other non-Lloyd’s buyer. For someone outside Lloyd’s, a big attraction of the purchase would be access to the Lloyd’s market without needing to go through the rigorous application process.

However, Omega does not provide all the capacity for its syndicate, 958. For the 2011 underwriting year it owns a small majority of 52.4% of the capacity, with the rest provided by third-party providers. “If you buy Omega you are not buying 100% of the syndicate capacity,” one source said.

On the flip-side, however, some buyers, such as private equity firms, may see it as a positive that they did not have to provide all the syndicate capacity themselves.

Japan impact

A further complication could be Omega’s exposure to the 11 March earthquake and resulting tsunami in Japan. While a number of early loss estimates have emerged, the true impact on any (re)insurer is unlikely to be known for several months, which could stall any potential deal.

“I find it difficult to believe we will get anything formed up until we know where companies’ book values stand post-Japan,” Espirito Santo insurance analyst Joy Ferneyhough says. “It’s difficult to see how something could be agreed when you don’t know what you are basing the price on.”

Research analyst at Edison Investment Research, Martyn King, agrees. “I can’t believe anyone could table a firm offer,” he says. But he adds: “I don’t think that would stop you doing the preliminary work.”

Impatience

While the events in Japan may complicate the sale process, they may also add impetus to it. Omega is already under pressure to sell. Invesco Perpetual fund manager Neil Woodford, who owns 29.5% of Omega, is rumoured to have told the firm to look for a buyer. And further losses could prompt other shareholders to support him.

“With Australia, New Zealand and now Japan losses, returns are going to be modest this year for quite a few players,” King says. “The first half is going to be difficult given these industry loss events, so its unlikely that management is going to make any firm decisions on a dividend payout until the end of the year.

"Given the importance of yield to investors in the sector, they could grow impatient an increase pressure on management to do something.”